When you’re trying to understand or influence human behavior—as you might do when, say, listing and marketing a home for sale—it’s important to respect the distinction between what people should do and what they actually do do.
This is the difference between economics and behavioral economics. Classical economics theory is based on the belief that people will behave rationally and that we can use reason and logic to predict the movements of the market. But the fields of behavioral economics and behavioral finance were created in the hopes of gaining a better understanding of how real people actually make real financial decisions in real life.
Here are a handful behavioral finance must-knows for listing agents, to help manage your clients’ mindsets and help them understand why and how you’re marketing your home to buyers.
1. Don’t let overconfidence lead to overpricing.
Real estate agents are the only commissioned salespeople I know of who spend much of their time trying to talk their clients down in pricing their product. Why? Because we know that listing a home at too high a price causes unnecessary woe, drama and failure. Set the listing price too high and a home will lag on the market, attracting lowball offers. The end result is often a price reduction or can even keep a hope from selling at all.
Overpricing can result from the same overconfidence and overoptimism that causes buyers to make lowball offers on great homes in a hot market. It’s the same overconfidence and overoptimism that inspires investors to day trade, erroneously thinking they have superhuman stock picking skills. In fact, when you study up on successful amateur day traders, it becomes clear that what they have is less innate skill and more the willingness to voraciously, constantly research the companies and the markets—many, for hours every single day. Many have also placed rules on themselves and their trades specifically to counter their own human emotions and irrational tendencies.
That’s precisely how home sellers can and should deactivate overconfidence when it comes to pricing. Urge them to commit to sitting down with you and pore over local market data, recently sold homes in the area, average days on market, and the local price-to-sale price ratios. While you’re looking through the comps together, take pains to point out the potential rewards of a disciplined, data-driven approach to pricing.