Commercial real estate investors appear to be as loss averse as regular homeowners

About ten years ago, a pair of economists published a study on loss aversion in the residential housing market (gated version here). Homeowners, they found, held out for more money, about 25-35 percent above the expected selling price, and ended up paying for it — either by not selling or by having their property languish on the market for months before a sale. But is that so unexpected? These were just regular homeowners.

In a new study of commercial real estate, Sheharyar Bokhari and David Geltner of MIT find that supposedly sophisticated commercial investors exhibited similar degrees of loss aversion during the recent housing bubble. In fact, the more sophisticated the investor, the larger the loss aversion, they find. The consequence to the investors was the same. More money spent (lost) in making a sale because of how much longer their property sat on the market.

Despite loss aversion at the individual level, the authors do not find that it had much impact at the market level. In other words, its impact on average transaction prices and trading volume during the boom and bust was minimal. So both behavioralists and neoclassicalists can take comfort when they read it.

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