Put yourself in the shoes of buyers, who are scanning the real estate ads -- or most likely the online listings -- trying to decide which houses to visit in person.
If your house is overpriced, that will be an immediate turnoff. The buyer will probably clue in pretty quickly to the fact that other houses look like better bargains, and move on. Very few buyers think to themselves, "The price may be on the high side, but I can negotiate the seller down." Instead, they think, "Why deal with an unrealistic seller when the sellers two blocks away seem not to realize what a steal they're offering?"
Another problem with overpricing your house is that, especially in a cold market, it will probably be slow to receive offers and eventually go stale on the market -- meaning that buyer interest will move on to the latest new listings. Even buyers who are just entering the market will look at your house suspiciously, speculating on why no one else has bothered to make an offer or succeeded in talking you down on price. You'll end up not only having to reduce your price, but probably reducing it dramatically, to bring buyers and their agents back to your door.
So, at the very least, make sure to set your initial list price at a realistic level given the market. Particularly in a cold market, setting a price that appears objectively rational -- neither too high or too low -- can be an important and effective way to bring in buyers.
What about going even lower than "objectively rational" for your list price? It's often a good strategy. For starters, remember that buyers often think about their price range in $25,000 increments -- and websites of home listings ask people to define their searches using these cutoffs as well. So if you think your house is worth $560,000, but you list it at $549,000, you may bring in a whole group of buyers who wouldn't have looked twice at it otherwise.
The obvious next question is, "Why would I want to bring in buyers who can't afford my house?" Actually, there are two good reasons for this strategy. The first is that, the more people who look at your house and express interest by following up with your selling agent (perhaps by asking for follow-up written materials), the more other potential buyers will feel pressured to make a strong offer.
The second reason is that, regardless of your list price, buyers will make their own assessment of what your house is worth. Whether it's running hot or cold, the market tends to correct for underpricing, as buyers compete against each other and drive the price up.
For more information on getting to know your local real estate market and setting the right list price, see Selling Your House: Nolo's Essential Guide.
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