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Prospect Theory and Loss Aversion in the Housing Market

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  • Florent Buisson

    (University Paris 1, France)

Abstract

A stylized fact of the housing market is the strong positive correlation between prices and trading volume. Loss aversion from the sellers is one of the most often suggested explanations for this phenomenon, through an increase in sellers' reservation value. This article demonstrates that on the contrary the effect of loss aversion is to decrease the reservation value and not to increase it. We suggest alternative behavioral explanations for the observed stylized fact.

Suggested Citation

  • Florent Buisson, 2016. "Prospect Theory and Loss Aversion in the Housing Market," Journal of Real Estate Research, American Real Estate Society, vol. 38(2), pages 229-250.
    • Handle: RePEc:jre:issued:v:38:n:2:2016:p:229-250
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    References listed on IDEAS

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    1. Benítez-Silva, Hugo & Eren, Selçuk & Heiland, Frank & Jiménez-Martín, Sergi, 2015. "How well do individuals predict the selling prices of their homes?," Journal of Housing Economics, Elsevier, vol. 29(C), pages 12-25.
    2. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1233-1260.
    3. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    4. Song Shi & Martin Young & Bob Hargreaves, 2010. "House Price-Volume Dynamics: Evidence from 12 Cities in New Zealand," Journal of Real Estate Research, American Real Estate Society, vol. 32(1), pages 75-100.
    5. Wakker,Peter P., 2010. "Prospect Theory," Cambridge Books, Cambridge University Press, number 9780521765015, January.
    6. Jeremy C. Stein, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(2), pages 379-406.
    7. repec:pri:cepsud:203ashenfelter is not listed on IDEAS
    8. Shefrin, Hersh & Statman, Meir, 1985. "The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-790, July.
    9. Hua Sun & Michael J. Seiler, 2013. "Hyperbolic Discounting, Reference Dependence and its Implications for the Housing Market," Journal of Real Estate Research, American Real Estate Society, vol. 35(1), pages 1-24.
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    Cited by:

    1. Akshita Singh & Shailendra Kumar & Utkarsh Goel & Amar Johri, 2023. "Behavioural biases in real estate investment: a literature review and future research agenda," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-17, December.
    2. Yu Zhu & Randall Wright & Damien Gaumont, 2017. "Modeling House Prices," 2017 Meeting Papers 744, Society for Economic Dynamics.

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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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