Prospect Theory, Reverse Disposition Effect and the Housing Market

45 Pages Posted: 23 Mar 2017

See all articles by Zhaohui Li

Zhaohui Li

Old Dominion University

Michael Seiler

College of William and Mary - Finance

Hua Sun

Iowa State University

Date Written: March 14, 2017

Abstract

We model a house seller's pricing decision under a prospect value function. Our model shows that reference dependence generates a disposition effect, which is magnified by loss aversion. Surprisingly, diminishing sensitivity will lead to a local reverse disposition effect in which a seller's asking price can be decreasing with increasing potential loss. Our model also predicts a larger price dispersion in a cold market and reaffirms the price-volume relation. We find consistent evidence using multiple listing service data in Virginia. Finally, the empirical pricing curve suggests the extent of diminishing sensitivity can vary with the loss/gain position of the agent.

Keywords: Loss Aversion, Prospect Theory, Housing Market, Disposition Effect, Price Dispersion Effect

JEL Classification: D03, R30

Suggested Citation

Li, Zhaohui and Seiler, Michael and Sun, Hua, Prospect Theory, Reverse Disposition Effect and the Housing Market (March 14, 2017). Available at SSRN: https://ssrn.com/abstract=2939186 or http://dx.doi.org/10.2139/ssrn.2939186

Zhaohui Li

Old Dominion University ( email )

Norfolk, VA 23529-0222
United States

Michael Seiler

College of William and Mary - Finance ( email )

VA
United States

HOME PAGE: http://mason.wm.edu/faculty/directory/seiler_m.php

Hua Sun (Contact Author)

Iowa State University ( email )

Ames, IA 50011-2063
United States
1-5152947514 (Phone)

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