Loss Aversion and Duration of Residence

PWP-CCPR-2017-001

Abstract

BACKGROUND
Studies of internal migration ask who moves, why they move, and what are the consequences − to themselves, their origin, and their destination. By contrast, studies of those who stay for very long durations are less common, despite the fact that most people move relatively infrequently.

OBJECTIVE
We argue that staying is the dominant, preferred state and that moving is simply an adjustment toward a desired state of stability (or equilibrium). The core of our argument, already recognized in the literature, is that migration is risky. However, we extend the argument to loss aversion as developed within prospect theory. Prospect theory posits that existing possessions, including the dwelling and existing commodities, are attributed a value well beyond their purchase price and that this extends the average period of staying among the loss-averse.

METHODS
Applying prospect theory has several challenges, including measurement of the reference point and potential degrees of gain and loss households face in deciding to change residence, as well as their own degree of loss aversion. The growing number of large panel sets should make it possible to estimate the degree to which endowment effects are likely to extend durations of residence as predicted by prospect theory.

CONCLUSIONS
Rational expectations models of mobility focus on the changes in the level of consumption of residential services. By contrast, prospect theory focuses on potential gains and losses relative to the existing dwelling − the reference point. As we confront increasing durations of residence in contemporary society, an application of prospect theory is likely to yield important advantages over existing models of mobility and staying.