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Contributed by William A. V. Clark, July 22, 2017 (sent for review May 23, 2017; reviewed by Susan Hanson and David Plane)
Significance
We use prospect theory and the endowment effect to provide a theoretical basis for an integrated approach to residential moving and residential staying. We link measures of risk aversion and the endowment effect to explain the tradeoff between moving and staying. We test Kahneman and Tervsky’s observation that endowment effects are especially likely in goods that are not regularly traded, e.g., houses. Their use value creates the endowment effect, which works in favor of the locational status quo, increasing the probability of staying. We analyze survey data to confirm that a general self-assessed risk aversion is important in decisions to migrate or stay, and the endowment effect, measured as tenure and duration, is a substantial factor in residential decision-making.
Abstract
Migration has always involved stress and risk. More risk-averse households are less likely to move, while less risk-averse households will seek out opportunities and migrate. We investigate how the theoretical contributions of prospect theory, and specifically the endowment effect, can provide new understanding about decisions whether to migrate or not. We test the hypothesis that risk aversion extends the length of stay in the dwelling and, by extension, in the local labor and housing markets. How long people remain in place is a function, we hypothesize, of their independently self-assessed propensity to take risks, after controlling for a range of demographic and socioeconomic characteristics. We use the theoretical insights of prospect theory and the endowment effect (the notion of the “use value” differing from the “exchange value”) to explain the likelihood of staying after controlling for life-course events. The results confirm the explanatory power of self-assessed risk in the decision to migrate or stay and, equally important, confirm the role of the endowment effect.
Footnotes
- ↵1To whom correspondence should be addressed. Email: wclark{at}geog.ucla.edu.
Author contributions: W.A.V.C. and W.L. designed research, performed research, analyzed data, and wrote the paper.
Reviewers: S.H., Clark University; and D.P., University of Arizona.
The authors declare no conflict of interest.
Prospect theory and residential decisions
Article Classifications
- Social Sciences
- Social Sciences
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