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Loss aversion and focal point bias: Empirical evidence from housing markets

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  • Ross, Stephen L.
  • Zhou, Tingyu

Abstract

Most research documenting correlation between behavioral biases use survey or experimental data, often focusing on related biases. We test whether evidence of loss aversion in housing sales prices is stronger among individuals who exhibited focal point tendencies when selecting their mortgage amount at purchase, allowing for market impacts of both behavioral biases in high-stakes contexts. We find a strong positive relationship between the effects of facing a loss on eventual sales prices and whether sellers selected a round mortgage amount during their initial purchase. Further, we show that selecting round mortgage amounts is persistent within borrowers over time.

Suggested Citation

  • Ross, Stephen L. & Zhou, Tingyu, 2024. "Loss aversion and focal point bias: Empirical evidence from housing markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:beexfi:v:42:y:2024:i:c:s2214635024000455
    DOI: 10.1016/j.jbef.2024.100930
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    More about this item

    Keywords

    Housing sales; Loss aversion; Anchoring; Mortgage; Behavioral bias; Round numbers; Focal point bias; House prices; Sale likelihood;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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