Monday, February 15, 2010

An Update on my Sunk Cost Paper with Rosenblatt and Yao

In the earlier version, we found that Loan-to-Value at origination predicted default probability, even after controlling for market-to-market (i.e., contemporaneous) LTV. We now find that the results are robust to whether we look at LTV at origination, dollar amount of the down-payment, or down-payment relative to income. This is consistent with prospect theory--borrowers show aversion to [realizing the loss] on their down-payments, even when walking away seems to make sense financially.

The paper is on SSRN.

[Thanks to Tstockmann for more correct wording on prospect theory].

4 comments:

TStockmann said...

"This is consistent with prospect theory--borrowers show aversion to losing their down-payments, even when walking away seems to make sense financially."

Consistent with sunk cost, shouldn't this be realizing the loss of their down-payments?

kanishk said...

This is consistent with prospect theory . I am impressed.
thanks for sharing

Antalya Homes Construction

Peter said...

Prospect theory could be inconsistent sometimes, but I must say that this one fits all the basic tenets of prospect theory. I'd like to ask if you have a sort of job board software in this site? sho

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