Just finished a beautiful drive to the North Georgia Mountains. I visited a client who is selling her home. It isn’t selling. Whether the price is too high or the fact buyers haven’t come out of hibernation wasn’t clear, but something else was.
As we talked I realized she is battling a behavioral flaw called anchoring bias. Anchoring bias makes it difficult to relinquish a house, stock or anything of value because of price memory. Memory that reminds us what we initially spent for the item. Despite market changes, we anchor ourselves to a past reality, a day gone by. This prevents us from moving on.
Imagine buying a $300 pair of shoes you cannot return. The shoes are beautiful but upon wearing them more than 30 seconds you discover one major problem — they make your feet hurt. The more they cost, the more you’ll try to wear them. Eventually, they move into that spot in the closet were shoes go to die. Never to see the light of day again.
Do you donate them to charity or throw them out? Nope, they just sit in the closet for 3 years taking up space rent-free. Then one day the regret subsides and you get rid of ’em.
When it comes to our homes, anchoring bias is critical to guard against. Unlike those shoes, the house can’t sit quietly in the back of the closet.
The decision to hold onto unproductive financial and emotional assets adds up. You still have to pay the bills every month which reduces your current standard of living. Your mortgage further increases the cost of ownership. Not to mention the unexpected cost of an air conditioner or new roof.
In business, we take losses on bad decisions all the time. It’s a part of business life. In our personal lives, it might not be a bad idea to visit what will be important tomorrow and cut the anchors from today.