In last weekend’s News.com.au article, a story of how a property, as part of a deceased estate, failed to reach it’s price expectations for the beneficiaries caused a lot of social media commentary.
The article discussed how Mr and Mrs Kerr were ‘heartbroken’ after their family home of the last 93 years didn’t reach their reserve of $1.7m and how the real estate agent believed that the price for the home last year would’ve been worth $2.4m.
Yet should they not be grateful for this large amount of money as beneficiaries from their mother? Plenty of people have expressed their thoughts.
Why The Disappointment?
Whilst it’s inevitable that there would be a very strong emotional connection to the home, which I’m sure is genuinely painful for the beneficiaries, from the financial perspective, the circumstances offer an example of our brain’s cognitive ‘anchoring bias’.
The anchoring effect is where we rely too heavily upon the first piece of information received.
In this case, it would appear that property in this location has been in the mid $2m range.
The beneficiaries have enhanced the property, yet some time after, those efforts in both time and money appear to be wasted as the initial reference point of the price is no longer applicable.
If the real estate agent had a crystal ball and could predict the price to be $1.7m in 2017, do you think there would be the same angst?
Anchoring Is Used Often
Retail stores use this tactic often.
Let’s say you see a new TV for sale at a recommended price of $1,200 and you negotiate a deal of $995. You feel terrific and believe you scored a great deal.
This is the anchoring effect at work – were you a skilled negotiator or was this within the retail stores profit margins to sell more stock?
Other Examples
It’s not just with money either. This article gives an example of what’s an acceptable curfew for a 16 year old.
If they had to be home by 11pm on a weekend night, a 1am curfew may not feel right even if ‘all the kids are doing it’.
This is the anchoring effect – the reference point of what time the peers have as a curfew.
Tips
This is how we are wired. Take into account this anchoring effect in the future and perhaps consider not only your initial thought, but other relevant ones that may expand your final decisions.
