I’m always amazed at how rational, professional clients can make seemingly illogical decisions when it comes to the process of buying or selling a home. When faced with facts and statistics that should lead to a comfortable and informed decision, the most intelligent clients still let fear and uncertainty dictate their choices. Why does this happen?
Herding Impulse
I’ve heard so many potential buyers hemming and hawing at the moment, hoping to time the market at it’s *absolute, exact bottom* that they have missed out on homes that were affordable and exactly what they were looking for. (Their words, not just mine.) So, I went poking around the interwebs to see what I could find about “crowd psychology.”
Robert Campbell, writing in his San Diego Real Estate Report, says “during upturns in real estate cycles, optimistic psychology takes a hold of the market…People start to believe that what is happening now will continue to happen, and thus they come to see less risk than actually exists in the market. ” Conversely, he says a downturn in the market brings on “the psychology of pessimism,” when “people are driven by risk avoidance, in order to minimize pain.” This makes total sense to me, from a practical perspective, as I watch buyers choose to wait, while house prices and mortgage rates match up perfectly with their long term goals. No one wants to feel like a sucker, so they continue to wait as if someone is going to fire up the alarm at some point, screaming, “We’re at bottom! Buy now!”
Enter the “Elliott Wave”
The idea that society moves in waves, that ‘mass psychology’ or ‘crowd psychology’ influences consumer decisionmaking is really nothing new. Interestingly, though, there is a whole cadre of financial advisors that use a principle based on investor psychology to predict how the market will move. In essence, the “Elliott Wave Theory” contests that market movements are driven by investor psychology: waves of greed versus fear, optimism or pessimism. An accountant, Ralph Nelson Elliott, wrote a series of papers in the 1930’s and 1940’s spelling out how this behavior creates waves, or price patterns, as buying and selling behavior swings from optimism at the peak to pessimism at the bottom.
Robert Prechter is probably the best known supporter of the theory in the investing world, founding Elliott Wave International. (He has a degree in psychology, so no wonder he was drawn to it!) Using the principle, he correctly forecasted the 1987 market crash and the beginning of the bull market in October 1982. However, he was off in the timing of the bear market by five years. So, I guess reading and correctly interpreting wave behavior isn’t the easiest task. However, most trading software packages include Elliott Wave analysis, and some traders use it to read the waves, to help them predict where the market is going.
Can You Hear Me Now?
People look to others to provide direction, whether they are investing in the stock market or in real estate. ‘Mass psychology’ and ‘crowd behavior’ can trump logic and data easily. The clients that base their decisions on diligent research and their future investment plans are the ones that reap the most reward. The question is, how do we get through to clients who can’t hear us for all of the noise everyone else is making?
Matt Stigliano
March 24, 2009 at 9:12 am
Heather – Crowd psychology is an interesting study. Jim Morrison of The Doors was fascinated by it and wrote about it several times. Having been a musician, I was always interested in it, after learning a bit about it from some of his writing. Having stood on festival stages, I’ve seen it in action. You can make a crowd do just about anything if you push them in the right direction.
Mark Eckenrode
March 24, 2009 at 7:06 pm
likin’ this post… psychology es muy bueno.
what you’re writing about is in line with “social proof” (https://en.wikipedia.org/wiki/Social_proof) where folks who lack enough information to decide on a course of action will follow the lead of others. very much herd behavior.
the way to reach those that are basing their decision off of noise instead of data is to highlight those that have the data and the moves they are making. Position them as “cool folks in the know” while also positioning those that aren’t making moves “uncool folks not in the know.”
for example, a community wanted to increase it’s recycling efforts and had failed with past promotions until… they ran a low-budget commercial that showed people in the neighborhood all taking their recyclables down to the curb. one boy asked his father, “where are the petersons?” to whcih dad replied, “son, the petersons, well, they don’t recycle.”
community recycling jumped (nobody wanted to be like the petersons!). same psychology can be applied here…
Ken Brand
March 25, 2009 at 6:47 am
As marketers, communicators, connectors, persuaders and entrepreneurs, a bit of study, observation and cogitating on this subject is a wise idea.
Seth Godin had a recent post that is sorta semi-related. Common desires quenched can influence and attract a crowd – https://budurl.com/SethGodin5PillarsSM
Thanks for sharing.
Bill Lublin
March 25, 2009 at 9:02 am
Heather;
Great post and great points- I just wanted to know if the photo was taken at Lori Bee’s farm?
😉