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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.
This study examines mortgage loan fallout using data provided by a leading financial institution. By accurately predicting mortgage loan fallout, lenders can protect their bottom line, maintain financial stability, and contribute to a healthier economy. The paper employs various machine learning models to predict mortgage fallout based on loan, market, property, and borrower characteristics. A large dataset of locked mortgage applications from a major U.S. lender was analyzed. The random forest model demonstrated superior predictive efficiency and stability. To understand the factors influencing mortgage fallout, the SHAP method, along with empirical analysis with logistic regression, was utilized to identify key determinants. The paper discusses the implications of these findings for mortgage lenders and future research.
Recent papers have modeled the prevalence of risk-tolerance as shaped by growth, making testable predictions about the distribution of risk-tolerance across the globe. We test these predictions using a dataset containing a survey question capturing people’s risk-tolerance for representative samples from 78 countries. We find a negative between-country correlation between risk-tolerance and GDP per capita. Together with the positive within-country correlation between risk-tolerance and income, this results in a risk-income paradox. We further find a negative interaction effect of risk-tolerance and GDP on fertility. These findings provide support for endogenous-preference models of economic growth.
This paper will focus on the relationship between cognitive ability and decision-making under risk and uncertainty. Taken as a whole, this research indicates that cognitive ability is associated with risk-taking behavior in various contexts and life domains, including incentivized choices between lotteries in controlled environments, behavior in nonexperimental settings, and self-reported tendency to take risks. One pattern that emerges frequently in these studies is that cognitive ability tends to be positively correlated with avoidance of harmful risky situations, but it tends to be negatively correlated with risk aversion in advantageous situations. We conclude by discussing perspectives for future research, in particular the scope for the development of richer sets of elicitation instruments and measurement across a wider range of concepts.
72 undergraduates took part in an experimental study of entrapment, in which the passage of time could be viewed either as an investment (increasing the likelihood of goal attainment) or as an expense. Ss were given an opportunity to win a large sum of money (the jackpot), which decreased in value over time. To win the jackpot, a series of crossword puzzle words had to be solved, some of which were so difficult that the use of a necessary, scarce resource (a crossword dictionary) was required. To obtain the use of this resource, Ss had to wait "in line" until it became available, which it never did. 3 variables were varied in a 2 * 2 * 2 design: rate of decrement of the jackpot, availability of a chart providing continuous information about this decrement, and information concerning Ss' (presumed) position in line for the dictionary. Entrapment in this waiting conflict was found to be high overall and was further heightened when (a) the size of the jackpot decreased slowly rather than rapidly, (b) no payoff chart was made available, and (c) Ss were told they were first rather than third in line for the dictionary. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Using a unique dataset of interest rates offered by a large sample of U.S. banks on various retail deposit and loan products, we explore the rigidity of bank retail interest rates. We study periods over which retail interest rates remain fixed ("spells") and document a large degree of lumpiness of retail interest rate adjustments as well as substantial variation in the duration of these spells, both across and within different products. To explore the sources of this variation we apply duration analysis and calculate the probability that a bank will change a given deposit or loan rate under various conditions. Consistent with a nonconvex adjustment costs theory, we find that the probability of a bank changing its retail rate is initially increasing with time. Then as heterogeneity of the sample overwhelms this effect, the hazard rate decreases with time. The duration of the spells is significantly affected by the accumulated change in money market interest rates since the last retail rate change, the size of the bank and its geographical scope.
Recent development cooperation with Guinea-Bissau, focusing on good governance, statebuilding and conflict prevention, did not contribute to democratization nor to the stabilization of volatile political, military and economic structures. The portrayal of Guinea- Bissau as a failed “narco-state”, as well as Western aid meant to stabilize this state, are both based on dubious concepts. Certainly, the impact of drug trafficking could endanger democratization and state-building if continued unchecked. However, the most pressing need is not state-building facilitated by external aid that is poorly rooted in the social and political fabric of the country. Rather, it is grassroots nation-building that is a pre-condition for the creation of viable state institutions.
Understanding how prior outcomes affect risk attitudes is critical for the study of choice under uncertainty. A large literature documents the significant influence of prior losses on risk attitudes. The findings appear contradictory: some studies find greater risk-taking after a loss, whereas others show the opposite-that people take on less risk. I reconcile these seemingly inconsistent findings by distinguishing between realized versus paper losses. Using new and existing data, I replicate prior findings and demonstrate that following a realized loss, individuals avoid risk; if the same loss is not realized, a paper loss, individuals take on greater risk.
