1 / 39

Psychology and Property Purchase Decisions

Psychology and Property Purchase Decisions. Clare Branigan June 2009. Research Question. Are decision-makers making rational decisions when buying property?. Outline. Traditional Economics Origins of Behavioural Biases Literature Dublin Property Market

sonyaadams
Download Presentation

Psychology and Property Purchase Decisions

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Psychology and Property Purchase Decisions Clare Branigan June 2009

  2. Research Question • Are decision-makers making rational decisions when buying property?

  3. Outline • Traditional Economics • Origins of Behavioural Biases • Literature • Dublin Property Market • Studies: Hypotheses, Methodology, Results • Contributions

  4. The role of Traditional Economics • Traditional economics theory is derived from neo-classical economics • Decision makers are assumed rational utility maximisers • They make unbiased forecasts about the future

  5. Psychology & Decision Making? • Decision Makers and investors are subject to decision errors and biases that result in the same mistakes repeatedly

  6. 2002 Nobel prize for economics • Daniel Kahneman (with Amos Tversky) • For integrating “insights from psychology into economics” (Royal Swedish Academy of Sciences citation)

  7. 2002 Nobel prize for economics • Daniel Kahneman (with Amos Tversky) • For integrating “insights from psychology into economics” (Royal Swedish Academy of Sciences citation) • I.e., for challenging one of the most sacred precepts of economics that people make rational decisions

  8. Origins of Behavioural Biases 1. Human Information Processing • Too little or too much information will lead to errors • Beyond an optimal point, more information leads to poorer decisions • The Decision Maker becomes swamped, ignores further new information & ultimately random decision results 2. Heuristics • We use heuristics or short cut rules of thumb & biases to simplify the complex judgement ore decision tasks that lead to cognitive errors (Tversky & Kahneman, Science, 1974) 3. Prospect Theory • How we deal with “loss” in making choices in the face of risk & uncertainty (Kahneman & Tversky, Econemetrica, 1979)

  9. Key Literature

  10. The representativeness heuristic • Judgements based on stereotypes – herd mentality • Example • Stockmarket reaction to dot.com firm name changes in the internet boom • Insensitivity to prior information - Market Bubbles

  11. Anchoring & Adjustment • Experiments demonstrate people will even anchor on a random number

  12. Loss Aversion • “Losses loom larger than gains” • Loss aversion: people are more averse to losing something they own than they are pleased to make a gain (Thaler 1980) • “Endowment effect” : we set a higher selling price on what we own (are endowed with) than what we would pay for the identical item if we did not own it.

  13. Loss Aversion • “Losses loom larger than gains” • Loss aversion: people are more averse to losing something they own than they are pleased to make a gain (Thaler 1980) • “Endowment effect” : we set a higher selling price on what we own (are endowed with) than what we would pay for the identical item if we did not own it. • However, standard finance, teaches that prior losses are sunk costs & irrelevant

  14. Loss Aversion • “Losses loom larger than gains” • Loss aversion: people are more averse to losing something they own than they are pleased to make a gain (Thaler 1980) • “Endowment effect” : we set a higher selling price on what we own (are endowed with) than what we would pay for the identical item if we did not own it. • However, standard finance, teaches that prior losses are sunk costs & irrelevant • “The sunk-cost effect is an escalation of commitment & has been defined as the Greater tendency to continue an endeavor once an investment in money, time or effect has been made”. (Arkes, Blumer,1985)

  15. Research Programmes • Viewed over 200 properties • Attended and collected data from 200 Auctions • Analyse Data relating to 1565 auction results

  16. Dublin Property Market • Auction Room • “Shortage Illusion” leads to Panic buying, price becomes irrelevant • Sunk Costs (property survey, solicitor’s fees, time at previous auctions) • Endowment Effect • Escalation of Commitment - View auction room as a competition, “win” at any cost • “Herd Mentality” • Winner’s Curse

