Friday, August 8, 2008

Loss aversion and finding a bottom

Loss aversion and finding a bottom

Daniel Kahnemann proved that people will go to extreme lengths to avoid taking a loss. For his efforts he was awarded the Nobel Prize. His theories go a long way in helping to explain why this will be a long, drawn out affair before we find a housing market bottom in the UK and elsewhere.

Posted by edwardnh @ 05:21 PM (576 views)
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4 thoughts on “Loss aversion and finding a bottom

  • Eternal Sceptic says:

    Ouch! It may only be a theory, but it has a shocking ring of reality about it.

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  • Left my comment on your site. I like this lots. Very rational and most importantly *scientific* explanation.

    If this is your own application of Kahnemann’s loss aversion ideas you should let the mainstream press know. Of course, it doesn’t completely account for irrationality, but it’s a solid starting point.

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  • Interesting, but applied to the uk housing market today I see a difference.

    That being that politicians know price falls of 20-30% are inevitable. They can not stop this happening as banks lending criteria has fundamentally changed. ie come down from 6 x earnings and no deposit to 4x earnings and 20% deposit.

    There is also a time frame involved. Election must be by Spring 2010.
    If prices are falling then Labour will loose the election.

    Therefore if they can get that 20-30% off prices by end 2009 and then use their limited ammunition prices may at least be stable or showing a small recovery come election time.

    Hence the leek about possible stamp duty holiday and then no decision. It effectively stops transactions and drives the market down further whilst giving the impression of considering helpful options.

    So it might be different this time !

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  • str 2007 @ 3

    They might be trying to manipulate the market but that’s always a very dangerous game.

    The guv’mint are absolutely up **it creek. They helped ramp up the market and now it’s in freefall. If the try to ‘bottom’ the market out quickly there’s absolutely no gaurantee that they will not succeed in making the market more unstable and it could even fall further/longer than would happen without meddling. Whatever they do, it will no doubt make things worse. They have no idea what they are doing, they are simply inept.

    The gur’mint are like a turkey that’ been made ready for christmas really. Stuffed!

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