Can Prospect Theory Explain the Disposition Effect? Evidence from China's Real Estate Market

There is a recent debate about whether prospect theory can explain the disposition effect. Using housing transaction data of China, we find the relationship between selling propensity and annual return presents an asymmetric inverted V shape, consistent with the prospect theory. We also find evidences that loss sellers are willing to set higher price and reluctant to lowering price, supporting the loss aversion explanation of the prospect theory to disposition effect