1. University of Cambridge Libertarian paternalism
What Drives the WTA-WTP Disparity in Real Estate Market? Endowment Effect, Information Asymmetry and Housing Decisions
Cynthia M. GONG
University of Cambridge
Background
Experiment
“Econs do not have passions; they are cold-blooded optimisers. You know, and I know, that we do not live in a world of Econs. We live in a world of Humans”
--Richard H. Thaler, “Misbehaving”
Field experiment is optimal
Lab experiment
Field experiment
Natural experiment
realism
controls
“Nudge”
Libertarian paternalism
Procedures (Sellers)
Part B:
Part A:
Part C:
Identification
Background information
Expectation?
Scenario A:
Current market information (average price and price range)
Scenario B:
Historical information (price 4y ago)
Scenario C:
Historical information (price 2y ago)
Scenario D:
Expectation-based up/down/stable market
Scenario E:
Receive signal (private information should be priced in)
Scenario F:
Loss aversion
Experiment design: a meta-analysis on the WTA-WTP gap studies offers general guidelines
Location: China is an ideal testing ground
Instrument: Actual properties on the market
Participants:
Real home owners (Properties)
Sample size: 105
The distribution of properties sampled for the experiment agrees with official statistics
Potential home buyers
Sample size: 385
The distribution of home buyers in the experiment is demographically consistent with official statistics
Real estate agents
Sample size: 310
Recruited from more than 10 of the largest real estate agencies in China
Motivation
Procedures (Buyers)
Part A:
Part B:
Part C:
Identification
Background information
Expectation?
Scenario A:
Current market information (average price and price range)
Scenario B:
Historical information (price 4y ago)
Scenario C:
Historical information (price 2y ago)
Scenario D:
Expectation-based up/down/stable market
Scenario E:
Information asymmetry (when buyers know little private information)
Scenario F:
Private information is disclosed
Why is the real estate market less liquid?
Why does the property transaction volume fluctuate?
Why do home sellers and buyers usually take a long time to negotiate the price?
What are the factors that impede market efficiency?
Take a simple trade for example:
A trade can only occur when seller’s willingness-to-accept (WTA) is not higher than buyer’s willingness-to-pay (WTP).
Standard economic theory (SET): WTA=WTP.
Experiment evidence: WTA>WTP.
Implication of the WTA-WTP disparity: undermines market efficiency; influences market liquidity and transaction volume (Fisher et al 2003).
The WTA-WTP disparity has not been extensively studied in the real estate market.
Procedures (Agents)
Part A:
Part B:
Part C:
Identification
Background information
Expectation?
Scenario A:
Current market information (average price and price range)
Scenario B:
Historical information (price 2y ago)
Scenario C:
Historical information (price 4y ago)
Scenario D:
Expectation-based up/down/stable market
Scenario E:
Receive signal (when agents are aware of private information, which should be priced in)
Item VS
Results
Sellers
Buyers
Benchmark gap
RMB 63,010
RMB
143,560
Information disclosure
Test for info asymmetry
52,750
Agents
RMB 75,320
Replace Buyers with Agents
Eliminate Mis-specification
Receive signal on Information disclosure
RMB 114,050
Exp. 1
Exp. 2
Positive relationship
E.E. increases RMB 86,120 when L.A. increases 1 unit
Test for L.A. ?
Does the WTA-WTP disparity exist in the housing market?
What are the driving forces behind such disparity? ? ?
Discussion
The gap increases when buyers are replaced with agents
Keen buyers in certain administrative areas, resulting in higher WTP overall
The isolated E.E. increases after the information disclosure signal
Agents discount structural defects more than homeowners do
WTA-WTP gap is independent of income effect
A property is not assigned to the buyer if its listing price is higher than the affordable price indicated by the buyer
Robustness checks: Loss aversion versus Endowment effect
Three definitions of loss aversion (dummy variables, continuous variables, risk preferences)
Literature Review
None of the above explanations has been tested in the housing market.
None of the previous studies has unified these factors in explaining the WTA-WTP disparity.
