Loss Aversion

Loss aversion is the concept that the pain of losing is more psychologically powerful than the pleasure of gaining. The concept was developed by Daniel Kahneman & Amos Tversky. It is associated with their "prospect theory," a behavioural model that shows how people decide between alternatives that involve risk & uncertainty. Anchoring is another relevant concept associated with loss aversion. In real estate, anchoring refers to individuals fixating on a target number or value and using that value as a reference point for future decisions. How does loss aversion and anchoring relate to our local real estate market?

The following characteristics of a slower real estate market are in some part influenced by loss aversion: Higher asking prices, longer days on market, low liquidity & less transactions. Since we went through a period of time when prices were higher than they are currently, a number of would-be sellers have been influenced by higher prices in the past (via anchoring). For some sellers, their loss is just a matter of perspective. They have still gained from when they purchased, but since they are anchoring their expectations against the peak, they feel they have lost by selling at today's market value. For other homeowners, their loss aversion applies to realizing a real loss (selling for less than they purchased). We do not trivialize either scenarios. We are very sensitive to a seller's need to achieve the best possible outcome. Whether it is to avoid selling at a loss, or reaching a benchmark that allows them to achieve their financial, retirement or life goals. We help in guiding our clients in making important and challenging decisions about how to navigate unpredictable markets. For example, if a certain target needs to be hit, and the market is not providing the price the seller needs, it may make sense to delay listing (not without downsides & risks). Or if a homeowner is looking to sell and buy at the same time, in a softer market, we may provide advice on the relative nature of the transaction. The client is selling for less than they would prefer, but they are buying at a lower price as well. From a buyer's perspective, operating in this market requires digesting a wide spread of listing prices, and encountering some sellers who have anchored their expectations against previous market highs. This makes it a complicated landscape for buyers that we can help navigate.

We understand that there are many factors that influence what price a homeowner is willing to accept for their home. Some financial and some emotional. At the end of the day, it is often a person's most valuable asset & also where they have built their life & memories. We provide as much insight as we can on recent sales, active listings & statistics to our clients. We also listen to their needs, fears, and emotions so that we can guide them the best we can. If you know someone that could benefit from our services, please don't hesitate to pass on our info. We always appreciate your referrals. All the best, Joe, Doug & Randal