International Journal of Housing Markets and Analysis

Measuring behavioural biases affecting real estate investment decisions in India:

using IRT
Richa Pandey, V. Mary Jessica,
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Richa Pandey, V. Mary Jessica, (2018) "Measuring behavioural biases affecting real estate
investment decisions in India: using IRT", International Journal of Housing Markets and Analysis,
https://doi.org/10.1108/IJHMA-12-2017-0103
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Real estate
Measuring behavioural biases investment
affecting real estate investment decisions in
India
decisions in India: using IRT
Richa Pandey and V. Mary Jessica
School of Management Studies, University of Hyderabad, Hyderabad, India
Received 9 December 2017
Revised 18 January 2018
Accepted 1 February 2018
Abstract
Purpose – This study aims to investigate the behavioural biases influencing the real estate market
investing decisions of normal non-professional investors in India.
Design/methodology/approach – As the study involves the behavioural data with polytomous
response format, psychometric test- graded response model (IRT approach) was used for the study with the
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help of STATA 14. Multi-stage stratified sampling was used to collect a sample of 560 respondents. The
study used a 14-item scale representing behavioural biases derived from two broad behavioural theories, i.e.
heuristics and prospect theories. Sample characteristics were checked using SPSS 20. Pre-required
assumptions for IRT (i.e. local independence and unidimensionality) were tested by CFA using AMOS 20.
Findings – Five items, four of which belong to heuristics (anchoring – 2, representativeness – 1 and
availability bias – 1) and one belong to prospect theory (regret aversion) are sufficient to measure the
behavioural attitude of real estate investors in the Indian scenario. Item discrimination ai ranged from 0.95 to
1.52 (average value 1.29), showing moderate discrimination power of the items. The items have done a pretty
good job of assessing the lower level of agreement. For the higher level of agreement, the scale came out to be
less precise, with less information and higher standard error of measurement.
Research limitations/implications – As the behavioural biases are often false, the study suggests the
investors not to repeat these nasty biases to improve investment strategies. As they are shared and not easily
changeable, understanding these biases may also help them in beating the market by acting as “noise
traders”.
Practical implications – The traditional price index is incomplete in some essential respects. The
inclusion of these behavioural biases into the construction of price index will greatly improve the traditional
price index, policymakers should seriously think about it.
Social implications – Shelter is one of the basic needs; a dwelling unit is needed for one to stay in, develop
and contribute to economy and society. If investors try to minimise these biases and policymakers keep a
track of these while making strategies, mispricing in this sector can be controlled to some extent, which will
ultimately help in the well-being of society.
Originality/value – This study contributes to the limited research by investigating the behavioural biases
influencing the real estate market investment decisions of normal non-professional investors. It contributes to
the lacking academe on real estate market in India. The study has used a psychometric test, i.e. the item
response theory, for evaluating the quality of the items.
Keywords Heuristics, IRT, Prospects, Behavioural factors, GRM, Real estate market
Paper type Research paper

Introduction
The diversity and complexity of real estate markets, its linkages with the economy and the
investment sphere has necessitated a closer study about its dynamics. Although exploring
those linkages is vital, finding the factors that drive that is enduringly significant. This International Journal of Housing
Markets and Analysis
study contributes to the limited research by investigating the behavioural biases influencing © Emerald Publishing Limited
1753-8270
the real estate market investment decisions of normal non-professional investors. The study DOI 10.1108/IJHMA-12-2017-0103
 IJHMA has adopted a 14-item scale, measuring 8 behavioural biases that influence investment
decisions of real estate investors from Waweru et al. (2014). Behaviours are duplicated from
Waweru’s research as their paper deals with behavioural factors affecting investment
decision of property market investors, which is in line with the present study. The eight
behavioural biases are based on two broad behavioural theories relating to investor
behaviour, i.e. heuristics and prospect. The study has used six items to measure three biases
for prospect theory:
(1) loss aversion;
(2) regret aversion; and
(3) mental accounting.

Eight items have been used for measuring the following five heuristic biases:
(1) representativeness;
(2) availability;
(3) anchoring;
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(4) overconfidence; and

(5) the gambler’s fallacy.

Items used in the study have been described in results and discussion section.
As the study involves the behavioural data that combines insights from psychology and
sociology, a psychometric test was used for the study, i.e. item response theory (IRT), for
evaluating the quality of the items. IRT serves as a tool for a more efficient evaluation of
scale with in-depth and psychometric analysis of items (Reeve and Mâsse, 2004). IRT is not
sample dependent as instead of first and second order of moments (mean and variance), it
uses higher order of moments (threshold and slope parameters), which are more stable and
less affected by the type of sample (Currivan, 2006, p. 249). As the study used five-point
Likert scale (polytomous in nature) for measuring the single construct, it has used
unidimensional graded response model (GRM) for analysis. GRM is the appropriate IRT
approach to be used for the study that is polytomous in nature (Nering and Ostini, 2011;
Van der Linden and Hambleton, 2013).

Real estate as a discipline

Diaz (1990) classified real estate as “applied science” on the basis of the argument that it has
both components – science (imperative to describe truth) and engineering components (to
prescribe improvement). So it is the overlap of science and engineering streams. Ratcliff
(1972) and Graaskamp and Jarchow (1991) added one more component to it, behaviour, and
identified it as “applied social science”; the argument given by them was “the essence of real
estate market is human behaviour”.

