Consumer house price judgements: new evidence of anchoring and arbitrary coherence

Abstract

Individuals are prone to significant errors when making value judgements through the use of heuristics (cognitive short cuts) to simplify decision making. This paper uses an economic experiment to investigate the strength of arbitrary anchors in judgements over house prices among a student group, which shares similarities with first-time buyers. The study represents an extension of existing property research literature on valuation because it focuses on consumers, not professionals, and uses experiments which are incentivised. Additionally it investigates the evolution of price estimates over multiple sequential property viewings. The results indicate that even in the presence of significant, binary incentives for accurate judgement, individuals rely, to a significant degree, on an arbitrarily established anchor value. Such anchors remain powerful enough for transitions to subsequent valuations to remain influenced by this initial value. This is interpreted as a confirmation – and extension – of the arbitrary coherence reported in other studies of consumer judgement.

Keywords:

• house prices
• value judgement
• anchoring
• arbitrary coherence

Acknowledgements

The authors would like to acknowledge the kind assistance of Vincent Rogowtzow and his staff at Hockeys Estate Agents, Cambridge. The research was achieved with the financial assistance of St John’s College, Cambridge for which the authors are grateful. The paper has benefited greatly from the comments of the editor and three anonymous referees.

Notes

1. Diaz and Hansz (2007) present a good summary. Sah, Gallimore and Sherwood Clements (2010) is a recent example of a paper that uses incentives with a professional subject pool.

2. In psychology literature, this is widely known as confirmation bias (Nickerson, 1998).

3. Note that the procedure uses the Becker–DeGroot–Marschak procedure (1963) for eliciting willingness-to-pay and ensures that some of the transactions – determined randomly – will be carried out, thus ensuring the reality of the situation to participants.

4. We acknowledge that the growing use of the internet and property search websites, including those that report recent sale prices in a particular area, is diminishing the ability of an estate agent to control the information set to potential buyers and thus their ability to manipulate value perception. However, we believe that evidence of perceptual bias in these decisions is still important, especially because there may be significant opportunities for manipulation in the new medium by engaging the same psychological flaws. For example, the designers of online search algorithms to return results which bias value perceptions may be even more powerful. This is a potentially fruitful avenue for further research.

5. We note here that the meaning here is that the anchor is arbitrary relative to the properties being valued. As discussed below, the agent could introduce that figure, in effect manipulating the anchoring process.

6. This explanation lies in the notion of bounded rationality first suggested by Simon (1957). It is also consistent with the appraisal updating model introduced by Quan and Quigley (1991) where appraisers must value using information from noisy signals from the market but possess a prior appraisal.

7. A minority were postgraduate students.

8. The mortgage valuation process to some extent acts to limit overpayment, with current market prices as a given.

9. In one experimental treatment there was the possibility of earning a top prize of £100 for the best overall estimate. This did not make a significant difference to the results.