Loss Aversion and Seller Behaviour: Evidence from the Housing Market

Data from downtown Boston in the 1990s show that loss aversion determines seller behavior in the housing market. Condominium owners subject to nominal losses 1) set higher asking prices of 25-35 percent of the difference between the property's expected selling price and their original purchase price; 2) attain higher selling prices of 3-18 percent of that difference; and 3) exhibit a much lower sale hazard than other sellers. The list price results are twice as large for owner-occupants as investors, but hold for both. These findings are consistent with prospect theory and help explain the positive price-volume correlation in real estate markets.

[1]  I. Fisher,et al.  The Money Illusion. , 1929 .

[2]  C. Plott,et al.  Economic Theory of Choice and the Preference Reversal Phenomenon , 1979 .

[3]  A. Tversky,et al.  Prospect theory: analysis of decision under risk , 1979 .

[4]  Takeshi Amemiya,et al.  Selection of Regressors , 1980 .

[5]  Vernon L. Smith,et al.  Individual Rationality, Market Rationality, and Value Estimation , 2000 .

[6]  G. Constantinides.  The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence: Discussion , 1985 .

[7]  W. Newey,et al.  Large sample estimation and hypothesis testing , 1986 .

[8]  N. Miller,et al.  A Note on Lending Indicators of Housing Market Price Trends , 1986 .

[9]  William D. Schulze,et al.  The Disparity Between Willingness to Accept and Willingness to Pay Measures of Value , 1987 .

[10]  N. Kiefer.  Economic Duration Data and Hazard Functions , 1988 .

[11]  A. Tversky,et al.  Loss Aversion in Riskless Choice: A Reference-Dependent Model , 1991 .

[12]  G. Loewenstein,et al.  Do Workers Prefer Increasing Wage Profiles? , 1991, Journal of Labor Economics.

[13]  Steven J. Kachelmeier,et al.  Examining Risk Preferences under High Monetary Incentives: Experimental Evidence from the People's Republic of China , 1992 .

[14]  Stephanie Jacques,et al.  The Endowment Effect and the Coase Theorem , 1992 .

[15]  A. Tversky,et al.  Advances in prospect theory: Cumulative representation of uncertainty , 1992 .

[16]  J. MacKinnon,et al.  Estimation and inference in econometrics , 1994 .

[17]  R. Thaler,et al.  Myopic Loss Aversion and the Equity Premium Puzzle , 1993 .

[18]  J. Stein,et al.  Prices and Trading Volume in the Housing Market: A Model with Downpayment Effects , 1993 .

[19]  R. Meese,et al.  Testing the Present Value Relation for Housing Prices: Should I Leave My House in San Francisco? , 1994 .

[20]  David Genesove,et al.  Equity and Time to Sale in the Real Estate Market , 1994 .

[21]  John Shea,et al.  Union contracts and the life-cycle/permanent-income hypothesis , 1995 .

[22]  René Garcia,et al.  Excess Sensitivity and Asymmetries in Consumption: An Empirical Investigation , 1995 .

[23]  Terrance Odean,et al.  Are Investors Reluctant to Realize Their Losses? , 1996 .

[24]  M. Rabin.  Psychology and Economics , 1997 .

[25]  J. Stein,et al.  Leverage and House-Price Dynamics in U.S. Cities , 1997 .

[26]  The Dynamic Structure of Housing Markets , 1997 .

[27]  Sven Rady,et al.  Housing Market Fluctuations in a Life-Cycle Economy with Credit Constraints , 1998 .

[28]  R. Ignatius.  Are Investors Reluctant to Realize Their Losses , 1999 .

[29]  Mark Grinblatt,et al.  What Makes Investors Trade? , 2000 .

[30]  Zur Shapira,et al.  Patterns of Behavior of Professionally Managed and Independent Investors , 2000 .

[31]  H. Gill,et al.  The Impact of Transaction Costs and the Expected Length of Stay on Homeownership , 2002 .