Loss Aversion and Anchoring in Commercial Real Estate Pricing: Empirical Evidence and Price Index Implications

Loss aversion behavior plays a major role in the pricing of commercial properties, and it varies both across the type of market participants and across the cycle. We find that sophisticated and more experienced investors are at least as loss averse as their counterparts and that loss aversion operat...

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Bibliographic Details
Published in:Real estate economics 2011-12, Vol.39 (4), p.635-670
Main Authors: Bokhari, Sheharyar, Geltner, David
Format: Article
Language:English
Subjects:
Asked price
Behavior
Commercial real estate
Losses
Risk aversion
Studies
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Summary:Loss aversion behavior plays a major role in the pricing of commercial properties, and it varies both across the type of market participants and across the cycle. We find that sophisticated and more experienced investors are at least as loss averse as their counterparts and that loss aversion operated most strongly during the cycle peak in 2007. We also document a possible anchoring effect of the asking price in influencing buyer valuation and subsequent transaction price. We demonstrate the importance of behavioral phenomena in constructing hedonic price indices, and we find that the impact of loss aversion is attenuated at the aggregate market level. This suggests that the pricing and volume cycle during 2001–2009 was little affected by loss aversion.
ISSN:1080-8620
1540-6229
DOI:10.1111/j.1540-6229.2011.00308.x