Cognitive Biases in Real Estate: The Framing Effect has a powerful influence on any decision a person makes. The decision to buy or sell a home is a MAJOR life decision, so it’s important to consider to what degree any cognitive bias may influence your decision-making.
What is the Framing Effect?
“The framing effect is when our decisions are influenced by the way information is presented. Equivalent information can be more or less attractive depending on what features are highlighted.” (https://thedecisionlab.com/biases/framing-effect). The Framing Effect is a cognitive bias that occurs when how you present an option to someone affects the outcome of their decision making.
Framing in Marketing
All real estate agents will highlight all the positive information they can about a home listed for sale. It’s a buyer’s response to the listing information (marketing) that prompts a buyer’s interest in seeing the home in person. On showings, I often hear buyers say, “It looked better in the pictures I saw online.” Well, the listing agent’s professional photography, drone videography, and narrative about the property are “setting the frame” for the property in hopes that it will prompt a person visit. It’s sort of like going out on a first date. You are looking your absolute best. But it’s not the whole story. You look a whole lot different at 6am with morning breath:)
The framing effect is part of prospect theory—a branch of behavioral economics that explains why humans make irrational decisions (like buying homes at inflated prices) rather than logical ones (like paying more than market value). Prospect theorists argue that humans are driven by loss aversion: We’re motivated more by avoiding losses than acquiring gains. This means that although most rational people would agree that paying below market value would be better than overpaying, most people still choose something else instead—often because they don’t want to take any risks or lose out on something they believe they deserve.
Framing during Inspections
The Framing Effect changes during the Inspection Period of the home-buying process. When an inspector presents their findings, the frame quickly changes from what you experienced on your first date to a cold report from a medical doctor, psychologist, or private investigator about all the problems with that person. As you can imagine in the dating scenario, such a report is likely to make you a little less excited about this person. So, the frame changes significantly.
Inspectors are required to issue a report on any problems they find with a home. This can be stressful to buyers because it focuses on what’s wrong with a house rather than what’s right. It’s important to remember that like people, no house is perfect and even if your inspector finds some minor issues in your new purchase, it doesn’t mean you should reject the property or abandon all hope for happiness there. Instead of focusing on these minor things, try reminding yourself of why this house was so appealing in the first place—perhaps its location or style made up for any defects?
On the other hand, if the reports from the private investigator revealed that the person is a psychopath, or has cheated in every relationship he or she has been in, or something worse, you may think twice about that second date. The same is true for a home inspection. If the home inspection reveals significant structural issues with the home, moisture/mold issues, the presence of asbestos, etc., you may want to use the Inspection Contingency Clause of the Purchase Agreement to “walk away” from the deal.
Framing Leading Up to Closing
If the inspection report didn’t scare you way, and now that Contingency of the contract has been satisfied, a new frame begins to emerge. You are weighing the good aspects of their chosen property with its defects and issues. This is likely the most realistic frame of the property you can have at this time (of course, it’s likely to change after you purchase the property and live it in a while).
In short, how information is framed has an influence on your decisions. The framing effect can be used to make an offer seem more appealing or less risky, which is why it’s important for buyers to stay informed about what they’re doing when they invest in a home. It’s just another reason you need a trusted agent who puts your interests above all else.