Applications of prospect theory in housing market analysis

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School of Business | Bachelor's thesis
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Authors

Pekkala, Rasmus

Date

2023

Department

Taloustieteen laitos

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Mcode

Degree programme

Taloustiede

Language

en

Pages

25 + 6

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Abstract

I conduct a literature review on prospect theory and specifically its applications for analysing decision making in the housing market. I study how prospect theory could help explain findings from the housing market that violate standard economic theory, as well as other ways the behavioural biases assumed in prospect theory might affect decisions made by sellers and buyers. I show that various applications have been proposed in existing literature, including nominal loss aversion, endowment effect in the form of WTA/WTP gaps and reference dependence. While empirical studies suggest the presence of all these phenomena, only nominal loss aversion has been studied extensively. I also propose further topics of study that could deepen our understanding of behavioural biases affecting sellers and buyers, and hopefully eventually help make the housing market more efficient.

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Thesis advisor

Valmari, Nelli

Keywords

housing market, prospect theory, decision making, nominal loss aversion

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https://urn.fi/URN:NBN:fi:aalto-202401211630

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[kand] Kauppakorkeakoulu / BIZ (Open Access)