What are the most common cognitive biases in real estate negotiations?

1 Anchoring effect

The anchoring effect is the tendency to rely too much on the first piece of information you receive when making a judgment or decision. For example, if you see a listing price for a property, you may use that as a reference point to evaluate its value, regardless of its actual market worth. This can make you either overpay or underpay for a property, depending on whether the anchor is high or low. To avoid this bias, you should do your own research and analysis before making an offer or counteroffer. You should also be flexible and willing to adjust your expectations based on new information.

2 Confirmation bias

Confirmation bias is the tendency to seek, interpret, and remember information that confirms your existing beliefs or opinions. For example, if you have a positive impression of a property, you may ignore or downplay its flaws and focus on its strengths. This can make you overlook important details or risks that could affect your satisfaction or profitability. To avoid this bias, you should try to be objective and critical when evaluating a property. You should also seek feedback from others who have different perspectives or expertise.

3 Loss aversion

Loss aversion is the tendency to prefer avoiding losses over acquiring gains. For example, if you have invested time, money, or emotion into a property, you may be reluctant to walk away from it, even if it is not the best option for you. This can make you stick to a bad deal or miss out on better opportunities. To avoid this bias, you should try to detach yourself from the outcome and focus on the process. You should also have a clear exit strategy and criteria for when to quit or move on.

4 Framing effect

The framing effect is the tendency to be influenced by the way information is presented or worded. For example, if a property is described as having a "cozy" living room, you may perceive it more positively than if it is described as having a "small" living room. This can make you more or less interested in a property based on how it is marketed or communicated. To avoid this bias, you should try to look beyond the surface and examine the facts and figures. You should also ask questions and clarify any ambiguous or misleading information.

5 Endowment effect

The endowment effect is the tendency to value something more when you own it or have a claim to it. For example, if you are selling a property, you may have an emotional attachment to it or a sense of pride in it. This can make you overestimate its value or demand a higher price than what the market can bear. To avoid this bias, you should try to be realistic and rational when setting or negotiating a price. You should also consider the opportunity cost and trade-off of holding or selling a property.

6 Bandwagon effect

The bandwagon effect is the tendency to follow the actions or opinions of others, especially when they are popular or widespread. For example, if you see a lot of demand or competition for a property, you may assume that it is a good investment or a desirable location. This can make you join the crowd or act impulsively without doing your own due diligence. To avoid this bias, you should try to be independent and informed when making a decision. You should also avoid being pressured or influenced by external factors or agents.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?