The Impact of Commitment on Pending Home Sales in Entrapping Situations

Abstract

This paper examines the decision-making processes of home buyers during the Global Financial Crisis, with a specific focus on passive coping mechanisms and the role of risk aversion. The study investigates how risk aversion influences the behavior of home buyers and highlights the disparities between high-income and low-income buyers. The findings reveal that high-income home buyers exhibit a risk aversion parameter that ranges from 1.74 to 1.99, while low-income home buyers have a parameter that ranges from 0.60 to 0.62, thus indicating different levels of risk tolerance and decision-making patterns among the income groups. These findings suggest that low-income home buyers are more likely to endure unfavorable situations or avoid making changes in periods of declining house prices than high-income home buyers. This behavior aligns with the concept of passive coping, where low-income home buyers choose to endure unfavorable situations rather than making changes because they fear the negative outcomes that may arise from taking a different course of action. They might worry that if they abandon the contract, they will miss out on the opportunity to own a home, live in a desirable neighborhood, or secure a specific property. This fear of potential losses leads them to choose passive coping, where they endure the current situation rather than making changes that could involve risks or uncertainties.

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