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Risk assessment of real estate investment with the use of subjective probability

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  • Iwona Dittmann

Abstract

Investing in real estate, as in any other market, involves risk. To assess investment risk, different measures are used, including measures based on probability distribution (like volatility measures and safety level) as well as measures based on distribution function (the probability of not achieving the aspiration level).The purpose of this paper is to propose the use of subjective probability in the risk assessment of investment in real estate. This paper: 1) will identify the determinants of subjective probability estimation in the assessment of investment risk in the real estate market, 2) will present heuristics and related possible errors committed by risk analysts and forecasters (like anchoring and adjustment heuristics, availability heuristic, representativeness heuristic, confirmation bias, hindsight bias, conjunction fallacy and unrealistic optimism), 3) will present the possibility of applying the Easyfit software to estimate subjective probability distribution based on the percentiles specified by experts.The theoretical considerations presented in the paper are based on the achievements of finance and behavioral economics. The practical part provides an example of estimating subjective probability distribution based on percentiles with the use of the Easyfit software.

Suggested Citation

  • Iwona Dittmann, 2014. "Risk assessment of real estate investment with the use of subjective probability," ERES eres2014_103, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2014_103
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    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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