Behavioral Finance and Incentives

Adverse Selection

Risky or more informed participants are more likely to accept a deal (e.g., Zillow bought overvalued homes).

Moral Hazard

Riskier behavior occurs after an agreement is made (e.g., owner misusing improvement loan).

Framing Effect

People's decisions are influenced by how information is presented (e.g., "only 1.1% monthly").

Loss Aversion

People feel losses more strongly than equivalent gains — leads to refusal to sell at a loss.

Sunk Cost Fallacy

Continuing a losing investment due to past costs instead of future value.

Overconfidence

Belief in one's ability to outperform despite evidence — common in real estate speculation.

Anchoring

Fixating on irrelevant numbers (e.g., original purchase price) when evaluating decisions.

Present Bias

Preference for immediate gratification over long-term benefits.

Winner's Curse

Overpaying in competitive bidding due to emotional escalation.

Endowment Effect

Overvaluing what you already own compared to market value.