When buying or selling a home, your biggest obstacle might not be the market—it might be your own brain. Behavioral economist Daniel Kahneman’s research reveals hidden cognitive biases that can cost buyers and sellers thousands of dollars without them even realizing it. From the anchoring effect that skews price perception to loss aversion that drives emotional decision-making, these mental shortcuts shape how we negotiate, evaluate value, and make financial choices. In this video, we break down the psychological traps that impact real estate decisions—and, more importantly, how to avoid them. Whether you’re a buyer trying to make a smart offer or a seller looking to maximize your price, understanding these biases will help you make better, more rational choices in today’s housing market.
Eric Andersen, B.A., M.Div.
Owner/Designated Managing Broker, Andersen Realty Group
📲 Text/Call: 708.674.6725
📩 Email: eric@eandersenhomes.com
🌎 https://www.ericandersenhomes.com
Did you enjoy this video or find it helpful? If so, be sure to 𝐋𝐈𝐊𝐄, 𝐒𝐇𝐀𝐑𝐄, & 𝐒𝐔𝐁𝐒𝐂𝐑𝐈𝐁𝐄 to my YouTube Channel.
Want to know what your home is worth?
https://www.ericandersenhomes.com/go/home-value/
Looking for homes for sale? Search the entire MLS on my website: https://www.ericandersenhomes.com/homes-for-sale/
Or, better yet, contact me directly for help with buying or selling a home: https://www.ericandersenhomes.com/contact/
Read my reviews:
Google: https://www.bit.ly/andersenrealtygroupgooglereviews
Zillow: https://bit.ly/andersenrealtygroupzillow
I have a number of awards and designations, including:
⭐️ Gold, Diamond, & Platinum Sales Award (Mainstreet Organization of REALTORS®)
⭐️ 20 under 40 (Mainstreet Organization of REALTORS®)
⭐️ Endorsed Local Provider (RamseyTrusted)
⭐️ Best of Zillow
⭐️ Pricing Strategy Advisor (National Association of REALTORS®)
⭐️ Certified Staging Consultant (Mainstreet Organization of REALTORS®)
⭐️ Accredited Buyer’s Representative (ABR®)
Transcript:
Buying or selling a home is one of the biggest financial decisions most people will ever make. But what if I told you that, despite all the research and planning, your brain might still be working against you? I’m Eric with Andersen Realty Group, and behavioral economist Daniel Kahneman spent decades studying how our decisions aren’t as rational as we might like to think they are. His acclaimed book, Thinking, Fast and Slow, shows us the hidden cognitive biases that influence our choices, sometimes in ways that cost us thousands of dollars. When it comes to real estate, these biases shape how buyers and sellers perceive value, negotiate, and ultimately make decisions. The good news is that once you understand these mental shortcuts, you can identify them before they lead to costly mistakes. In this video, we’ll look at the key psychological traps that influence home buyers and sellers, and how to avoid them.
1. The Anchoring Effect: The First Price You See Matters More Than You Think
First impressions matter, especially when it comes to price. The anchoring effect is the tendency to rely too much on the first piece of information we see. For buyers, this means asking price often serves as a mental benchmark. If a home is listed at five hundred fifty thousand dollars, any negotiation naturally revolves around that number, even if the home’s actual value is lower. A small price reduction might feel like a big deal, even if the home was overpriced in the first place.
For sellers, the anchoring effect is a double-edged sword. Price a home too high, and you risk scaring away buyers who assume it’s out of their range. But price it strategically—just low enough to generate interest and possibly multiple offers—and you can create a bidding war that pushes the final sale price even higher. The key is knowing that the first number buyers see will shape their perception of the home’s value.
If you’re buying, don’t take asking price as gospel truth. Do independent research, look at the comps, and try to determine a reasonable market value for the home. If you’re selling, know that your asking price isn’t just a number—it’s a marketing tool that will set the stage for negotiations.
2. Loss Aversion: The Fear of Losing Can Make You Overspend or Overvalue
People hate losing. Research shows that losses feel twice as painful as equivalent gains feel good. This is what’s known as loss aversion—our tendency to avoid losses at all costs, which sometimes leads us to make decisions irrationally.
Buyer face loss aversion when they’re afraid of losing a home to another buyer. The fear of missing out can lead to overpaying in competitive markets or rushing into a purchase before doing your proper diligence. It’s a big reason why bidding wars can get so crazy. Once you’ve mentally committed to a house, the thought of losing it feels unbearable.
For sellers, loss aversion often results in overpricing. Homeowners tend to overvalue their property simply because it’s theirs. They remember every upgrade, every holiday they celebrated, and every hour spent perfecting the landscaping. Their emotional attachment makes the idea of “losing” money on the sale harder to accept, even if the market says otherwise.
