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Loss Aversion and Seller Behavior: Evidence from the Housing Market

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  • David Genesove
  • Christopher Mayer

Abstract

We show that loss aversion is an important feature in explaining sellers’ behavior in the housing market. Data from the 1990-97 boom-bust cycle in downtown Boston show that condominium owners subject to nominal losses 1) set higher asking prices of 25-35 percent of the difference between the expected selling price of a property and their original purchase price; 2) attain higher selling prices of 3-18 percent of that difference; and 3) exhibit a much lower hazard rate of sale than other sellers. The list price results are roughly twice as large for owner-occupants as investors, although they hold for both groups. We also show that the larger the prospective loss, the smaller the marginal mark-up of list price over expected selling. These findings are consistent with the shape of the value function in prospect theory as first proposed by Kahneman and Tversky (1979). They also help explain the strong positive correlation between aggregate prices and volume in this and other real estate markets.

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Paper provided by Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania in its series Zell/Lurie Center Working Papers with number 323.

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Handle: RePEc:wop:pennzl:323

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  1. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, Econometric Society, vol. 47(2), pages 263-91, March.
  2. Sven Rady, 1998. "Housing Market Fluctuations in a Life-Cycle Economy with Credit Constraints," FMG Discussion Papers, Financial Markets Group dp296, Financial Markets Group.
  3. Genesove, David & Mayer, Christopher J, 1997. "Equity and Time to Sale in the Real Estate Market," American Economic Review, American Economic Association, American Economic Association, vol. 87(3), pages 255-69, June.
  4. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(1), pages 73-92, February.
  5. Jeremy C. Stein, 1993. "Prices and Trading Volume in the Housing Market: A Model with Downpayment Effects," NBER Working Papers 4373, National Bureau of Economic Research, Inc.
  6. Genesove, David & Mayer, Christopher, 2001. "Loss Aversion and Seller Behaviour: Evidence from the Housing Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2813, C.E.P.R. Discussion Papers.
  7. Shapira, Zur & Venezia, Itzhak, 2001. "Patterns of behavior of professionally managed and independent investors," Journal of Banking & Finance, Elsevier, Elsevier, vol. 25(8), pages 1573-1587, August.
  8. Amemiya, Takeshi, 1980. "Selection of Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(2), pages 331-54, June.
  9. Loewenstein, George F & Sicherman, Nachum, 1991. "Do Workers Prefer Increasing Wage Profiles?," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 9(1), pages 67-84, January.
  10. Shafir, Eldar & Diamond, Peter & Tversky, Amos, 1997. "Money Illusion," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 341-74, May.
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  1. > Real Estate and Housing Economics
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