Hyperbolic Discounting, Reference Dependence and Its Implications for the Housing Market

Abstract

The influential work of Genesove and Mayer (2001) uses loss aversion theory to explain several puzzling behaviors in the housing market. In this study, we present an alternative theory, which does not require an asymmetric value function, to observe the same “loss aversion” behavior. Specifically, this paper presents a model in which a reference-dependent home seller has a symmetric value function, but faces an inter-temporal decision problem. Furthermore, the framework presented in this paper also helps explain the positive price-volume relationship and price dispersion effect, two observations that are well-documented in the housing market.

Keywords: Hyperbolic Discounting, Loss Aversion, Repeat-Sales Index

JEL Classification: D01, R21, R20