I have a neighbour who is on his third real estate agent in under a year. The two previous agents had failed to sell his property at a price he was happy with. Interestingly, the two previous failed attempts saw the property pass in at the same price. Added to this this three other properties have sold in my street that are functionally identical to my neighbours in terms of size, number of bedrooms, number of bathrooms, etc. The three properties were all sold in a fairly narrow price range, so the market has established a price range that his property would sell at.
I ran into our neighbour down at our local and was asking him about his house and why his place hadn’t sold and of course it was the agents fault. As we chatted it became apparent that he thought his house was worth much more than the others which had sold in the street because it was his and it has his stuff in it. That by itself makes it more valuable.
This little story is a perfect example of how our own internal biases can defeat us and how the reason goes out the window when it does not conform to our world view. In this instance my neighbour believes his house is worth much more than it really is despite the market pointing out how much it is actually worth. This is a charming example of a optimism bias and cognitive dissonance. But recently I was reading of the work of Dan Kahan. He has coined a term he has called motivated numeracy. Kahan who is interestingly a professor of both law and psychology at Yale examines how peoples numeracy collapses when it is confronted by their existing political beliefs. The basic tenet of Kahans work is that peoples political beliefs cause them to ignore compelling evidence that is contrary to their opinions. Which is why people involved in politics appear so stupid (because they are) and interestingly those on the right of politics are the dumbest of the bunch when it comes to motivated numeracy.
It is not much of a stretch to see the same bias in my neighbour – he knows what his house is worth, the market has told him what it is worth. But both of these clash with his world view that because it is his house it is worth more. the cool thing about any given bias is that it is not confined to a given segment of our lives. The same bias afflicts traders – they ignore information that clashes with their world view. but more importantly traders can become wedded to a given stock when they should be letting it go. The same emotions come into play – its my stock so it must be worth more than the market thinks it is worth because after all I wouldn’t buy a stock that was going to go down.