Stress can be high during a real estate transaction. How can real estate pros aim to have mentally healthy relationships with their clients? Should they apply a little psychology, if you will? It seems to me that [with these business relationships] it’s not a little psychology; it’s almost all psychology. The actual mechanics of a real estate sale or purchase are pretty cut-and-dried. It’s engineering. The people involved are the source of almost all the problems. Under the best of circumstances, people are not very rational decision makers.
Now, put them in a circumstance where they are making a purchase that is many times larger than every other kind of purchase they have ever made or will make again, and you have a recipe for people being extraordinarily irrational. If you go into this thinking, “My clients are as rational about all of this as I am,” you’re going to be sadly disappointed, for two reasons. First, they have a lot more on the line; second, they don’t have the broad experience that you have seeing how these things go, seeing how minor bumps in the road get smoothed or seeing how major bumps in the road sometimes look minor early on. For a client, this is often the first and only time they have ever done something with huge repercussions for their lives. No wonder they think irrationally.
So how can agents incorporate these insights to work more effectively with anxious clients? You anticipate and understand that this is going to happen. You resist the urge to roll your eyes [and wonder], why in the world don’t they see it as clearly as I do? It’s probably useful to sit down and think about the problems that they are likely to experience. Psychology and behavioral economics gives us a host of them. For some reason, people who own a house think it is worth more than people who want to buy it. Now, this isn’t just posturing in negotiations; it’s not just that sellers ask for more and buyers offer less and they’re trying to meet in the middle. We know from lots of research that people truly believe a property is worth more if they’re selling it and less if they’re buying it. This is easy to demonstrate. You can do this in a classroom. You hand out coffee mugs to half the students and you say, “This mug is yours. Now, what I want to know is the lowest price you would take to sell it to somebody on the other side of the room?” You ask the people who didn’t get a coffee mug, “You didn’t get a mug. I want to know the highest price you would pay to get one of those coffee mugs?” When you look at the average of these two numbers, they are nowhere near close. It’s a $5.00 coffee mug and what you will find is that sellers generally will accept no less than $7.00 for it and buyers will pay no more than $3.00.
In psychology, this is called the endowment effect. What that means is once you’re endowed with something—the economic term for owning it—its value increases. When sellers and buyers can’t seem to meet in the middle, and the agent thinks they’re just being intransigent or just trying to get a better deal, the agent might be missing the point. In their heart of hearts, clients really believe the house they own is worth far more than buyers are willing to pay.
How much of a role does emotional attachment play? Of course, there are emotional attachments to things we own. If you can get people emotionally attached to a coffee mug in a classroom in 60 seconds, imagine how emotionally attached they get to a house where they raised their children for 20 years. But there are other pieces to it as well. For example, we psychologists and behavioral economists know that the pleasure of gaining something seems to be smaller than the displeasure of losing exactly the same thing. That’s why people will never make a bet where they could accidentally lose $20,000, but they’ll make bets where they’ll gain $20,000. If you think about it, the seller is losing something. A seller is looking at a potential loss: “My house won’t be mine anymore.” And that seller anticipates that his or her emotional reaction to the loss of that house will be much greater than buyers anticipate that their increase in positive emotion will be if they gain it. This is what we call the loss-gain asymmetry—it’s just a fancy term for saying that losing a dollar feels worse than gaining a dollar feels good.
I would imagine that a large chunk of the frustration that agents experience is with buyers and sellers who are close but can’t complete a deal. For sellers, they’re selling what may be the most emotional object to which people ever become attached. I mean, just the word “home” for human beings—and really for almost all animals—is the most special thing in the world. It’s right below the people whom you love. It’s the most emotional object and you would expect people to be most irrational about it.
Seemingly small issues, like who’s taking an appliance, can lead to doubt and fear and may feel like a reason to walk away. When people are in negotiations, their honor and integrity are at stake. Somebody won’t meet them on price, and they don’t just see it as money. It suddenly becomes “that person is trying to screw me! They’re trying to use me! They’re being mean to me!” My guess is that more real estate transactions than you would imagine are lost because somebody felt insulted about something having almost nothing to do with the economics of the transaction.
So is telling clients to check their emotions a hopeless approach? I think that’s good advice, but I bet it often falls on deaf ears. You can’t tell people to turn off their feelings and emotions any more than you can say, “stop understanding English” or “stop smelling French fries.” You can’t just stop because someone advised you to stop.
When buyers are shopping for a home, they’re expected to think about how a place may work for them in the future. But isn’t this a dilemma since the future is impossible to predict? Yes, people evolve over time in unexpected ways. They are buying something for now but also for all of the people they will become. The question is how will they feel weeks, months, or years from now? Buyers have to have some insight into their own psychology, as difficult as it is to project ourselves in the future.
Based on your understanding of human thought, what are some of the things going through buyers’ minds when they’re choosing a home? People focus on making comparisons. If one home has a garage that’s 9 percent bigger than another, that fact will loom very large to the buyers because they are focused on the difference between A and B. Interestingly, though, once they buy one of the homes, either A or B, that difference will vanish. It will be utterly unimportant. Why? Because when they walk into their house three years later, they’re not thinking about the house they might’ve bought. That’s gone. Well, they might be if their car doesn’t fit in the garage. But if it’s just a small difference, it won’t matter [after the decision is made]. The point is, buyers can get caught up in momentary comparisons.
Why do people make bad decisions? There are thousands of reasons, but I can distill it to a couple of simple principles. Every decision has two components. First, what are the odds that if I do this thing, I’ll get what I want? Second, how much will I like it if I get it? Those are really the only two questions that we ever ask when we make a decision. Will it get me where I want to be? And when I get there, will I like it? People do a pretty bad job of answering both of those questions. We make mistakes in figuring out the odds that we’re going to get what we want if we take certain kinds of action and we make mistakes in predicting how happy we will be with the consequences of our decisions if we do indeed get what we want.
But this doesn’t mean people are hopeless. It doesn’t mean we shouldn’t have goals or make decisions. We should understand the errors to which human beings are naturally susceptible. Then, when we make big decisions in our lives, the best we can do is run through a checklist of common errors that people make when they are making decisions like ours. People should stop and ask themselves honestly if they might be susceptible to the endowment effect. The best remedy for it is second-guessing yourself, but mainly as decision makers we don’t do it.
How can real estate professionals help their clients avoid errors of judgment? Any agent or broker who understands the kinds of cognitive and emotional mistakes that people are prone to can take steps to ameliorate them. So if you knew, for example, that people were very likely to exaggerate the importance of any dimension on which two houses differ, you could actually say to them, “I know one house has this and the other house has that,” but it’s really important for you to ask, “Just how much do you care about this? It may be looming large for you only because one has it and the other doesn’t.” Ask your clients, “What did you really care about before you made the comparison?’
Regardless of the economy, REALTORS® are enthusiastic advocates of the American dream of home ownership. Is there such a thing as being too optimistic? Human beings on the whole are overly optimistic. They believe that their future will contain [more] positive events than their past did, which is generally unrealistic. The past is the best predictor of the future. So human beings are known on almost every measure to think that good things are likely to happen to them more often than they will and that bad things are likely to happen less often than they will.
You might think of this as a harmless positivity. I mean, who doesn’t like to wake up in the morning next to Piglet rather than Eeyore? And in many domains of our lives, it’s perfectly fine. However, because we think everything is going to be rosy, we don’t think we need to take any precautions today for what’s going to happen tomorrow. That’s how our over optimism can sometimes be a problem for us.