Algorithm Failures and Consumers’ Response: Evidence From Zillow

41 Pages Posted: 27 Jul 2023

See all articles by Isamar Troncoso

Isamar Troncoso

Harvard Business School

Runshan Fu

New York University (NYU) - Leonard N. Stern School of Business

Nikhil Malik

Marshall School of Business, USC

Davide Proserpio

Marshall School of Business - University of Southern California

Date Written: July 24, 2023

Abstract

In November 2021, Zillow announced the closure of its iBuyer business. Popular media largely attributed this to a failure of its proprietary forecasting algorithm. We study the response of consumers to Zillow’s iBuyer business closure. We show that after the iBuyer business closure, home sellers started making list-pricing decisions that deviated more from the Zestimate, Zillow’s algorithmically generated estimate of a home’s current value, suggesting that the iBuyer forecasting algorithm failure negatively affected consumer trust in the Zestimate algorithm. Moreover, sellers deviated more by increasing rather than decreasing their list price. We next look at the downstream consequences of the Zillow iBuyer closure on sales outcomes, such as sales price premium over the list price and time on the market. We find that properties are sold for more and in less time, both benefitting home sellers.

Keywords: Algorithmic Pricing, AI Trust, Economics of AI, Housing Market, Zillow

Suggested Citation

Troncoso, Isamar and Fu, Runshan and Malik, Nikhil and Proserpio, Davide, Algorithm Failures and Consumers’ Response: Evidence From Zillow (July 24, 2023). Available at SSRN: https://ssrn.com/abstract=4520172 or http://dx.doi.org/10.2139/ssrn.4520172

Isamar Troncoso

Harvard Business School ( email )

15 Harvard Way
Boston, MA 02163
United States

Runshan Fu

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Nikhil Malik (Contact Author)

Marshall School of Business, USC ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

Davide Proserpio

Marshall School of Business - University of Southern California ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

HOME PAGE: http://dadepro.github.io/

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