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Daily Real Estate News  |  November 6, 2006  |   Psychology of Money Drives Housing Decisions
Studies of the psychology of finance indicate that emotions play a huge role in decisions people make about money.


"There's a whole emotional processing system that goes on in the brain that's largely beyond our control," says Kevin McCabe, a professor of economics, law, and neuroscience at George Mason University in Fairfax, Va. "The general view is that our emotions control us, and not vice versa."

The study of neuroeconomics has illuminated a few key concepts: Many people will pass up sure profits for illusory ones. Some will turn down profits if they believe someone else is unfairly profiting more. Some will even refuse to sell if they believe they may come to regret it, because fear of future regret can be as powerful a motivator as money in the pocket today.

While little of this has been applied scientifically to real estate, it is easy to make the leap.

For instance, much research has been done on the concept of "loss aversion," which shows that people tend to deny reality when something they own, such as a house, declines in value. Sellers maintain the asking price even at a level that makes no sense, economists say. Similarly, home sellers become attached to the prices their neighbors received at the top of the market rather than current prices, and they become reluctant to sell unless they get that higher price.

"There seems to be a psychological resistance to taking losses on the sale of a house," says David Laibson, who teaches psychology and economics at Harvard University. "People think they'll make money on it....That logic worked for a long time, and now anyone who bet on that logic is being burned."

Source: The Washington Post, Kirstin Downey (11/04/2006)

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