The science of bidding

The tension is palpable, eager sellers wait in the wings while budding buyers recite their strategy and you might have to check your pulse if the emotions of auction day didn’t affect your demeanour, says Bayleys residential and auction manager Daniel Coulson.

There’s a very good reason a sale by auction is Bayleys’ most successful strategy for residential property, it’s because it works, and like all good things it comes with hard work and science-like precision.

Hinging on transparency and competition, the auction process is a beacon of the human condition and psychology plays a vital role in understanding the behaviour of both buyers and sellers - increasingly important when looking to retain value in a shifting market landscape.

Commonly affecting sellers, who for 12-months have been bombarded with headlines about the astronomical value of their property, the ‘Endowment Effect’ (or the ‘I love my property’ effect) goes a long way to explain why sellers can be reluctant to let property go, even when presented with market value.

First coined by economist Richard Thaler and psychologist Daniel Kahneman in the 1990’s, the endowment effect gives explanation to the theory that humans tend to ascribe greater value where there is an emotional connection or ownership. Assuming that humans are naturally adverse to loss and that it is common-place for homeowners to develop an emotional connection to their property, a sale is inherently associated with loss, and therefore greater value (more than the market has indicated) is placed on the property.

This presents an enormous challenge for salespeople, who are tasked not only with finding market value, but working with zealous buyers who have arrived at the auction room determined to secure a bargain. Savvy buyers will do their research, diligently looking at recent comparable sales. Some use the Government’s rating valuations (R.V’s), however this can be problematic given it is a tool used to calculate rates rather than approximate sale prices.

The incongruence between market expectations and prices presently being achieved in the auction room could be attributed to property features like renovations, landscaping and expansion, or that preferable economic developments and factors driving the housing market have simply superseded market fundamentals. However, there is another lesser discussed element which plays a pivotal role in determining value at auction.

Known in psychology as the ‘Audience Effect’ (or ‘Social Facilitation’), this theory describes the phenomena which occurs when humans behave differently in the presence of others versus when they are alone. Dating back to the 1890’s when psychologist Norman Triplett found that once faced with physical challenges, cyclists had a tendency to perform better against other competitors than against the clock. Developments of the theory have suggested a strong link between social perception, stimulation and the tendency to ‘over-perform’ – or in this case, out-bid the competition.

Research from the University of Missouri found that over the past two million years, the size of the human brain has tripled, with social competition the main contributor to this increased cranial capacity and that the growing importance placed on social status has meant that our brains have adapted (increased in size) to survive.

Add to this an element known as ‘Competitive Arousal’ where ‘winning’ is said to induce a positive physiological response and an adrenaline-fuelled ‘win-at-all-costs’ mindset. The research paints a clear picture that a win in the auction room has implications that far supersede simply securing the keys.

Said to increase when intensified, research from the Harvard Business Review similarly found that prospective purchasers were more likely to bid past their pre-determined threshold when competing in a smaller field (against one or two other bidders). During competition of this nature, opponents reported greater feelings of exhilaration and agitation, fuelling the desire to perform beyond their reasonable limits.

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