Heuristics and Behavioral Biases in Residential Real Estate Markets

Abstract

Behavioral economics has provided numerous insights into typical con- sumer markets and policy intervention, but a unique market to explore is that of residential real estate. The structure of the housing market presents various behavioral implications to consumers, many of which are premised on reference points from prospect theory. This paper investigates heuristics and biases on both sides of housing transactions. Specif- ically, the presence and impact of the anchoring heuristic and status quo bias are analyzed for buyers, while loss aversion and endowment effect are discussed for sellers. A hypothetical website is proposed as a solution to combat irrational behaviors in order to improve market efficiency and economic impacts.