The reported research examined the usefulness of placing risk propensity and risk perception in a more central role in models of risky decision making than has been done previously, Specifically, this article reports on two studies that examined a model in which risk propensity and risk perception mediate the effects of problem framing and outcome history on risky decision-making behavior, Implications of the pattern of results for future research are discussed.
There are many instances in which individuals can become locked into a costly course of action. Because it is often possible for persons who have suffered a setback to recoup their losses through an even greater commitment of resources to the same course of action, a cycle of escalating commitment can be produced. In this paper, I review recent research on the escalation of commitment and try to integrate its complex and often conflicting determinants.
Entrapping conflicts are those in which individuals have made substantial, unrealized investments in pursuit of some goal and feel compelled to justify these expenditures with continued investments, even if the likelihood of goal attainment is low. Two experiments tested the notion that entrapment (i.e., amount invested) would be more pronounced when costs were rendered less important (and/or rewards were made more important). In Exp I, half the Ss were instructed beforehand of the virtues of investing conservatively (cautious condition), and half were informed of the advantages of investing a considerable amount (risk condition). Investments by the risky group were more than twice as great as those by the cautious group. Consistent with a face-saving analysis, the instructions had a greater effect on Ss with high rather than low social anxiety; and individuals with high social anxiety who participated in front of a large audience were more influenced by the instructions than were individuals with low social anxiety who participated in front of a small audience. In Exp II, the importance of costs and rewards was varied in a 2 × 2 design. As predicted, Ss invested significantly more when cost importance was low than when it was high. Contrary to expectation, reward importance had no effect. The data also suggest that entrapment was at least partially mediated by the participants' concern over the way they thought they would be evaluated. (7 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Presents an animal model of how learned helplessness may manifest itself as depression and anxiety. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
This paper studies risk attitudes using a large representative survey and a complementary experiment conducted with a representative subject pool in subjects' homes. Using a question asking people about their willingness to take risks “in general”, we find that gender, age, height, and parental background have an economically significant impact on willingness to take risks. The experiment confirms the behavioral validity of this measure, using paid lottery choices. Turning to other questions about risk attitudes in specific contexts, we find similar results on the determinants of risk attitudes, and also shed light on the deeper question of stability of risk attitudes across contexts. We conduct a horse race of the ability of different measures to explain risky behaviors such as holdings stocks, occupational choice, and smoking. The question about risk taking in general generates the best all-round predictor of risky behavior.
It is commonly expected that individuals will reverse decisions or change behaviors which result in negative consequences. Yet, within investment decision contexts, negative consequences may actually cause decision makers to increase the commitment of resources and undergo the risk of further negative consequences. The research presented here examined this process of escalating commitment through the simulation of a business investment decision. Specifically, 240 business school students participated in a role-playing exercise in which personal responsibility and decision consequences were the manipulated independent variables. Results showed that persons committed the greatest amount of resources to a previously chosen course of action when they were personally responsible for negative consequences.
The function of the reference point was studied with individuals and groups deciding among bets. Prospect Theory (Kahneman & Tversky, 1979) asserts that a psychological reference point is influenced by recent changes in one's current asset. Based on this notion, a person who has experienced losses recently was predicted to make riskier choices than a person who has not, but no systematic risk preference was expected for a person experiencing recent gains. Subjects' individual choices were generally consistent with these notions, although one of the key assumptions of the theory was violated. Assuming that a loss person will have a greater influence over a group decision, a group containing a loss member was anticipated to make riskier decisions than a group that does not. The results of three-person group decisions did not show this pattern; instead, the idiosyncratic risky preference of a loss member was found to be overridden by majority influence from nonloss members. Discussion focused on the implications of the loss member's idiosyncratic choice and of the robustness of social/normative factors relative to task/ individual factors.
