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Over-Confidence and Cycles in Real Estate Markets: Cases in Hong Kong and Asia

Studies on the calibration of subjective probabilities find that people tend to over-estimate the precision of their knowledge. In this paper we develop a semi-rational model and apply it to the real estate markets in Hong Kong and other Asian countries. The key point is that a person is rational about her/his private information until her/his private information is confirmed by a clearly defined market signal. Using a pre-sale as a mechanism of updating a developer's beliefs, this paper analyzes the impact of over-confidence on overbuilding and cycles in real estate markets. Our finding indicates that a pre-sale activity will increase the magnitude of over-building and over-confidence will increase the volatility in real estate markets. Our model also has implications to the well-established literature dealing with the issue of over-capacity in many industrial sectors.

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File URL: http://www.umac.mo/fba/irer/papers/past/vol3_pdf/093-108HK-2000.pdf
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Article provided by Asian Real Estate Society in its journal International Real Estate Review.

Volume (Year): 3 (2000)
Issue (Month): 1 ()
Pages: 93-108

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Handle: RePEc:ire:issued:v:03:n:01:2000:p:93-108
Contact details of provider: Postal: Asia Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
Web page: http://www.asres.org/
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Order Information: Postal: Asian Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
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