Loss Aversion and Anchoring in Commercial Real Estate Pricing : Empirical Evidence and Price Index Implications

This paper empirically tests for the predictions of prospect theory and the anchoring-and-adjustment heuristic in commercial real estate pricing. Using US market data, we confirm and extend previous findings in both housing and commercial real estate that loss aversion affects seller behavior in real estate markets. Consistent with prospect theory, we find that losses loom larger than gains. We also compare loss aversion amongst the different investor types and our results are indicative of a lower degree of loss aversion amongst private investors as compared to others, particularly institutional investors. Furthermore, using the number of trades made by an investor as a measure of their trading experience, we find that the degree of loss aversion is higher, the more sophisticated or experienced the investor is. We also find evidence for anchoring or strategic pricing by the seller that results in transaction prices away from the expected selling price. Finally, we construct an informational tool in the form of a hedonic price index that provides a scenario adjusted for loss-aversion and anchoring