Examines risk aversion in the United States using data on property/liability insurance. Evidence is presented in support of the hypothesis of constant relative risk aversion; the degree of relative risk aversion is estimated to lie between about 1.2 and 1.8. -Author
Much experimental evidence indicates that choice depends on the status quo or reference level: changes of reference point often lead to reversals of preference. The authors present a reference-dependent theory of consumer choice, which explains such effects by a deformation of indifference curves about the reference point. The central assumption of the theory is that losses and disadvantages have greater impact on preferences than gains and advantages. Implications of loss aversion for economic behavior are considered. Copyright 1991, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
This paper uses the television game show 'Jeopardy!' as a natural experiment to analyze behavior under uncertainty and the ability of players to choose strategic best-responses. The results suggest that, while most players bet in a rational manner, the failure rate for choosing best-responses increases as the betting problem grows more complex and that players' choices are affected by the 'frame' of the problem. However, suboptimal betting tends to decrease as inferior players are driven from the game. The data also allow for estimation of the extent of risk aversion; the results imply near risk-neutrality. Copyright 1995 by American Economic Association.
This chapter discusses some extensions on the demand for risky assets. The research on capital asset pricing has until very recently been devoted almost exclusively to the interrelationships of the risk premiums among different risky assets rather than to the determinants of the market price of risk. Such research has also generally relied on theoretical preconceptions to determine the appropriate utility functions of individual investors upon which both the market price of risk and the pricing of individual risky assets depend. The chapter discusses the highlights of the theoretical and empirical analysis and their conclusions. Then, the same analytical framework is used to obtain new results on the effect of inflation on the market price of risk. It turns out that by using nominal values for returns, the market price of risk under inflation is increased by positive covariance between the rate of inflation and the market rate of return, and decreased by negative covariance. However, statistically as the actual covariance has been very small since the latter part of the 19th century, at least in the USA, the measured market price of risk is not affected appreciably by the adjustment for inflation.
Analysis of decision making under risk has been dominated by expected utility theory, which generally accounts for people's actions. Presents a critique of expected utility theory as a descriptive model of decision making under risk, and argues that common forms of utility theory are not adequate, and proposes an alternative theory of choice under risk called prospect theory. In expected utility theory, utilities of outcomes are weighted by their probabilities. Considers results of responses to various hypothetical decision situations under risk and shows results that violate the tenets of expected utility theory. People overweight outcomes considered certain, relative to outcomes that are merely probable, a situation called the "certainty effect." This effect contributes to risk aversion in choices involving sure gains, and to risk seeking in choices involving sure losses. In choices where gains are replaced by losses, the pattern is called the "reflection effect." People discard components shared by all prospects under consideration, a tendency called the "isolation effect." Also shows that in choice situations, preferences may be altered by different representations of probabilities. Develops an alternative theory of individual decision making under risk, called prospect theory, developed for simple prospects with monetary outcomes and stated probabilities, in which value is given to gains and losses (i.e., changes in wealth or welfare) rather than to final assets, and probabilities are replaced by decision weights. The theory has two phases. The editing phase organizes and reformulates the options to simplify later evaluation and choice. The edited prospects are evaluated and the highest value prospect chosen. Discusses and models this theory, and offers directions for extending prospect theory are offered. (TNM)
Cost-effectiveness analysis, which ranks projects by quality adjusted life years gained per dollar spent, is widely used in the evaluation of health interventions. We show that cost effectiveness analysis can be derived from two axioms: society prefers Pareto improvements and society values discounted life years, lived in perfect health, equally for each person. These axioms generate a unique social preference ordering, allowing us to find the cost effectiveness threshold to which health projects should be funded, and to extend cost effectiveness analysis to give a consistent method of project evaluation across all sectors of the economy.
Utility‐based models of asset pricing may be estimated with or without assuming a distribution for security returns; both approaches are developed and compared here. The chief strength of a parametric estimator lies in its computational simplicity and statistical efficiency when the added distributional assumption is true. In contrast, the nonparametric estimator is robust to departures from any particular distribution, and it is more consistent with the spirit underlying utility‐based asset pricing models since the distribution of asset returns remains unspecified even in the empirical work. The nonparametric approach turns out to be easy to implement with precision nearly indistinguishable from its parametric counterpart in this particular application. The application shows that log utility is consistent with the data over the period 1926–1981.
The Hidden Perils: The Role of the Condominium Market in the Current Financial Crisis? Review of Finance
- S Agarwal
- Y Deng
- X Luo
- W Qian
Agarwal, S., Deng, Y., Luo, X., & Qian, W. (2016). The Hidden Perils: The
Role of the Condominium Market in the Current Financial Crisis? Review of
Finance, 20, 467-500.