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A Statistical Explanation for Extreme Bids in the House Market

Department of Urban Studies, University of Glasgow, 25 Bute Gardens, Glasgow, G12 8RS, UK, e.levin{at}socsci.gla.ac.uk

Gwilym B. J. Pryce

Department of Urban Studies, University of Glasgow, 25 Bute Gardens, Glasgow, G12 8RS, UK, g.pryce{at}socsci.gla.ac.uk

This paper proposes a simple statistical explanation for the phenomenon of extreme bids. During a boom, the housing market regime switches from a single bidder to a multiple bidder environment. The sale price in a multiple bidder auction is the maximum bid and the distribution of maximum bids contains a much higher proportion of extreme bids compared with the distribution of single bidder valuations. While this theory does not preclude behavioural explanations of extreme bids, it does demonstrate that a world free from strategic and idiosyncratic behaviour would not be a world free from extreme bids during boom periods. Therefore, when gauging the impact of strategic or idiosyncratic behaviour (either hypothetically or empirically) one has to measure the effect against a baseline regime where extreme bids are inevitable, not against a world that is free from extreme bids.

Urban Studies, Vol. 44, No. 12, 2339-2355 (2007)
DOI: 10.1080/00420980701540903


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