How to Weaken the Endowment Effect in the Housing Market? The Role of Behavioral Interventions

Abstract

Abstract The endowment effect is one of the key behavioral biases causing friction in the housing market. It results in sellers’ offer prices being inflated relative to buyers’ bid prices. Although this effect has been confirmed in many studies, little is known about how it can be reduced or eliminated. Therefore, this article assesses the impact of behavioral interventions on the intensity of the endowment effect using the Polish housing market as a case study. The research was based on a lab-in-the-field experiment, in which a hypothetical transaction in the secondary sales housing market was simulated and the recruited respondents were randomly divided into sellers and buyers. The endowment effect was measured by the gap between the average value of minimum prices for which sellers would be willing to sell a dwelling (WTA) and the average value of maximum prices that buyers would be willing to pay to acquire that dwelling (WTP). The results show that the endowment effect significantly decreases but does not disappear after the application of behavioral interventions. The latter consists of highlighting relevant information about the market price of a property and visualizing it graphically. Specifically, before the intervention, the WTA-WTP gap was 7.01%, and after 2.48%.