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.


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