Daniel Kahneman, Author of Bestselling Book on Behavioral Economics Theory, “Thinking, Fast and Slow;” nrkbeta, CC BY-SA 2.0, via Wikimedia Commons
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I was recently exposed to a survey for a buyer following a property tour wherein the buyer and buyer’s broker were asked a few questions, one addressing how they felt about the listing price. This immediately struck me as something that might work against the interests of the seller.
I’ve long been a student of behavioral economics theory. I notice situations all the time in my personal and business life. This provides me a familiarity such that I instantly sense the implications of asking a prospective buyer about the price, that for the seller this could have undesirable anchoring and framing effects.
The impact of this is perhaps more obvious if one imagines a hypothetical. Imagine if instead of this question being posed in an email, the listing broker pulled the buyer aside during a property tour and whispered the question; “Hey, what do you think of the listing price?” If you think this is different if posed in an survey, stop and think how you’ve looked for every opportunity to talk down a price, regardless of how you felt about it (pricing). This question, even if only in a survey question, would seem to be at the cost to the seller of some number of percentage points in price.
I posed this question to the generative artificial intelligence chatbot ChatGPT. This is just the type of topic it can answer well.
Asking buyers and their agents for their opinion on the price after touring a property can have several implications according to behavioral economics theories.
Question Posed to ChatGPT:
A property was listed at a price believed to be at market value given comparable sales in the area. After buyers tour the property, the listing agent sends the buyer’s agent and the buyer a survey. One question is; “what is your (and your client’s) opinion of the price.” What might the implications be of asking this question after a buyer tours a property, according to behavioral economics theories?
ChatGPT’s Answer:
Asking buyers and their agents for their opinion on the price after touring a property can have several implications according to behavioral economics theories:
1. Anchoring Effect: By asking for the buyer’s opinion on the price after they have toured the property, the listing agent may inadvertently anchor the buyer’s perception of the price to the figure they have in mind. If the buyer perceives the property as being overpriced, their response may reinforce this perception, potentially making negotiations more challenging.
2. Reciprocity: According to the principle of reciprocity, when someone is asked for their opinion, they may feel obliged to reciprocate by providing a response. In this case, the buyer may feel obliged to offer their opinion on the price, even if they haven’t fully formed one yet, which could influence their subsequent negotiations.
3. Confirmation Bias: The question about the price may trigger confirmation bias, where individuals are more likely to notice and remember information that confirms their pre-existing beliefs. If the buyer already believes the property is overpriced, they may be more likely to respond with a negative opinion, reinforcing their initial bias.
4. Social Proof: People often look to others’ opinions and behaviors as a guide for their own. By asking for both the buyer’s and their agent’s opinion on the price, the listing agent may be seeking to leverage social proof to reinforce the perceived value of the property. However, if the responses are negative, it could have the opposite effect and undermine the perceived value.
5. Framing Effect: The wording of the question itself can influence the response. If the question is framed in a way that suggests the price is open to negotiation or that the seller is open to feedback, it may encourage the buyer to be more candid in their response. Conversely, if the question is framed in a way that suggests the price is fixed and non-negotiable, the buyer may be less likely to express any concerns they have about the price.
In summary, asking for the buyer’s opinion on the price after they have toured the property can potentially influence their perception of the price and impact negotiations, depending on various psychological factors such as anchoring, reciprocity, confirmation bias, social proof, and framing.
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Richard Thaler, Author of Bestselling Books on Behavioral Economics Theory, “Misbehaving” and “Nudge;” Chatham House, CC BY 2.0, via Wikimedia Commons
I thought ChatGPT answered this very well. But of course, this might just be confirmation bias. Chuckle.
In my two decades on Wall Street, I noticed how people tended to sometimes irrationally make financial decisions that I later came to know as falling under behavioral economics theory. As a commercial real estate broker, I also see it all the time, and frequently an amped up version of it. As I did for publicly traded markets investors in my Wall Street days, I have developed methods to help clients make better decisions with their commercial real estate negotiations, principally by making them aware of human tendencies that can put them at a disadvantage.
I communicate on an ongoing basis with prospective buyers and their brokers that have inquired about commercial properties. I do this more than any other commercial broker I know, with quantified positive effects in the form of sales that happened from one of these follow-ups weeks after an initial inquiry. Thus, I believe in communicating with buyers. What I definitely do not do is ask them how they feel about the price.
Follow Up Question Posed to ChatGPT
What would you estimate the effect, in percentage points of the asking price, of such a question to be on an offering price by the buyer?
ChatGPT’s Answer to the Follow Up Question
It’s challenging to provide a precise estimation of the effect of asking for the buyer’s opinion on the price in percentage points of the asking price, as it depends on numerous factors including the specific market conditions, the buyer’s mindset, the property’s perceived value, and the negotiation strategies of both parties. However, I can offer a broad range of potential effects based on behavioral economics theories and empirical observations:
1. Minimal Effect (0-5%): In some cases, the question may have a minimal effect on the offering price by the buyer. If the buyer’s opinion aligns closely with the asking price and they perceive the property to be fairly priced based on their assessment, they may not adjust their offer significantly.
2. Moderate Effect (5-15%): The question could lead to a moderate adjustment in the offering price by the buyer. If the buyer perceives the property as slightly overpriced or if the question triggers doubts about the value, they may adjust their offer downwards within a moderate range.
3. Substantial Effect (15-30%): In certain situations, the question might result in a more substantial adjustment in the offering price. If the buyer’s opinion is strongly negative regarding the price, or if the question prompts them to reassess the value significantly, they may substantially decrease their offer.
4. Negligible Effect (>30%): In rare cases, the question may have a negligible effect on the offering price if other factors, such as the property’s desirability, location, or unique features, outweigh the buyer’s concerns about the price. Additionally, if the buyer is highly motivated or if there are multiple competing offers, the effect of the question on the offering price may be minimal.
These estimations are speculative and highly variable depending on the specific circumstances of the transaction. The actual effect of asking for the buyer’s opinion on the price will likely vary case by case and may not fit neatly into these categories. Additionally, other factors such as the negotiation skills of both parties and any external market influences will also play a significant role in determining the final offering price.
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What I gather from this is that ChatGPT, based on behavioral economics theories and empirical observations, estimates that 45-60% of buyers’ offering prices would be moderately to substantially affected by this question. I’d guess – and I’m pulling this out of the air from my own experiences, a gut feel as much as anything – that the effect on a buyer’s offer would be in the 2-10% range, with a median effect of 4%. That’s not being persnickety; that’s real money. I’ll also guess that the question would have an affect on most buyers, probably 80-90%.
Also consider that 475.278 of the Florida Statutes requires that transaction brokers, among other things, provide limited confidentiality that “will prevent disclosure that the seller will accept a price less than the asking or listed price.” In my opinion, walking up to a buyer to ask how he feels about the price is consistent with the spirit of this, and certainly is not in line with what sellers expect. Doing this via a standard email survey is nearly the same. It is a bad idea, in my opinion.
Hawkins Commercial Realty brokers commercial properties only. Given this, we only consider things in terms of their impact on commercial transactions. The discussion herein could apply equally to commercial or residential real estate. In fact, the survey mentioned herein that I was exposed to and which led to this post was regarding a listed residential property owned by someone close to me. I’ve not seen such a post-tour survey question in the commercial world.
If you are at all intrigued about the topic of behavioral economics, there are several books I’ve read on the topic by Richard Thaler, Daniel Kahneman, and others, each of which I would strongly recommend. Some of my favorites are:
- Misbehaving by Richard Thaler
- Nudge by Richard Thaler
- Thinking, Fast and Slow by Daniel Kahneman