In this study we propose a new metric for overconfidence, a well-documented psychological bias, to investigate the effects of overconfidence on the Korean housing market. We find that a considerable level of overconfidence increased housing prices in Incheon, Ulsan, and in particular, Gangnam, before the global financial crisis in 2007-2008. Since the financial crisis, however, the accuracy of information on future housing prices has been underestimated. These empirical results support the view that confidence in information affects housing prices, creating price bubbles or undervaluations over time depending on levels of confidence in information accuracy. Finally, we show that our overconfidence metric is not explained by macroeconomic variables, sentiment, population growth, or the number of employees, which have been widely used to explain housing prices. The overconfidence metric captures a unique psychological bias in the housing market.
In this study we propose a new metric for overconfidence, a well-documented psychological bias, to investigate the effects of overconfidence on the Korean housing market. We find that a considerable level of overconfidence increased housing prices in Incheon, Ulsan, and in particular, Gangnam, before the global financial crisis in 2007-2008. Since the financial crisis, however, the accuracy of information on future housing prices has been underestimated. These empirical results support the view that confidence in information affects housing prices, creating price bubbles or undervaluations over time depending on levels of confidence in information accuracy. Finally, we show that our overconfidence metric is not explained by macroeconomic variables, sentiment, population growth, or the number of employees, which have been widely used to explain housing prices. The overconfidence metric captures a unique psychological bias in the housing market.
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