Behavioural Finance PPT

EXPERTS, AMATEURS, AND REAL ESTATE: AN ANCHORING-AND-ADJUSTMENT PERSPECTIVE ON PROPERTY PRICING DECISIONS

GREGORY B. NORTHCRAFT

AND

MARGARET A. NEALE

Presented By:

Shikhir Arora (18)

Mallika Trivedi (24)

INTRODUCTION

Recent researches have suggested that demonstration of decisional biases is a function of the contrived nature of the laboratory setting.

It has been hypothesized that, biases will disappear once the subject is allowed to interact with the object, and is placed in an information rich surroundings.

The purpose of these studies was to explore whether “real world” situations elicit the kinds of decisional biases and heuristics which have been documented in laboratory experiments.

CONTD..

The psychological literature on the “anchoring-and-adjustment” heuristic suggests that an arbitrarily chosen reference point (anchor) will

significantly influence value estimates, and value estimates will be insufficiently adjusted

away from the reference point toward the true value of the object of estimation.

Demonstration of this effect, Tversky and Kahneman (1974): Wheel of fortune and % of African countries in the UN.

CONTD.. Anchoring seems especially relevant to a

bargaining setting such as the purchase of residential real estate, where the fair market value (FMV) of the piece of property is

not objectively determinable, and a bidding process is used to arrive at the property’s

actual selling price.

Every piece of property has an appraised value which is often used as the property’s objective value for insurance or loan purposes. However, while this appraisal value is thought to be primarily systematic, it does contain subjective components.

For example, the value of a property:

HYPOTHESES

H1: Listing price will bias value estimates of the FMV of residential real estate.

H2: The biasing influence of the listing price on estimates of FMV will decrease as the listing price becomes a less credible estimate of FMV.

SUBJECTS Amateur:

48(30 Male,18Female) Avg. age:22.2 yrs Living in Tuscon for 7.72 yrs 14% involved in Real Estate transaction Received extra credit in an OB course

Expert Subjects: 21(17F,4M) average age of participants was 44.5 years real estate for 6.99 years, 5.77 years in Tucson received a state lottery ticket Only $65,900 , $83,900 anchor conditions

EXPERIMENT METHODOLOGY Each subject visited a piece of property currently

for sale in Tucson, Arizona. Filled out a short questionnaire concerned with

estimating the value of the property. Provided with a 10-page packet of information

Information Real Estate sales, immediate neighborhood property

for last 6 months Listing price ,square footage, characteristics of

property Questionnaire to be filled

Information compiled after interviewing several local real estate agents.

Represented all the information required to evaluate a piece of residential property.

The subjects were allowed to examine the house, surrounding property, and neighborhood for up to 20 min.

Dependent measures for the study the appraised value Appropriate advertised selling price reasonable price to pay for the house the lowest offer they would accept(as seller)

DECISION PROCESS

Subjects had to: check from a list of 16 relevant items they had

used in completing the follow-up questionnaire identify their “top three” considerations describe briefly the process by which they

arrived at the price Does past real estate experience influence

pricing decisions ? demographic information about the subjects was

collected.

THE EXPERIMENT

4 experimental conditions Subjects received the same 10-page packet of

information one exception-the listing price was different

Actual Value :$74,900 Low Price($65,900, 12%S.D) moderately low price($71,900,4%S.D) moderately high price(77,900,4%S.D) high price(83,900,12% S.D)

RESULTS Significant influence of the listing price anchor on all

four dependent measures. Hypothesis 1 tested using planned comparison Values significant for all four dependent measures

F’s >10.89, p’s <.O1( Amateurs)

Result- Experts T-tests used to assess the impact of the anchors estimates were significantly influenced by the

anchors for all four estimate measures (all t’s >2.40, all p’s <.05) Hypothesis 1 was confirmed for both amateur and

expert subjects: listing price anchor significantly biased estimates on each

of the four estimation measures.

Hypothesis 2-impact of anchor value will be diminished when the anchor value is further from the true-score value.

Absolute deviation scores from the anchor. scores were proportional to the magnitudes of the anchors

Percentage deviation from the anchor was performed.

One Estimation measure (listing price) did deviations prove significantly higher for more distant anchors.

Hypothesis 2 received only weak support.

DECISION PROCESS

Amateur considered 7.90 factors, Experts (7.71 ) listing price as a factor ( Questionnaire Filling )

56.2% (Amateurs) 24.0 ( Experts) listing price one of their “top three” considerations

Amateur-22.9% Expert- 14.3%

Estimation strategies comparison computations Featured only computations concrete referent

CONTD..

Demographic Variables influence of experience and expertise regressed on

age, sex, years lived in Tucson, ever bought a house, and ever bought a house in Tucson

Amateur : Have you ever bought a house F = 5.80, p = .02 Experts : None significant

EXPERIMENT 2 Different piece of property, second set of subjects Actual listing price of the second property $134,900 Anchor Prices :

119,900, 129,900, 139,900, 149,900( SD 11%,4%) Amateur subjects:

54(30 M, 24 F), Avg. age:24.1, in Tuscon :5.9yrs, 11 %inv Expert subjects:

47(29F,18 M), Avg.age:48yrs, in Tuscon:9yrs

RESULTS

Hypothesis 1 again was supported significant influence of the listing price

anchor on all four dependent measures for both amateur and expert subjects

all F’s >7.0, all p’s <.001 Hypothesis 2 was not supported for amateur

or expert subjects

H 1 : EXPERTS

H1 : AMATEURS

DECISION PROCESS Factors considered in completing the follow-up

questionnaire Amateurs: 6.15 Experts: 8.34

Listing price as one of the factors considered Amateur – 37% Experts – 19%

listing price was one of their “top three” considerations. Amateur - 9% Experts - 8%

Demographic- “Have you ever bought a house in Tucson”( Amateurs) ( Experts – None )

DISCUSSION & CONCLUSION

According to the experiment: both amateur and expert subjects received fully

10 pages of information, toured the properties about which they made

estimates Local knowledge (such as proximity to shopping

and parks) would be readily available to subjects Only one item of information-the listing price-

differed among subjects. Hypothesis 1 was supported. i.e. a reference

did affect the value estimates.

CONTD..

The hypothesis that an anchor will exert proportionally less influence on estimation and decision behaviour as the anchor is placed further from the “true score” of the estimate- was rejected.

Amateur subjects appeared more aware of the role that listing price plays in their judgments; while the decision checklists and descriptions of the expert subjects flatly denied their use of listing price as a consideration.

IMPORTANT

1. Experts are susceptible to decision bias, even in the confines of their “home” decision setting, and

2. Experts are less likely than amateurs to admit to (or perhaps understand) their use of heuristics in producing biased judgments.

THANK YOU!