Anchoring and Loss Aversion in the Housing Market: Implications on Price Dynamics
Tin Cheuk Leung
Chinese University of Hong Kong (CUHK)
Kwok Ping Tsang
Virginia Polytechnic Institute & State University
November 29, 2010
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 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 increase the volatility and cyclicality of house price.
Number of Pages in PDF File: 30
Keywords: Price Dispersion, Anchoring, Loss Aversion, Housing Market
JEL Classification: R31, D03working papers series
Date posted: November 30, 2010 ; Last revised: November 12, 2011
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