  17. Samples

  18. Belmont Ave, Donnybrook Apr 05 Guide €700,000

  19. Belmont Ave, Donnybrook Apr 05 Guide €700,000 Sold €1.36 m, 4 bidders 94% over guide price

  20. Temple Cresent, Blackrock May 05 Guide €650,000

  21. Temple Cresent, Blackrock May 05 Guide €650,000 Sold, €1.3 m, 5 bidders 100% over guide

  22. Priory Grove, Blackrock March 05, €730,000

  23. Priory Grove, Blackrock April 06 ?

  24. Priory Grove, Blackrock April 06 €1.8m

  25. Which biases could be tested in an Auction Situation? • The Winner’s Curse • Experienced Bidders vs. non-experienced bidders • Anchoring • Guide prices should correlate directly to Sales Results • Escalation of Commitment

  26. Methodology • Between Sept 04 and November 05, observed 200 auctions • 100 were sold at auction, by an average of 40% over the guide price - clear evidence of Winner’s Curse

  27. Variables • Guide Price • Sale Price • Price announced on the market • No. of Bidders • Progression of Bids • Previous Advertisement and Newspaper Editorials • Characteristics of House • Comparable Sales • Agent

  28. Result 100 Auctions #bidders Avr Winning Bid (% over Guide) 2 26 3 35 4 42 5 67 6 73

  29. The Role of Experienced Bidders • Experienced bidders are less likely to be affected by the Winner’s Curse. • The opposite is true: • Property Investors paid 63% over the guide price vs. average of 40% over the guide price

  30. ESCALATION OF COMMITTMENT The more bids a person makes, the more committed he becomes to winning the auction.

  31. High Guide prices provide better Sales Results at Property Auctions • Theory: Property valuations are influenced by initial selling price, with high initial prices, resulting in high valuation and sales price. This is an “anchoring” affect. • High Guide prices provide better Sales Results at Property Auctions

  32. Data Gathered • Data on over 1500 houses was collected between Sept 2004 and Nov 2005.

  33. Summary: 1565 Auctions

  34. Low vs. High Guide Prices • Choose a similar selection of houses within a four mile radius –Grouped houses together by type (townhouse, semi-detached, detached), area, size and condition Semi-D ResultsBeforeAfter • Low Guide: €554/sq ft €747/sq ft • High Guide €618/sq ft €663/sq ft Anchoring does not occur

  35. Estimate of Guide Price • Estate Agents deliberately underestimated the guide price • Prior to auction, Estate Agents stated guide price was 10-15% below market value. • At auction Market Price was actually 23% higher than guide price (for 61 cases out of 100 auctions that marker price was announced).

  36. Explanation: • Lower guide prices present lower barriers to entry, which encourage more bidders to become interested in the property • The greater number of bidders the greater chance of higher estimates, therefore the greater likelihood of the winner’s curse • Lower guide prices encourage more bidders to have sunk costs in terms of property surveys and legal checks • This encourages participation in the auction which results in the endowment effect • All of which results in higher sales prices

  37. Contributions To Literature

  38. Implications for the Economy • Property - Important Sector of Economy , in 2005 construction employment accounted for 12 ½ % of total employment • The Auction method contributed to huge price fluctuations and unrealistic valuations • Houses in “South Dublin” had 8-10 times increase in value compared to Dublin average of 4 times • Also influenced house valuations in rest of Dublin and nearby counties • Previous studies on property auctions are limited • Percentage of Auctions increased each year by 25% • By 2006 - 1,400 houses were auctioned, the majority of second-hand residential homes in South Dublin

  39. Contributions to Public Policy • Transparency in Sales Results All sales prices should be available in a public register, both auction prices and private treaty sales. Winner’s Curse known to be more prevalent in the absence of complete information Changes to Guide Prices • Changes to Auction Policy • Houses should have to adhere to certain criteria before they can be auctioned . Reserve Price should be used only.

More Related