Lecture 6 Biases in Real Estate Valuation

Question 1

Money Illusion

Answer 1

the failure to perceive that the dollar, or any other unit of money, expands or shrinks in value
the tendency to think in terms of nominal rather than real values

Question 2

Nominal Loss Aversion

Answer 2

The mix of Money illusion and loss aversion

Question 3

What is the Natural reference point for a seller?

Answer 3

Their previous nominal purchase price

Question 4

Disposition effect

Answer 4

the tendency of investors to sell assets that have increased in value, while keeping assets that have dropped in value

Question 5

What are the findings of Genesove & Mayer (2001; ctd)?

Answer 5

• Sellers facing a nominal loss set higher asking prices: 25-35% of the nominal difference between expected selling price and purchase price
• No significant effect for real losses on asking prices
• Sellers respond to nominal rather than real losses due to nominal loss aversion
  (people are less likely to sell if a nominal loss is faced)

Question 6

Contrast effect/Ebbinghaus illusion

Answer 6

The same circle appears large when surrounded by small circles and small when surrounded by large ones

Question 7

Background Contrast Effect

Answer 7

The tendency to prefer x over y will be enhanced if the decision maker encounters other comparisons in which the exchange rate between price and quality is higher than that implied by x and y

Question 8

What does the back ground contrast effect mean in terms of commuting (woon-werk verkeer)

Answer 8

People are more willing to accept long commute if they come from city where median commute is longer