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I think you surely end up deterring bidders who feel nervous about going that far above valuation.
Maybe, but it's pretty easy to look at equivalent properties that have sold recently nearby to get a feel for what a place is actually likely to sell at. Anyway, it's academic as you wouldn't sell to these people anyway. You are trying to attract a frenzy of people who can buy and sense there might be a bargain (there isn't.).
Your example house listed at £850k sold for £1m+, right?
(it's also a much less risky strategy to underprice than it is to be market rate or over priced)
Howard
Maybe if you price by £25 / £50k under that strategy can work. Setting price at £150k under sale price, I think you surely end up deterring bidders who feel nervous about going that far above valuation.