Endowment Effect, Information Asymmetry, and Real Estate Market Decisions: Willingness to Pay and Willingness to Accept Disparities

Abstract

The endowment effect has gained dominance over the decades due to its ability to explain behavioral instincts portrayed by individuals when making decisions and its inconsistency with standard economic theories. It has been extensively applied in different fields of study, however its applicability to the housing market has been limited since its establishment. The study seeks to investigate whether the endowment effect exists in the housing market and whether the disclosure of information, increased affordability and agent evaluation significantly reduce the endowment effect. Using data obtained from a survey conducted between January and August 2022 in the Eastern Cape Province of South Africa, the study found that the disclosure of information eliminates the gap between buyers’ valuations and market values, while the gap between sellers’ valuations and market prices is reduced but not eliminated by information disclosure. The study has further concluded that increased affordability and agent evaluations significantly reduce the endowment effect in the housing market. Therefore, the study recommends that private and public entities should establish laws and regulations which promote the disclosure of information to reduce the gap between the willingness to pay (WTP) and the willingness to accept (WTA) that exists in the market.