Anchoring and Loss Aversion in the Housing Market: Implications on Price Dynamics
AbstractIn this paper we develop a simple model with anchoring and loss aversion to explain house price dynamics. We have two testable implications: 1) when both cognitive biases are present, price dispersion and trade volume are pro-cyclical; 2) if anchoring decreases with time, then price dispersion and trade volume are higher for transactions whose previous purchase is more recent. Using a dataset that contains most real estate transactions in Hong Kong from 1992 to 2006, we find strong and significant anchoring and loss aversion which are robust to type of housing and sample period. The finding is consistent with the strong correlation between house price, price dispersion, and volume in the data. Moreover, anchoring decreases with time since previous transaction, and both price dispersion and volume show the same pattern. Our results suggest that anchoring and loss aversion can induce cyclicality in house prices.
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Bibliographic InfoPaper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 282011.
Length: 29 pages
Date of creation: Sep 2011
Date of revision:
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Price Dispersion; Anchoring; Loss Aversion; Housing Market;
Other versions of this item:
- Leung, Tin Cheuk & Tsang, Kwok Ping, 2013. "Anchoring and loss aversion in the housing market: Implications on price dynamics," China Economic Review, Elsevier, vol. 24(C), pages 42-54.
- Tin Cheuk Leung & Kwok Ping Tsang, 2010. "Anchoring and Loss Aversion in the Housing Market: Implications on Price Dynamics," Working Papers e07-20, Virginia Polytechnic Institute and State University, Department of Economics.
- R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-09 (All new papers)
- NEP-UPT-2011-10-09 (Utility Models & Prospect Theory)
- NEP-URE-2011-10-09 (Urban & Real Estate Economics)
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