Consumer House Price Judgements: New Evidence of Anchoring and Arbitrary Coherence

Abstract

Individuals are prone to significant errors when making value judgements through the use of heuristics (cognitive short cuts) to simplify decision making. This paper uses an economic experiment to investigate the strength of arbitrary anchors in judgements over house prices among a student group, who are representative of first-time buyers. The study represents a departure from existing property research literature on valuation because it focuses on consumers, not professionals, and uses experiments which are incentivised. Additionally it investigates the evolution of price estimates over multiple sequential property viewings. The results indicate that even in the presence of significant, binary incentives for accurate judgement individuals rely, to a significant degree, on an arbitrarily established anchor value. Such anchors remain powerful enough for transitions to subsequent valuations to remain influenced by this initial value. This is interpreted as a confirmation – and extension – of the arbitrary coherence reported in other studies of consumer judgement (Ariely, Loewenstein and Prelec, 2003).

Keywords: House Prices, Value Judgement, Anchoring, Arbitrary Coherence

JEL Classification: C91, D3, D10