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

36 Pages Posted: 16 Nov 2011

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

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Date Written: Winter 2011

Abstract

Loss aversion behavior plays a major role in the pricing of commercial properties, and it varies both across the type of market participants and across the cycle. We find that sophisticated and more experienced investors are at least as loss averse as their counterparts and that loss aversion operated most strongly during the cycle peak in 2007. We also document a possible anchoring effect of the asking price in influencing buyer valuation and subsequent transaction price. We demonstrate the importance of behavioral phenomena in constructing hedonic price indices, and we find that the impact of loss aversion is attenuated at the aggregate market level. This suggests that the pricing and volume cycle during 2001–2009 was little affected by loss aversion.

Suggested Citation

Bokhari, Sheharyar and Geltner, David, Loss Aversion and Anchoring in Commercial Real Estate Pricing: Empirical Evidence and Price Index Implications (Winter 2011). Real Estate Economics, Vol. 39, Issue 4, pp. 635-670, 2011. Available at SSRN: https://ssrn.com/abstract=1960453 or http://dx.doi.org/10.1111/j.1540-6229.2011.00308.x

Sheharyar Bokhari (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

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

David Geltner

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

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