An Innovative Approach to Identify Latent Overconfidence and Disposition Effects in Frictional Real Estate Markets

Abstract

The operating decisions of investors can be irrational. This research proposes an approach to measure overconfidence bias and the disposition effect based on real estate rental decisions, and disentangle from market friction. Irrational operating decisions transform into impacts on real estate rentable supply responsiveness and market illiquidity. Analyzing US office market data from 2005 to 2019, the empirical findings confirm that the disposition effect significantly impacts supply responsiveness, alongside the effects of overconfidence, regulations and geographical barriers. Friction is the leading cause of market illiquidity, and the level of market illiquidity due to the disposition effect is higher than the overconfidence bias; thus, the disposition effect more frequently occurs.

View PDF – https://doi.org/10.53383/100417

Keywords

Overconfidence, Disposition effect, Friction, Supply responsiveness, Market illiquidity, Commercial real estate