I am guessing like mine, your feed is full of stories about the housing market. I am following with interest as I have recently moved myself, and Mum is in the middle of all of this as she is selling her house.
In one of the articles I read, there was a comment from a real estate agent about the length of time it is taking to sell properties and how important it is to ‘manage expectations’ of vendors. That phrase certainly piqued my interest. I have another term for ‘managing expectations’, it’s one of my favourite Money Biases, Anchoring.
So, what is anchoring? It’s where our judgements and decisions are influenced by a reference point (anchor). The first time you hear a fact or a number, you anchor yourself to it, and base future decisions on that fact. Here’s a simple example. You see a shirt for $100, that becomes your anchor. The next one you see is $40, so you think this shirt is a bargain, then you see one that is $200, and this one is expensive. At this point you haven’t considered the quality or any other factor.
The shirt example seems pretty straight forward. But when it comes to anchoring, nothing is as simple as it seems. You can be anchored to something completely random and not even know you are anchored to it!
This example from Daniel Kahneman’s book “Thinking Fast and Slow” is a little unnerving. A group of German judges, (each with over 15 years’ experience on the bench), read a case about a woman caught shoplifting. They were then asked to roll a pair of dice. Fortunately, this wasn’t Las Vegas, as the dice were loaded to only roll a 3 or 9. Immediately after rolling the dice, the judges were asked if they would sentence the woman to prison (in months) for a term of more or less than the number they had rolled. They were asked for the exact term they would give her. On average, the judges who rolled a 9, sentenced 8 months, those who rolled a 3, gave a sentence of 5 months. The moral of the story, if ever you find yourself in this situation, make sure you have a pair of loaded dice to throw a low number!
I digress, let’s get back to buying and selling houses, as this is a significantly more important decision than buying a shirt. As I am sure you have guessed by now, anchoring comes into play here too.
Back in 1987, a couple of Professors at the University of Arizona, decided to have a bit of fun with some real estate agents. I am going to paraphrase the study; you can read the detail in Dan Ariely and Jeff Kreisler’s book “Dollars and Sense” chapter 7.
A group of very experienced real estate agents were sent to inspect a property (currently for sale) and asses the value. They visited the property and were given comprehensive information including an asking price. Here’s the catch, half of the agents were given a price that was much higher than the actual list price, and the other half were given a price that was much lower than the actual list price.
Each of the agents was asked to give their opinion on the buying price, and the lowest value they would sell, if they were the owners. They were also asked how they arrived at the figures. With a great sense of pride, 81% said they relied on their knowledge of the property market, and the listing price they were given had no effect on their decision at all.
What they didn’t know was a group of non-real estate people were given exactly the same information and asked exactly the same questions. The asking prices that this group came up with weren’t that much different than the experts. However, only 63% of this group said the price they were given had no influence on the decision they made.
As Dan Ariely so succinctly put it. “In other words, the listing price changed how everyone valued the property, but most of them had absolutely no idea it was happening.”
At this point, please don’t fire your real estate agent, they have a very important role to fulfil in this process. But be aware that just like you, they are also anchored.
This brings me back to Mum. The market, as we all know, is slow and prices are going down not up, so understanding your anchors when selling your house is important. I was chatting to Mum, and she mentioned that the house around the road from where she lives has just sold. She commented that her house must be worth more, as that house only has two bedrooms, and she has three. Anchoring is alive and well here. I decided to ask Nancy Millet from Whangamata Real Estate, how she ‘manages expectations’, in other words breaks the anchors that we all have. She had this to say, using Mum’s comment as an example. “Point out other differences that affect the price point. Proximity to parks, internal garaging, the sun, show other properties that have two bedrooms that have sold for more, and explain why”.
What Nancy told me, is exactly how we can challenge and reset our anchors. It’s researching, comparing apples with apples, not apples with oranges.
Anchoring is instinctive, we can’t stop it, we believe it must be relevant because we are experts in our own lives. We don’t like to admit to ourselves (let alone anyone else) that we might be wrong. When it comes to buying or selling one of our largest assets, we just might be.
I’m off now to have a look at an open home round the corner from where I have just bought. The house is the same era, same size, but my section is bigger, so mine must be worth more! Anchors aweigh!
Lynda Moore is a Money Mentalist coach and New Zealand’s only certified New Money Story® mentor. Lynda helps you understand why you do the things you do with your money, when we all know we should spend less than we earn. You can contact her here.
17 Comments
I was chatting to Mum, and she mentioned that the house around the road from where she lives has just sold. She commented that her house must be worth more, as that house only has two bedrooms, and she has three.
I would say this is not an anchor, as if the "round the road" is within a street it is a valid assumption. If round the road is a couple of blocks away, then that is just hope.
Assuming the value is different because of x/y/z, isn't really an anchor, rather an assessment on the merits. The fact people often assume theres is better for inconsequential reasons is a whole different issue.
To me the housing anchor tends to be the price people paid. i.e. "I paid x, y years ago, so it must be worth more now". They refuse to acknowledge drops in price. ALthough sometimes this can be influenced by the mortgage required. Negative equity is a scary proposition for most.
This is why 30% are delisting their houses after the offers presented have not meet their expectations...
The expectations are for only higher and higher prices. There is still a belief if they just wait a bit things will recover then they can list and get top dollar. Sure some can wait, but many of our mums cannot.... they become the marginal seller and the market simply has a huge overhang of property waiting for prices to rise. This is simple market dynamics, anyone who has traded any market with transparent depth has seen this and understands it.
