For years, economists have used the study of behavioral finance to explain the role emotions play in investment decisions. Their observations have turned up some interesting results.
First, they’ve found that while investors know very well that the stock market has its ups and downs, some will still base investment decisions on the assumption that what’s happening now will continue in the future. For example, the home buyer driven by a hot market will engage in bidding wars, assuming that the market will continue to heat up. The buyer believes he or she has to buy now or lose out.
Second, they’ve found that other investors follow the “anchoring” concept, in which they hold off selling an asset in hopes that it will increase in value despite evidence to the contrary. In this scenario, home buyers stubbornly anchor themselves to an offering price even though the seller and buyer are only a few hundred dollars apart.
Third, they’ve found that some investors buy too much house for their budget or they forget about the crumbling foundation, because they love the seller’s decor.
Fourth, they’ve found that other investors fail to see beyond the clutter as to possibilities of a home.
To prevent such problems, the emotional home buyer needs the perspective of a real estate agent. Such a professional can separate the emotion from the investment so your dream house won’t become a nightmare.