Saturday, June 14, 2008

Sunday dollars+Sense: When selling hurts

Are you finding it hard to buy a house in Canberra? Does it seem to you as if the people who own houses want far more for them than they are actually worth?

They almost certainly do, and a cutting-edge experiment using brain scans has just told us why.

The team led by Brian Knutson from Stanford University couldn’t actually scan the brains of people who were buying and selling houses. It would have been too hard to wire them up to the equipment.

So instead they wired up 24 right-handed students in a lab and gave them two desirable electronic goods as a gift and also $60 in cash.

Then they showed the students a picture of an electronic good and asked how much they would be prepared to buy or sell it for depending on whether they already had it...

Told the real price, the students were then were able to decide to go ahead with the transaction.

The team noticed the expected “endowment effect”. People were more reluctant to part with things than they were keen to buy them.

As one of the researchers put it: “We might only pay $35 for an iPod nano, but we won’t sell it for less than $70”.

It had been thought that this was because when we get hold of something it becomes more valuable to us – a perfectly understandable if somewhat irrational way of thinking.

The researchers expected to see different behaviour in the part of the brain that deals with trading depending on whether the students were buying or selling.

In fact they found that that part of the brain looked much the same, regardless of whether the student was buying or selling.

But what did look different was another part of the brain, the insula, which is normally associated with pain.

The “pain centre” lit up on the scans as soon as a student thought about selling.

In fact the more a student liked the good that he or she was thinking about selling the more the pain centre lit up.

Selling something we already have, especially if we like it, seems to cause us something close to physical pain.

That’s probably why so many Canberra houses offered for sale are remaining unsold or are passed in at auctions right now.

One US study found that owners typically want 12 per cent more for their houses than the market price.

During a downturn they want 33 per cent more.

It mightn’t be because they are greedy. They might be in pain.


Reference:

Brian Knutson, Scott Rick, G. Elliott Wimmer, Drazen Prelec, George Loewenstein,
Neural Antecedents of the Endowment Effect, Neuron, vol 58, Issue 5, 12 June 2008, Pages 814-822

3 comments:

TX1138 said...

Interesting to hear about the pain involved in selling a house for less than we expect. Mr Swan should now be preparing his response to a lot of this pain happening here in Oz. The coalition of the willing is set to become the coalition of recession. US house prices have died, UK are following and Australian prices will follow in due course. The "commodities boom" is just a side effect of the much larger "financial sector" bust - of which real estate is the most obvious symptom. Money with no real value is now moving out of the financial sector into commodities, aided by the US Fed's bailout of the US financial sector. Watch carefully for the commodities bust (probably led by something useful and less volatile - like copper). At that point we might be starting to look at the possibility of Australians going hungry. This article is amusing and relevant http://www.guardian.co.uk/business/2008/jun/09/economicgrowth.economy

TX1138 said...

And another thing (in case you thought that things in the US had pretty much bottomed out) http://www.doctorhousingbubble.com/stage-two-of-the-mortgage-collapse-500-billion-in-pay-option-arms-meet-the-piper-in-2008-with-60-percent-being-in-california/

Anonymous said...

Not only is there reluctance to sell in ACT.

Courier Mail Qld ran an article on the weekend that had residential properties awaiting sale – up 18,085 to 34,670 since year ago – with few buyers in the wings.

To get some idea where prices might be heading try this from the UK:
http://www.guardian.co.uk/business/2008/jun/09/housingmarket.houseprices

The prediction is 47.5 percent drop in real terms in the next 4 years. Ouch!

Investors seem to have a choice. Sell at market price or weather the coming storm. What will cause more pain - Sell at discount, or watch the value halve?

Should be interesting if the government ever amends the negative gearing framework that has pushed up prices out of all proportion.

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