Anchoring and loss aversion in the housing market: Implications on price dynamics

Tin Cheuk Leung () and Kwok Ping Tsang

China Economic Review, 2013, vol. 24, issue C, 42-54

Abstract: In this paper we develop a simple model with anchoring and loss aversion to explain house price dynamics. The model has 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 with a previous purchase that is more recent. Using a data set that contains most real estate transactions in Hong Kong from 1992 to 2006, we find anchoring and loss aversion to be important, and the results are robust to type of housing and sample period. The finding is consistent with the strong correlations among house price, price dispersion, and volume found in the data. Moreover, anchoring, price dispersion and volume decrease with time since previous transaction. Our results suggest that anchoring and loss aversion contribute to the cyclicality of the housing market.

Keywords: Price dispersion; Anchoring; Loss aversion; Housing market (search for similar items in EconPapers)
JEL-codes: D03 R31 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Related works:
Working Paper: Anchoring and Loss Aversion in the Housing Market: Implications on Price Dynamics (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:24:y:2013:i:c:p:42-54

DOI: 10.1016/j.chieco.2012.10.003

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