Can Anchoring and Loss Aversion Explain the Predictability of Housing Prices?

Abstract

We offer an explanation of why changes in house price are predictable. We consider a housing market with loss‐averse sellers and anchoring buyers in a dynamic setting. We show that when both cognitive biases are present, changes in house prices are predicted by price dispersion and trade volume. Using a sample of housing transactions in Hong Kong from 1992 to 2006, we find that price dispersion and transaction volume are, indeed, powerful predictors of housing return. For both in and out of sample, the two variables predict as well as conventional predictors such as the real interest rate and real stock return.

Navigating the Stock Market: Modeling Wealth Exchange and Network Interaction with Loss Aversion, Disposition Effect and Anchoring and Adjustment Bias

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Taxing land rent, lowering other taxes – the case of Hong Kong

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“…But evidence from studies shows that even irrelevant information can influence decision making. Even knowing that it is irrelevant, individuals rarely ignore the information (Leung & Tsang, 2013;Lobão, 2012;Tversky & Kahneman, 1974).…”