Anchoring and loss aversion in the housing market : Implications on price dynamics

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journal

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Author(s)

  • Tin Cheuk Leung
  • Kwok Ping Tsang

Detail(s)

Original languageEnglish
Pages (from-to)42-54
Journal / PublicationChina Economic Review
Volume24
Issue number1
Publication statusPublished - Mar 2013
Externally publishedYes

Abstract

In this paper we develop a simple model with anchoring and loss aversion to explain house price dynamics. The model has two testable implications: 1) when both cognitive biases are present, price dispersion and trade volume are pro-cyclical; 2) if anchoring decreases with time, then price dispersion and trade volume are higher for transactions with a previous purchase that is more recent. Using a data set that contains most real estate transactions in Hong Kong from 1992 to 2006, we find anchoring and loss aversion to be important, and the results are robust to type of housing and sample period. The finding is consistent with the strong correlations among house price, price dispersion, and volume found in the data. Moreover, anchoring, price dispersion and volume decrease with time since previous transaction. Our results suggest that anchoring and loss aversion contribute to the cyclicality of the housing market. © 2012 Elsevier Inc.

Research Area(s)

  • Anchoring, Housing market, Loss aversion, Price dispersion

Citation Format(s)

Anchoring and loss aversion in the housing market : Implications on price dynamics. / Leung, Tin Cheuk; Tsang, Kwok Ping.

In: China Economic Review, Vol. 24, No. 1, 03.2013, p. 42-54.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journal