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I was listening to All Things Considered on March 30, 2008 and I heard an interesting exchange. The usual economic truism — as demand goes down, the prices go down— doesn't seem to apply in the current troubled housing market. Many homeowners prefer not to sell their home than to take a penny less than their inflated asking price. Hersh Shefrin, professor of behavioral finance at Santa Clara University, breaks down the economic conundrum for Andrea Seabrook. You can listen for yourselves on the National Public Radio website by clicking on the link above, or get the gist of the conversation from my paraphrase: Behavioral Finance is the study of how psychology impacts financial decision making. For instance, pricing their home in a declining market. When a homeowner thinks they are going to take a loss if they sell their house, they are inclined, instead, to gamble by setting a much higher asking price, hoping that they can beat the odds and a magic buyer will appear...
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