Loss Aversion and Anchoring in Commercial Real Estate Pricing: Empirical Evidence and Price Index Implications

Posted: 1 Dec 2010

See all articles by Sheharyar Bokhari

Sheharyar Bokhari

Massachusetts Institute of Technology (MIT)

David Geltner

Massachusetts Institute of Technology (MIT); MIT Center for Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: November 29, 2010

Abstract

This paper empirically tests for the predictions of prospect theory and the anchoring-and-adjustment heuristic in commercial real estate pricing. Using US market data, we confirm and extend previous findings in both housing and commercial real estate that loss aversion affects seller behavior in real estate markets. Consistent with prospect theory, we find that losses loom larger than gains. We also compare loss aversion amongst the different investor types and our results are indicative of a lower degree of loss aversion amongst private investors as compared to others, particularly institutional investors. Furthermore, using the number of trades made by an investor as a measure of their trading experience, we find that the degree of loss aversion is higher, the more sophisticated or experienced the investor is. We also find evidence for anchoring or strategic pricing by the seller that results in transaction prices away from the expected selling price. Finally, we construct an informational tool in the form of a hedonic price index that provides a scenario adjusted for loss-aversion and anchoring.

JEL Classification: G1

Suggested Citation

Bokhari, Sheharyar and Geltner, David, Loss Aversion and Anchoring in Commercial Real Estate Pricing: Empirical Evidence and Price Index Implications (November 29, 2010). 46th Annual AREUEA Conference Paper. Available at SSRN: https://ssrn.com/abstract=1717099

Sheharyar Bokhari

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

David Geltner (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139
United States

MIT Center for Real Estate ( email )

77 Massachusetts Avenue
Cambridge, MA 02139
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
400
PlumX Metrics