Not challenging your money anchors can draw you into distorted ‘values’
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!