The solution? Buyers should set a clear budget and stick to it, no matter how much they love a home. Sellers should focus on market data, not emotions, when setting a price. The market doesn’t care how much you paid for your home or how much work you put into it. The only thing that matters is how much buyers are willing to pay now.
3. The Framing Effect: The Way Information is Presented Changes How You Perceive It
How something is framed changes how we feel about it, even if the facts remain the same. This is what’s known as the framing effect. Buyers see it all the time in real estate listings. A home described as “90% updated” sounds so much better than “10% still needs work,” even though both statements mean the same exact thing. A seller might describe a home as having a cozy backyard rather than calling it small with limited space.
Sellers can use the framing effect to their advantage by framing their home’s features in the most attractive way possible. Instead of emphasizing what’s missing, highlight what’s there. “Lots of potential” sounds better than “a complete disaster.”
For buyers, the key is to reframe the information yourself. When you hear a home is in a “hot neighborhood,” ask: Is it actually appreciating, or is that just marketing hype? If it has a freshly-redone basement, is that because it has major water problems? Sellers craft descriptions to make homes sound as appealing as possible. It’s your job to see past the framing.
4. The Decoy Effect: How a “Worse” Option Makes Another Look Better
Have you ever noticed how restaurants sometimes have an oddly expensive dish on the menu, seemingly overpriced? That’s because its real purpose isn’t to sell—it’s to make other options seem like a better deal. The same thing happens in real estate.
This is known as the decoy effect. If a buyer is comparing two homes at the same price, considering a third, slightly less appealing home can make one of the first two look like a great deal. Sellers will often price their listing just below the others in the neighborhood, making theirs seem like a deal by comparison.
For buyers, the takeaway is clear: Evaluate each home on its own merit, not just how it compares to the others you’ve seen that day. For sellers, you can leverage this bias by pricing your home strategically relative to the competition.
5. The Endowment Effect: Sellers Overvalue Their Own Homes
The endowment effect is our tendency to overvalue what we own simply because we own it. Sellers do this all the time. The house isn’t just four walls and a roof: it’s where their kids took their first steps, where they celebrated holidays and made a lifetime of memories. Naturally, that makes their home more valuable than all of the other homes in the area. The trouble is, buyers don’t share your emotional connection. They’re evaluating your home based on things like size, layout, condition, and features. For sellers, the best approach is to think like a buyer. Look at the numbers objectively and trust the data, not your emotions, when setting your price.
Bonus: Buyer-Specific Biases to Watch Out For
Beyond the major biases that impact both buyers and sellers, there are a few other mental traps that buyers should be aware of. One of the most common is confirmation bias—the tendency to seek out information that supports what we already believe while ignoring anything that contradicts it. Once a buyer falls in love with a home, every detail suddenly reinforces their positive impression. A slightly outdated kitchen? “Nothing a coat of paint won’t fix.” A smaller backyard? “That just means less maintenance.” Meanwhile, serious concerns—like structural issues or an overpriced listing—get rationalized away. To avoid this, buyers should actively look for reasons not to buy a home. Challenge your first impressions, carefully review inspection reports, and ask tough questions before making an emotional commitment.
Another bias that leads buyers into trouble is overconfidence—the belief that they can judge a home’s condition on instinct. It’s easy to walk through a house and think, “I know a solid home when I see one,” but a fresh coat of paint and well-staged furniture can cover up a multitude of real estate sins. Some buyers even waive inspections in competitive markets, assuming they’ll be able to spot any major red flags on their own. This kind of overconfidence can be costly. Unless you’re buying a tear-down, a professional home inspection is always a good idea.
Finally, there’s the sunk cost fallacy—the feeling that once you’ve invested time, effort, or money into something, you need to see it through, even if it’s not the best choice. Buyers sometimes fall into this trap after spending weeks or months searching for a home. When they find something that’s almost right, they go through with the purchase just to justify all the effort they put in. Or, they’re so desperate to move, they’ll settle for practically anything. This is a big mistake. Past effort or a less-than-ideal current living situation doesn’t make a bad decision better. If a home doesn’t seem like the right fit, the best thing you can do is walk away.
Buying a home isn’t just about the numbers. It’s an incredibly emotional decision, and when buyers recognize these hidden biases, they will be in a much better position to make decisions that are based on facts, and not just feelings.
Closing Thoughts
Understanding these biases won’t just make you a more informed buyer or seller, it can save you thousands of dollars. Real estate is as much about psychology as it is about property, and the better you understand these mental shortcuts, the better decisions you’ll make. If you’d like honest, bias-free help selling or buying a home in the western suburbs of Chicago, reach out anytime using my contact information below. And, if you found this video helpful, be sure to like, subscribe, and turn on notifications. I’m Eric with Andersen Realty Group, a family-owned brokerage where we treat our clients like family.