The "Anomalies" in housing market: Evidence from auction attempts

Abstract

This thesis is motivated based on the greater difficulty of standard economic theory to understand individual choice behavior. In the recent years, there are numerous efforts to capture psychologically more realistic notions of human nature into economics and finance. This is commonly labeled under the rubric ?behavioral economics? and ?behavioral finance.? This thesis is mooted on the individual choice behavior by providing it with more realistic psychological foundations. It is based on the behavioral economics theories. one of the thesis objectives is to provide a greater understanding of loss aversion in housing market. There are two research questions that attempts to examine on loss aversion. Firstly, what is the relevant reference point for evaluating losses in a prospect theory framework? Secondly, how does the sensitivity to loss vary across different types of sellers? Our results suggest that loss aversion is evident. Probably our most robust result is that the relevant reference point for measuring the change in the value function is not the initial nominal purchase price, but rather the highest value. Our other findings include that institutions are less susceptible to loss aversion than individuals. The second part of the thesis focuses on the price anomalies observed in auction.The research questions that the second part of the thesis attempts to examine include (1) Is there any interaction between the phenomenon of expected premium at auction and discount for foreclosed properties; (2) Is price premium/discount uniform across market participants? Any differences due to bargaining power? (3) Between high and low rise properties, what is the extent of under-maintenance and asymmetric information that cause foreclosed properties to transact at a discount, that is, is there pure discount for foreclosed properties? (4) In the price discovery process, is there any price anomaly for units that are not sold at non-pooled auction but subsequently sold through private negotiation? Has bidders gained experience at auction? The results shed clear light on the existence of a premium or discount for auction sales, but also the relationship between under-maintenance and asymmetric information on unit quality and the price of units sold at foreclosure. The third part of the thesis looks into whether anomalies behavior survives in a repeated market environment. We will focus on loss aversion and the question to ask is basically ?Whether loss aversion dissipates with repeated auctions?? Interestingly it is found in our research that anomalies do disappear with repeated auctions. However, the adversity of loss is independent of the number of auction attempts.