Betting on the House: Subjective Expectations and Market Choices

45 Pages Posted: 22 Jun 2020

See all articles by Nicolas L. Bottan

Nicolas L. Bottan

Cornell University - Department of Policy Analysis and Management

Ricardo Perez-Truglia

University of California, Berkeley; National Bureau of Economic Research (NBER)

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Date Written: June 2020

Abstract

Home price expectations play a central role in macroeconomics and finance. However, there is little direct evidence on how these expectations affect market choices. We provide the first experimental evidence based on a large-scale, high-stakes field experiment in the United States. We provided information by mail to 57,910 homeowners who recently listed their homes on the market. Collectively, these homes were worth $34 billion dollars. We randomized the information contained in the mailing to create non-deceptive, exogenous variation in the subjects’ home price expectations. We then used rich administrative data to measure the effects of these information shocks on the subject’s market choices. We find that, consistent with economic theory, higher home price expectations caused the subjects to delay selling their homes. These effects are statistically highly significant, economically large in magnitude, and robust to a number of sharp checks. Our results indicate that market choices are highly elastic to expectations: a 1 percentage point increase in home price expectations reduced the probability of selling within six months by 2.45 percentage points. Moreover, we provide evidence that this behavioral elasticity would be even higher if it were not for the presence of optimization frictions.

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Suggested Citation

Bottan, Nicolas Luis and Perez-Truglia, Ricardo, Betting on the House: Subjective Expectations and Market Choices (June 2020). NBER Working Paper No. w27412, Available at SSRN: https://ssrn.com/abstract=3632639

Nicolas Luis Bottan (Contact Author)

Cornell University - Department of Policy Analysis and Management ( email )

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HOME PAGE: http://https://www.nicolasbottan.com

Ricardo Perez-Truglia

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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