Endowment Effect and Housing Decisions

Abstract

Endowment effect refers to the reported gaps between willingness to accept and willingness to pay. According to prospect theory, this effect is a result of the underweighting of opportunity costs. Given the high stake involved in a typical housing transaction, endowment effect is expected to have a significant influence on housing decisions. We develop a theoretical framework to study the presence of endowment effect and its role in housing decision-making process. Three hypotheses are derived and tested through a field experiment conducted in Beijing, China. Our empirical results show that endowment effect plays an important role in the formation of judgmental biases in housing decisions. Moreover, endowment effect interacts with housing cycles. Our study highlights the application of prospect theory in the housing market; thus, it not only extends existing theoretical and empirical works in this important sector, but also clarifies consumer behavior in the emerging property market of China.

‘Smarter Information, Smarter Consumers’? Insights into the Housing Market

“…Part C of the questionnaire is labelled 'background information'. The questions include social and cultural values (Lin & Lin, 2006;Maddux et al, 2010), educational level/experience (Bao & Gong, 2016;Plott & Zeiler, 2005;List, 2003;2004), income effect (He & Asami, 2014) and gender (Dommer & Swaminathan, 2012). All information obtained from this part is used as control variables in the subsequent analysis.…”

Tracking Owners’ Sentiments: Subjective Home Values, Expectations and House Price Dynamics

“…Our results from subsection 2.3 suggest that such a gap may be large in the secondary housing market where homeowners constitute the supply side. This is also supported by Bao and Gong (2016). In surveys, homeowners estimate the price of their home and hence the OEV can be expected to reflect owners' WTA.…”

“Smarter information, smarter consumers”? Insights into the housing market

“…However, their work did not comprehensively discuss the WTA-WTP disparity. He and Asami (2014) and Bao and Gong (2016) conducted WTA-WTP experiments on land price and resale property in Beijing, respectively. They confirmed the existence of the WTA-WTP disparity in land and housing markets.…”

“…Part C of the questionnaire is labelled 'background information'. The questions include social and cultural values (Lin & Lin, 2006;Maddux et al, 2010), educational level/experience (Bao & Gong, 2016;Plott & Zeiler, 2005;List, 2003;2004), income effect (He & Asami, 2014) and gender (Dommer & Swaminathan, 2012). All information obtained from this part is used as control variables in the subsequent analysis.…”