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7:53 pm - Tuesday December 6, 2016

On the Psychological Effects of Ownership and Overpricing

| Economics, Psychology | Rating: 4.5
by Numan

Sellers tend to overprice their assets to include the pain of having to let go


During the last couple of weeks I’ve been browsing around for an apartment for my parents. They’re thinking about moving closer to the city to spare the precious time lost in traffic. I’ve seen 7 apartments up until now and I was constantly surprised by the gap between the state of the apartment and the asking price. Homeowners were very consistent in overpricing their assets, almost in complete disregard to the apartment and the market’s condition.

This phenomenon was so consistent I began wondering whether my perspective was at its source. Maybe I was under pricing these apartments? I was pretty sure I was willing to pay an honest price so I sat at my computer and started researching why owners overprice their assets.
Soon enough I had more examples than I could handle. In investments one usually attributes higher values to stocks one owns while a potential buyer would often attribute a lesser value. Even common trinkets such as pens or cups were considered of higher value than others in research done with students.

Essentially, in every situation where a buyer and seller are involved a value gap will emerge stemming from a subjective attribution of value that depends on whether you’re buying or selling.

Research shows ownership has a strong psychological effect on us

In a relatively early research by Knetsch & Sinden (Knetsch & Sinden, 1984) participants were given either a raffle ticket worth two dollar or simply two dollars. Very few participants showed any willingness to trade and were very content with what they got.

In another research (Loewenstein & Kahneman, 1991) half the students of a certain class received pens while the other half received a token exchangeable for an unspecified gift. The students were then asked to rate 6 possible gifts for future experiments. In the end the students had two options: either a pen or two chocolate bars. 56% (!) of the students that originally received pens preferred to keep the pen while only 24% of the rest of the students chose the pen. Furthermore, while rating the 6 possible gifts pens didn’t register any significant preference. This led researches to believe the main effect of ownership is not in enhancing the value of a thing but rather in enhancing the pain of having to give it up.

Ownership clearly has a psychological effect on us resulting in the aforementioned symptom: Overpricing of assets we own. The pain involved in having to part with an object takes form in a higher pricing of it. Furthermore, people unaware of this phenomenon are surprised when they realize others don’t share their perspective. Further research done by noble winning Prof. Daniel Kahnman shows even veteran brokers have a hard time letting go of the ownership effect usually attributing it to a sort of margin for negotiations.

The problem with the ownership effect

Overpricing an asset isn’t a bad thing in itself. Many home owners tend to overprice, even knowingly, thinking the right person will arrive and be willing to pay the price they ask for. That’s an understandable approach but it should be done with extreme care.

While searching for an apartment I quickly learned to ignore these over pricings deeming them not serious enough. As a potential buyer one is always looking for a potential seller to close a deal with. I believe over pricing signals lack of seriousness and disrespect on the part of the seller.

With an abundance of information getting away with overpricing isn’t really possible. Market surveys are easier than ever, even in the traditionally less transparent markets like real estate. The internet has a wealth of knowledge and one only needs to search very roughly to get good information quickly.

How can we counteract the ownership effect?

The obvious and only solution is to put ourselves in either the sellers’ or the buyers’ shoes. Would I be willing to pay the price I’m asking? What would be my asking price? Answering these questions objectively will help counteract the effects of ownership and help bridge the gap between buyer and seller.

Expect the buyer to ask for higher prices and expect the seller to negotiate. Part of it’s a game but a part of it is true value assign to the price. The frustration of having to pay more or to receive less is not easily dealt with and it may make or break a deal.

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