So, what did you think?
What are the types of assets an individual might have a strong
personal connection with?
Well, you might think, right off the bat, your house.
This lady looks kind of very satisfied with this house behind her here.
After all, this is an asset that you live in.
You likely have this very strong personal attachment with, all right?
You could also think that you have collectables.
You bought this, this is also an asset you have that can appreciate and
depreciate in value.
But since it’s kind of part of a collection,
you probably have a very strong, emotional, personal attachment.
And given loss aversion is based on psychology emotion,
you would think the strong as your emotional tie to the asset,
the stronger might be loss aversion affect.
So when we're talking about housing, you can also buy a house for
investment purposes, right?
So the prediction'd probably be that for owner occupied housing,
you should have a stronger personal connection.
Stronger, thus loss aversion effects.
So Genesove and Mayer actually did a study thinking about this intuition,
is loss aversion strong in the Boston condominium market, okay?
So controlling for the usual determinants of house prices,
the seller's original purchase price also matters for
the listing price of the house, and the likelihood of sale.
So economically, you'd think all that matters are the current conditions in
the housing market, but loss aversion also seems to have an impact.
If the seller's original purchase price is influencing that kind of market for
that house.
So Genesove and
Mayer, when you dig into their study, they have several interesting findings.
First, for a house that has fallen in value since purchase,
when the owner lists it, controlling for the attributes of the house,
the owner will ask for a higher price, which is consistent with a loss aversion.
Like, hey, I bought the house up here, I'm asking for a price probably here or
a little more, because I don't want to realize a loss on this psychologically.
Not surprisingly, if the house has fallen in value since purchased from the owner,
they ask for a higher price.
You also see that it takes longer for the house to sell,
because there can be kind of a potential breakdown in the market that for buyers,
all they care about is what's the current price?
But for sellers, they maybe influenced by what they paid.
And if housing prices have fallen since the original owner bought the house,
there maybe a problem.
Like the buyer's willing to pay here,
the seller still has in mind this original price from a long time ago.
Prices have fallen since then,
they still have this high price in mind when they want to sell.
So it might take a long time to bridge that gap.
Also, as we talked about, the effect of this loss aversion on the house market
is twice as large for owner-occupants, as opposed to investors, okay?
So those who are buying a house for investing purposes, loss aversion has less
of an effect on their listing price, and how long those houses are for
sale, as opposed where it's an owner-occupant, okay?
So the results imply loss aversion have a big impact on liquidity of
the housing market when you have a sharp decline in prices.
Prospective buyers don't care what the current owner paid for the house.
They just care about the attributes and what those attributes,
given the current economic conditions, suggest should be the house price.
So maybe someone bought it at $700,000 three years ago.
Housing prices have fallen, current market value is $500,000,
that's what's relevant for the buyer.
But the seller may still have that $700,000 benchmark in mind.
So it may be very difficult to bridge this gap if the seller is subject
to loss aversion, which a Genesove Meyer study finds evidence of, okay?
Loss aversion, because of this effect that it has on the liquidity of
the housing market, particularly following a sharp decline at prices,
where sellers may be attached to this kind of high price that they originally bought.
Buyers just care about what’s the current market price.
That likely would suggest loss aversion has an effect
on the rental market for homes.
When you have buyers wanting a price here,
what they paid originally, prices have fallen since then.