Loss Aversion and its Reference Point in the Housing Market

김준형; Lewis Alexander

doi:10.15793/kspr.2011.69..008

In the last dozen years, loss aversion, a key component of prospect theory, has been rigorously applied to understanding seller behavior in housing market and have met with no small success. However, those studies have all assumed the original purchase price as the reference point for what would constitute a loss. This may be debatable; given that many houses are owned for long periods of time, other, more recent, reference points may be come into play. Based on an analysis of Korean homeowners from the KLIPS dataset, our study demonstrates that among Korean homeowners, recent prices are the primary reference point of loss. The odds ratio for loss calculated with a recent price reference point is 0.02, which is quite lower than that for loss calculated with a purchasing price reference point. This means that households experiencing loss in house value are reluctant to sell them. In addition, we also find that loss averse behavior among Korean homeowners increases if they live in apartment housing, are in debt or have other housing. The existence of an alternative reference point may amplify the effect of loss aversion in Korea when housing prices decrease. Further light should be shed on this possibility by new studies based on housing transaction data.

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