In most markets you have to learn money management to be a good trader, because not all trades are profitable, you get it wrong, and you need to limit losses. Sadly in NZ Residential Housing this vital learning, has recently not been required, rather those who have ignored money management and simply over leveraged have until recently done very well. This lesson is now about to be taught.
Denial is the most predictable of human responses.
And why those who have conquered that do well.
Years back, I went into Citibank's trading room in San Fran and witnessed trader Mark Rosasco angrily shouting at his screen and mentioned to my host "Looks like he's got a bad position". The reply I got? "Oh no. Quite the opposite. He's 'angry' because he's making money, and that he's got nothing to do. He's happiest when his positions don't go according to plan, and he actually has to do something about it".
Love this stuff. Anchoring examples:
- NZ house prices double in fiat value every 7-10 years.
- Rat poison has appreciated 100% pa in fiat value over its lifetime.
So how does one psychologically deal with this?
1. Adopt stoicism into your mindset. Facts change so do not rely on urban memes as your guide rail.
2. Accept that the urban memes could be more or less representative of reality. But examine the trade offs within your own goals and values. Consider extreme exceptions to the norm.
3. "We don’t like to admit to ourselves (let alone anyone else) that we might be wrong"
Too true. Therefore, the only way out is to adopt Socratic thought: All I know is I know nothing.
Embrace humility and the acknowledgment of your own limitations in knowledge. True wisdom comes from recognizing the boundaries of one’s understanding and being aware of the vastness of what lies beyond.
3. "We don’t like to admit to ourselves (let alone anyone else) that we might be wrong"
Often housing buy/sells are decided by a couple.... I have never really seen this work on a trading floor, sure there may be teams involved in setting asset allocations etc, but I have not seen two traders manage a trade in FX/Bonds/Equities like couples do in real estate.
It's makes it really hard as you need to be as unemotional as possible evaluating active trading positions.
One of the funny memories I have is a local NZ spot guy asking the AUD spot guy what he thought here, the Aussie talked for about 2 mins on a hoot line about why he thought it was only going up, local said yours 20....
So many couples where sold a leveraged superannuation scheme by the Spruikers.
Institutional trading is where some huge biases sit. It's actually a fascinating world but you can understand why many become cynical burnouts. It's a fertile environment for sociopaths to thrive. The crypto space has a different breed of sociopath.
As for the property Ponzi, one redeeming feature is that it appears on the surface to be more equitable. That it offers a way out of the social grinder. And for a period, it served that purpose. But it has become a political, economic, and social nightmare. I think that reality is now starting to hit home. And we're only in the early innings (baseball analogy) of the unravelling.
Good article. Reminds me of the Overton window in politics - we really are so much more guided by signals and precedents than the intelligent rationality and imagination we like to credit ourselves with. In the case of the housing market, it seems to me that it current signals and precedents are anchored a long way from rationality.
Something that to me doesn't withstand rational inspection is how much anger over cost of living is directed at our "rip-off" food prices. The cost of food, relative to hourly wages, is actually extremely low when comparing to most of the world throughout history, or when considering the actual importance of food to our wellbeing. Unearned profits in the food chain are a problem, but a rather small one - perhaps the average Kiwi loses a dollar or two a week to the duopoly's coffers. Meanwhile they may be losing a hundred times that or more to the banks, landlords and middlemen profiting from controlling their access to land and shelter. And the same again to the government's insistence on taxing earned income of workers, rather than the unearned income of the above groups.
Screaming about the evil supermarkets seems to be a massive distraction from the two big things that are really making life expensive for the working poor - housing and income tax.
Some other anchoring I've observed in NZ / western politics:
* a top income tax rate of over 50% seems outrageous and unthinkable to many people; we assume it will cause economic catastrophe. This is at odds with most western economies maintaining top rates over 70% during the post war period, a time of remarkable economic growth.
* interest rates over 5% are seen as unsustainable - again, history suggests not so.
* population - whilst I think the speed of population growth currently is a problem, there seems to be a common view that NZ couldn't sustain a higher population at all, and even some commenters who think the current population too high to prosper. This view is absolutely laughable to anyone who's visited Taiwan or Japan (and no, those countries haven't had to destroy all or even most of their wilderness).
there seems to be a common view that NZ couldn't sustain a higher population at all, and even some commenters who think the current population too high to prosper. This view is absolutely laughable to anyone who's visited Taiwan or Japan (and no, those countries haven't had to destroy all or even most of their wilderness).
Taiwan and Japan both have abundant natural and pristine environments. Easily as beautiful and unique as that of NZ. We're largely an ignorant lot.
The issue of high tax rates 50%/70% or whatever is considedred high by the payer is the de motivational aspect. If you are offered say overtime at 1.5 times normal pay rates of $20 an hour and the additional income pushes you into a high tax bracket say 33% the net remuneration is $20 an hour which is more than net normal pay but may create the thought is the extra money worth more than the benefit of using the time for something esle - mowing the lawn perhaps. I think NZ has already reached peak tax and Govt policy should be focused on increased productivity which it appears to be doing and I await the delivery.
Meanwhile they may be losing a hundred times that or more to the banks, landlords and middlemen profiting from controlling their access to land and shelter.
Jfoe's illustrations of the current cost of credit creation are superb. The only criticism I have is that nobody is prepared to take any pain necessary for creative destruction to work its magic.
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