McCabe: Emotion Influences Financial Decisions

Important decisions like the sale of a home are often affected by the emotions of the person involved, says Professor of Economics and Law Kevin McCabe in an Washington Post article that probes the reasons behind the slight decline in housing prices despite the current rising inventory of unsold homes in the Washington market. "There's a whole emotional processing system that goes on in the brain that's largely beyond our control," says McCabe, stating, "The general view is that our emotions control us, and not vice versa."

For Sale, By the Owner's Ego, The Washington Post, November 4, 2006. By Kirstin Downey.

"Neuroeconomic research may provide buyers and sellers with some clues about how to psych out the market themselves.

"Sellers, neuroeconomist McCabe suggests, might need to realize that no matter how passionately they wish things were different, prices have fallen and they need to accept that. They can hold on and wait, but may actually lose more money by making payments on a home in a place they no longer want to live -- in effect, throwing good money after bad.

"Buyers, he said, need to be aware that they are dealing not just with a house but also with a seller wrestling with his ego. Sometimes it might be smarter to let the poor fellow keep his price, but ask for other concessions that might actually be more valuable. A new roof, new appliances or substantial assistance toward the closing costs all have material value, but they allow the seller the dignity of maintaining the price at a level that leaves him standing tall in his neighbors' eyes.

"'Haggle less over price and more over other stuff,' McCabe said the research indicates. 'Change the bargaining so you still get the deal you want.'"

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