Behavioral Failure or Market Failure? A Survey on Beijing Real Estate Market in the Fall of 2012

Title:Behavioral Failure or Market Failure? A Survey on Beijing Real Estate Market in the Fall of 2012
Lecturer:Dr. Jiayin ZHANG,Sloan school of management, MIT 

Time:2:00PM, Dec 26(Thu),2013

Place: Room 102, North Building

The prominent explanations of market bubbles, based on the classical economic assumption that market prices incorporate market participants’ private valuations, emphasize that market participants were caught in “collective delusion” in which they misestimated the value of their assets.  An emerging institutionalist approach of research, in contrast, argues that mispricing can persist even if rational investors collectively have the resources to correct mispricing, implying that market price doesn’t necessarily incorporate true private beliefs. This paper tests the two competing models in the context of the Beijing real estate market in the fall of 2012, where the collective delusion explanation seems particularly appropriate since this market is dominated by amateur participants. However, my analysis of the unique survey data shows systematic and precise evidence that prices do not equal the mean of private valuations, which strongly supports the institutionalist approach. Moreover, the survey data shed light on a novel explanation by showing that the market is driven by market participants who were drawing incorrect inferences about other participants’ beliefs—they overestimate the degree of others’ support to the price, though they personally do not endorse the price. They therefore choose “dancing”—speculating but exiting from the market before the burst of the bubbles—as the optimal strategy, but it is actually suboptimal in such a situation and fuels the bubble. I conclude by drawing lessons for how the construction of publics by institutions can act as an intermediary step of market evaluation, and how the similar dynamics may exist in many management practices and industries.

Jiayin Zhang joined MIT Sloan's Ph.D. program in 2008, and is currently a Ph.D. candidate in the area of Behavioral & Policy Sciences, with concentrations on Economic Sociology and Strategy. Before studying at MIT, Jiayin has earned her B.S. degree in Computer Science and M.A. degree in Sociology in 2005 and 2008, respectively, both at Tsinghua University in Beijing, China.

Research interests: Economic Sociology, Strategy, and International Management. 

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