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Anchoring and Loss Aversion in the Housing Market: Implications on Price Dynamics

  • Tin Cheuk Leung
  • Kwok Ping Tsang

In this paper we develop a simple model to link anchoring and loss aversion with 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 ï¬nd strong and signiï¬cant anchoring and loss aversion which are robust to type of housing and sample period. The ï¬nding 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 increase the volatility and cyclicality of house price.

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Paper provided by Virginia Polytechnic Institute and State University, Department of Economics in its series Working Papers with number e07-20.

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Length: 26 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:vpi:wpaper:e07-20
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  1. David Genesove & Christopher Mayer, 2001. "Loss Aversion And Seller Behavior: Evidence From The Housing Market," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1233-1260, November.
  2. Charles K. Y. Leung & Garion C. K. Lau & Youngman C. F. Leong, 2002. "Testing Alternative Theories of the Property Price-Trading Volume Correlation," Journal of Real Estate Research, American Real Estate Society, vol. 23(3), pages 253-264.
  3. Mark Grinblatt & Matti Keloharju, 2000. "What Makes Investors Trade?," Yale School of Management Working Papers ysm146, Yale School of Management, revised 01 Nov 2001.
  4. James A. Berkovec & John L. Goodman, 1996. "Turnover as a Measure of Demand for Existing Homes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(4), pages 421-440.
  5. Charles Leung & Youngman Leong & Siu Wong, 2006. "Housing Price Dispersion: An Empirical Investigation," The Journal of Real Estate Finance and Economics, Springer, vol. 32(3), pages 357-385, May.
  6. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
  7. Alan Beggs & Kathryn Graddy, 2009. "Anchoring Effects: Evidence from Art Auctions," American Economic Review, American Economic Association, vol. 99(3), pages 1027-39, June.
  8. 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.
  9. McAlvanah, Patrick & Moul, Charles C., 2013. "The house doesn’t always win: Evidence of anchoring among Australian bookies," Journal of Economic Behavior & Organization, Elsevier, vol. 90(C), pages 87-99.
  10. Esteban Rossi-Hansberg & Pierre-Daniel Sarte & Raymond Owens, 2010. "Housing Externalities," Journal of Political Economy, University of Chicago Press, vol. 118(3), pages 485-535, 06.
  11. Shapira, Zur & Venezia, Itzhak, 2001. "Patterns of behavior of professionally managed and independent investors," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1573-1587, August.
  12. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
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