Hat tip to Aztec for sending this along, from Bloomberg:
We are largely hostage to the way our mind works. According to prospect theory, pioneered by psychologists Amos Tversky and Daniel Kahneman, the idea of losing money is a much more powerful motivator than a gain.
Our brains are telling us it’s painful to price our homes to reflect 20 percent to 50 percent losses in market values. So sellers overprice houses and wait for something to happen.
A myopic, loss-averse view of the market, for example, means listing for $500,000 or more when comparable upscale homes are selling for $400,000 or less. I have seen it in my suburban Chicago neighborhood, where homes have been on the market and unsold for years.
Our loss-aversion fears are so powerful that they override our logic circuits. We tend to ignore economic reality because we are emotionally anchored to our homes and values based on boom-era prices. It’s like holding on to a favorite stock long after it has tanked.
There are also influential cerebral centers for optimism and self-confidence. We hang on to properties, falsely believing that prices will rebound to the bubble years of 2005-2006.