Loss Aversion and Focal Point Bias: Empirical Evidence from Housing Markets

Most research documenting correlation between behavioral biases use survey or experimental data, often focusing on related biases. We test whether evidence of loss aversion in housing sales prices is stronger among individuals who exhibited focal point tendencies when selecting their mortgage amount at purchase, allowing for high-stake impacts of both behavioral biases. We find a strong positive relationship between the effects of facing a loss on the eventual sales price and whether the seller selected a round mortgage amount during their initial purchase. Further, we show that selecting round mortgage amounts is persistent within borrowers over time.