Dear reader, the concept of the endowment effect suggests that people view the value of what they own as being at least equal to, if not greater than, what they originally paid, regardless of the economic downturn. This idea aligns with the “loss aversion” phenomenon, made popular by Daniel Kahneman and Amos Tversky, which indicates that people feel the pain of losing something far more intensely than the pleasure of a gain of equal value. Thus, property owners tend to hold on to their real estate and refuse to acknowledge a drop in its market value, often procrastinating in the hope that prices will rise again.

The real estate market provides one of the most tangible examples of this phenomenon. For many, buying property is not just an investment decision but an emotional one as well, blending personal considerations with financial ones. An owner associates a home with family memories or makes renovations they believe add value, additions that may not carry significant weight from a buyer’s perspective. So, when economic circumstances change and prices begin to fall, it becomes difficult for the owner to accept that the actual value of the property has dropped below what they paid or what they believed was a “fair” price.

Because of these psychological factors, real estate price corrections slow down. The prospective buyer, who follows economic indicators and sees the property’s fair price as lower, stands opposite the owner who insists on a much higher price due to the “endowment effect.” This gap between supply and demand leads to a market standstill, causing fewer deals to occur and properties to remain unsold for longer periods. Instead of a gradual price decrease and a swift market adjustment, a “freeze” persists until a number of owners, who may be forced by urgent financial needs or changing family circumstances, cut their prices noticeably, causing property values to drop abruptly and affecting other prices in the area.

To understand the psychological roots of this phenomenon, we can look at several associated biases. One of the most prominent is confirmation bias, where the owner constantly searches for information that reinforces the belief that the property value must go up or that real estate is “never sick and never dies,” all while dismissing negative indicators or downplaying their importance.

There is also status quo bias, which leads people to prefer maintaining their current situation rather than taking the risk of lowering their price. Emotional attachment and fond memories tied to the home, along with personal designs or modifications, further increase the owner’s insistence on a certain price.

By contrast, in financial markets, professional traders have learned to handle assets without becoming emotionally attached. They rely on automatic sell orders called stop-loss at predetermined price points, selling quickly without hesitation and moving on to better opportunities, rather than clinging to a losing investment in the hope it will rebound. While property differs from stocks in several respects (such as the size of the investment and the difficulty of selling), the principles of risk management and realistic number-crunching can mitigate the endowment effect and facilitate better decision-making.

In conclusion, dear reader, the endowment effect is a deep-seated psychological bias that can push property owners to cling to outdated valuations that no longer match the current economic realities, negatively affecting market activity and delaying price corrections. Nonetheless, awareness of this bias, along with sound financial policies and appraisal procedures that accurately reflect market conditions, can help reduce its impact. Only then can we reconcile psychological factors with financial returns, achieving wiser, more objective decisions in one of the most significant investment arenas for many people.