Endowment effect (E.E.)
Coined by Thaler (1980)
Sellers’ decision bias
Loss aversion (L.A.) in prospect theory (Kahneman & Tversky 1979) offers an explanation
Contradicting findings in previous studies
Further studies are required
Information asymmetry (I.A.)
Violation of SET assumptions
Friction in the free market
Rational explanation (Dupont & Lee 2002, Casey 1995)
Yet to be tested by empirical data
Experiment mis-specification (M.S.)
Subject misconception (Plott & Zeiler 2005,2007)
“Sell-high buy-low” strategy (Ericson & Fuster 2014)
Experimental studies on these do not agree with theory
Additional studies are necessary
Conclusions
Both information asymmetry and the endowment effect contribute to the WTA-WTP disparity in the housing market.
The effect of information asymmetry can be reduced by information disclosure (e.g. policy makers can introduce information disclosure laws).
The endowment effect exists even after the effect of information asymmetry is minimized.
Loss aversion is a driving force of the endowment effect. However, completely eliminating the endowment effect requires a good understanding of the psychological and emotional driving force of the endowment effect/loss aversion–a future research direction.
Contributes to the academic community
Bridges the research gap by investigating the WTA-WTP disparity in the housing market.
Incorporate the information asymmetry materials in the WTA-WTP gap experiment for the first time.
The first experiments that recruit real home owners, potential buyers and real estate agents as participants; use real properties on the market as stimuli.
Similar experiments can be conducted with institutional investors; the study should be replicable to the rental market.
The experiment designs could be further extended to other housing markets.
Contributes to market participants
Home owners: be conscious of the presence of their endowment effect and minimize their decision bias.
Home buyers: help them to identify willing sellers and make better decisions.
Real estate agents: promote sales performance.
Policy makers: can incorporate “behavioural nudge” in policies to improve market efficiency; facilitate an effective policy-making process.
Contributes to the general society
Offers the knowledge of the driving force behind real estate market trends (e.g., market liquidity, transaction volume, market efficiency, etc.).
Research Framework
WTAs and WTPs are not explicitly observable – Experiment data is required
Sellers
Buyers
WTA-WTP disparity
E.E. with
I.A. and M.S.
Eliminate Information Asymmetry
Info-asymmetric scenarios
Information disclosure
Test for info asymmetry
E.E. with M.S.
Agents
E.E. with I.A.
Replace Buyers with Agents
Eliminate Mis-specification
Receive signal on Information disclosure
Isolated E.E.
Exp. 1
Exp. 2
E.E ⇔ Loss aversion
Test for L.A.
References
Contact me:
Casey, J. T. (1995). Predicting Buyer-Seller Pricing Disparities. Management Science, 41(6), 979–999.
Dupont, D. Y., & Lee, G. S. (2002). The Endowment Effect , Status Quo Bias and Loss Aversion : Rational Alternative Explanation. The Journal of Risk and Uncertainty, 25(1), 87–101.
Ericson, K. M. M., & Fuster, A. (2014). The Endowment Effect. Annual Review of Economics, 6(1), 555–579.
Fisher, J., Gatzlaff, D., & Geltner, D. (2003). Controlling for the Impact of Variable Liquidity in Commercial Real Estate Price Indices. Real Estate Economics, 31(1).
Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263–292.
Plott, C., & Zeiler, K. (2005). The Willingness to Pay/Willingness to Accept Gap, the “Endowment Effect,” Subject Misconceptions and Experimental Procedures for Eliciting Valuations. American Economic Review, 95(3), 530–545.
Plott, C., & Zeiler, K. (2007). Exchange Asymmetries Incorrectly Interpreted Evidence of Endowment Effect Theory and Prospect Theory? American Economic Review, 97(4), 1449–1466.
Thaler, R. H. (1980). Toward a Positive Theory of Consumer Choice. Journal of Economic Behavior & Organization, 1, 39–60.
Cynthia M. GONG
University of Cambridge
Website:
Phone: 0044-(0)