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Prospect Theory and Loss Aversion in the Housing Market

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  • Florent Buisson

Abstract

A stylized fact of the housing market is the strong positive correlation between prices and trading volume. Loss aversion from the sellers is one of the most often suggested explanations for this phenomenon, through an increase in sellers' reservation value. In this paper, I demonstrate that on the contrary, the effect of loss aversion is to decrease the reservation value, not to increase it. I suggest alternative behavioral explanations for the observed stylized fact.

Suggested Citation

  • Florent Buisson, 2016. "Prospect Theory and Loss Aversion in the Housing Market," Journal of Real Estate Research, Taylor & Francis Journals, vol. 38(2), pages 229-250, April.
    • Handle: RePEc:taf:rjerxx:v:38:y:2016:i:2:p:229-250
    DOI: 10.1080/10835547.2016.12091444
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    References listed on IDEAS

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    1. Hua Sun & Michael J. Seiler, 2013. "Hyperbolic Discounting, Reference Dependence and its Implications for the Housing Market," Journal of Real Estate Research, American Real Estate Society, vol. 35(1), pages 1-24.
    2. Song Shi & Martin Young & Bob Hargreaves, 2010. "House Price-Volume Dynamics: Evidence from 12 Cities in New Zealand," Journal of Real Estate Research, American Real Estate Society, vol. 32(1), pages 75-100.
    3. Jeremy C. Stein, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(2), pages 379-406.
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    Cited by:

    1. Akshita Singh & Shailendra Kumar & Utkarsh Goel & Amar Johri, 2023. "Behavioural biases in real estate investment: a literature review and future research agenda," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-17, December.
    2. Yu Zhu & Randall Wright & Damien Gaumont, 2017. "Modeling House Prices," 2017 Meeting Papers 744, Society for Economic Dynamics.

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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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