3 Psychological Tips to Help Your Clients Make Smarter Decisions

Here are two real estate news headlines from The New York Times:

• Mortgage Rates Too High? (Blame the Fed, Wall Street and Your Neighbor.)
• With Rates This Low, Where's the Boom?

Before you read the next sentence, try to guess the 30-year fixed mortgage rate at the time each article was published.

The first story appeared last fall, when rates surged to 6.95%. The second story, however, is from 1993, when rates were so “low,” they dropped all the way to… 7.10%.

What’s going on here? These headlines illustrate the power of perspective. Our brains rely on mental shortcuts to make judgments and solve problems. But sometimes, those shortcuts lead us to inconsistencies and flawed conclusions based on incomplete information.

Buyers and sellers may struggle to deal with the stressful world of real estate, but agents have the power to steer their clients to smart decisions. Here are three psychological biases to watch out for, and three exercises you can use to give customers the extra edge they’ll need in today’s market.

How recency bias affects expectations

The big idea: Recency bias occurs when we give greater value to newer information and undervalue older information. As a result, people expect patterns to form based on recent trends even when there’s no evidence to support them. 

For example, potential homebuyers may believe 3% mortgage rates are normal just because they hovered there during the pandemic. Or they might anticipate that home values will keep skyrocketing because they’ve continued to increase lately. 

What the data shows: It’s hard to completely escape recency bias, but research suggests it impacts people differently. A 2019 study on investing found that sudden stock market changes influenced younger people more than older people. It also impacted individuals with lower incomes more than those with higher incomes.

Interestingly, people who worked with a professional advisor stayed more consistent with their approach during market turmoil. This could apply to real estate agents as well – setting clear goals and providing education can help clients stay the course. 

How to help clients address it: Zoom out and remind them that current market conditions won’t last forever. Past performance is no guarantee of future results, and eventually, customers should acclimate to a new status quo. 

Spend time going over historical trends, and your clients may start to see things differently. In the 1980s, the 30-year fixed mortgage rate never dipped below 9%, and for most of the decade, it stayed above 12%. By comparison, today’s rates won’t look so high anymore. 

How anchoring bias affects decisions

The big idea: Anchoring bias causes people to make judgements based on an existing reference point or “anchor.” 

For example, if a buyer looks at a house listed for $500,000 and then sees the price cut $10,000, they may consider it a better value than if they had just seen the property listed for $490,000 originally. 

What the data shows: A clever study published in The Economic Journal discovered that people who moved from more expensive cities tended to pick more expensive homes than people who moved from cheaper cities. 

So if a client is moving from San Diego to, say, Tulsa, the baseline standard of California home values will nudge them to more expensive properties in Oklahoma. However, the anchoring bias changes over time. So once these clients are settled in Tulsa, their anchor point will adjust to the new conditions. 

How to help clients address it: Ask your clients to pretend they’re on The Price Is Right. (No, seriously.)  One interesting exercise is to review listings without prices and ask your clients to write down the most they’d pay for it. This way, they can form an opinion based solely on the property and make a decision without as many preconceived notions. 

How left-digit bias affects pricing

The big idea: Left-digit bias suggests consumers are disproportionately influenced by the left-most digit in a price. 

Consumers see this phenomenon – sometimes called “charm pricing” – everywhere. It’s why paying $3.99 for a gallon of gas seems much cheaper than forking over $4.00.

What the data shows: For major purchases including real estate transactions, this bias can have a major effect. When studying Sweden’s housing market, researchers learned that apartments listed just below a round million “sold at a 3-5% higher final price.” 

Afterward, the researchers surveyed real estate agents to see whether they believed left-digit bias worked. Most agents thought it wouldn’t make a difference. However, the study found that agents with more years of experience were slightly more likely to employ charm pricing when listing a home. 

How to help clients address it: If you’re working with buyers, you could try changing all prices to round numbers before looking at homes. Or you could try the same blind evaluation exercise mentioned above in the anchoring section.

If you’re a listing agent, use charm pricing to your advantage. It could lead to a larger commission, all thanks to human psychology.