Today we received a note at our condo door from someone asking if we would be interested in selling our unit. Upon quick reflection, I realized they would have to offer us a LOT more than the going market price for units like ours before we would even consider moving. We quite like the place.
This example seems like a classic example of "consumer surplus" in economics. But read this definition from Wikipaedia carefully:
Consumer surplus is the difference between the maximum price a consumer is willing to pay and the actual price he does pay. If a consumer would be willing to pay more than the current asking price, then they are getting more benefit from the purchased product than they spent to buy it. An example of a good with generally high consumer surplus is drinking water. People would pay very high prices for drinking water, as they need it to survive. The difference in the price that they would pay, if they had to, and the amount that they pay now is their consumer surplus.
We did indeed receive consumer surplus when we bought our condo unit. We paid less for it than the maximum we'd have been willing to pay.
The case of valuing our condo more than the market price is not quite the same, though, is it. Consumer surplus refers to the difference between what we would have been willing to pay and what we did pay for our unit. It does not refer to the difference between what we would be willing to sell it for and the market price.
In other words, what we were willing to pay for the unit before we owned the unit was much less than what it would take to get us to move now that we are here. Maybe it's inertia; maybe it's irrationality; maybe it's transaction costs (lawyers, movers, redecorators, etc.). For sure, it is in part dread at the thought of moving again.
But it is in part the endowment effect:
In behavioral economics, the endowment effect (also known as divestiture aversion) is the hypothesis that people ascribe more value to things merely because they own them.[1]This is illustrated by the observation that people will tend to pay more to retain something they own than to obtain something owned by someone else—even when there is no cause for attachment, or even if the item was only obtained minutes ago.
Offer us maybe $150K over the market price, and we might give the offer serious consideration. That's enough to overcome even one heck of an endowment effect!