Real estate property investment

According to the American Institute of Real Estate Appraisers (AIREA, 1987), “real estate
investment is buying, building, and/or developing the property for rent, such as investment
property or income property, with the premise of eventual recovery of principal and
reasonable security in earning a profit”. Shim et al. (2008) define real estate investors
behaviour as “actions involved in investing in real estate that is built and developed for rent
with the permanent purpose of earning a profit, presuming reasonable security and eventual
recovery in compensation for foregoing current consumption”.
 Real estate market in India Real estate
In India, real estate is slated to grow at 30 per cent over the next decade according to India investment
Brand Equity Foundation (IBEF). Despite this impressive profile, the sector lacks academic
presence (Dwivedi, 2015). The diversity and complexity of real estate market, its linkages
decisions in
with the economy and the investment sphere has necessitated a closer study on its dynamics India
in India (RBI, 2008, 2010). “A huge real estate system in the country brimming with immense
growth yet lacking a dedicated academe”(Das and Sharma, 2013, p. 29). In India, the
residential real estate market is dominated by speculative investment (future price
appreciation of real estate; Das and Sharma, 2013, p. 8).

Real estate market: rational and efficient or irrational and inefficient

Rattner (2013) talks about the confusion created owing to the 2013 Nobel Memorial Prizes in
Economics as it was given to both Fama and Shiller. The confusion arises from the fact that
both are opposite in beliefs; according to Fama, markets are efficient while according to
Shiller, markets are often irrational. According to Statman (2014), the market can be beaten
by people such as Warren Buffet but cannot be beaten by ordinary investors. So actually,
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both Fama and Shiller accept that markets are not always rational and that it is hard for
ordinary investors to beat it. Statman (2014) further stated that normal people are not
rational, and thus, they commit mistakes caused by behavioural biases. These behavioural
biases substitute normal people for rational people in standard finance. Retail investors are
well representative of normal irrational investors so they are the sample for this study.
Irrationality in real estate market is because of the existence of information asymmetry
and the excess human element in this market (Pandey and Jessica, 2015). Quigley and
Redfearn (1999) argued that there is a large share of real estate price movements, which the
economic fundamentals are unable to capture. Farlow (2003) confirmed it by saying that
behavioural biases are responsible for this. Salzman and Zwinkels (2017) quoted real estate
as “behavioural real estate”. These behavioural biases are a result of “cognitive illusion”
(Tversky, 1995). And these cognitive illusions can be broadly classified into heuristics and
prospect.

Behavioural research in real estate market and research gap

“The social and emotional perspective of real estate are often neglected and a large
component of behavioural decision-making is left undiscovered” (Salzman and Zwinkels,
2017). The behavioural approach combines insights from psychology and sociology into real
estate finance and investment. Though the stock market has much of the behavioural
research, in case of real estate market, very few behavioural research has been done
(Kishore, 2006), and that mainly on institutional investors (Waweru et al., 2014). Behavioural
research in real estate market is mainly concentrated on “valuation experts”, while the
behaviour of other types of stakeholders are unexplored (Black et al., 2003). The same was
supported by Diaz III and Hansz (2007), “The behavioural paradigm is relatively new and
has focused primarily on valuation decision-making behaviours and the anchoring
and adjustment heuristic”. They also suggested representativeness, availability and
overreaction as probable areas of behavioural research in this discipline. Newell (2007)
pointed “property investment decision-making” as an emerged area for property research.
As behavioural finance substitutes normal people for rational people in standard finance
(Kahneman, 1979; Shefrin and Statman, 1984; Fromlet, 2001; Bikas et al., 2013), results can
be different for individual investors.
This study contributes to the limited research by investigating the behavioural biases
influencing the real estate market investing decisions of normal, non-professional investors
 IJHMA by taking up the case of the Indian real estate market. As far as the Indian scenario is
concerned, Das and Sharma (2013, p. 11) stated that “Most available literature on Indian real
estate could be categorized as a passive commentary of the trends and forecasts. Academic
literature on real estate is thin and highly fragmented”. The study contributes to the lacking
academe on the real estate market in India. Although psychometric tests are most suitable to
check behavioural biases, they are almost absent from this area of research. The study has
used a psychometric test, i.e. IRT, for evaluating the quality of the items.

Current study
Objective of the study
To investigate the behavioural biases influencing the real estate market investing decision
of normal, non-professional investors by taking up the case of the Indian real estate market.

Behavioural biases influencing real estate market

This study has adopted the behavioural biases of real estate investors from Waweru et al.
(2014) as their paper deals with property market investors, which is in line with the present
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study and has used theoretical framework and the practical applications of behavioural
finance theory (De Bondt and Thaler, 1995; Fuller, 1998; Shiller, 1999; Fromlet, 2001). The
eight behavioural biases are based on two broad behavioural theories relating to investor
behaviour, i.e. heuristics and prospect theories. The study has used six items to measure
three biases for the prospect theory:
(1) loss aversion;
(2) regret aversion; and
(3) mental accounting.

Eight items have been used for measuring the following five heuristic biases:
(1) representativeness;
(2) availability;
(3) anchoring;
(4) overconfidence; and
(5) the gambler’s fallacy.

Items have been described in the results and discussion section.

Prospect theory was introduced by Daniel Kahneman and Amos Tversky in 1979
through their paper called, “Prospect Theory: An Analysis of Decision under Risk” in
Econometrica. Again, came its widely used modified version as “cumulative prospect
theory” (Tversky and Kahneman, 1992).
A prospect is the Kahneman-Tversky name for a lottery. Prospect theory actually resembles
expected utility theory in that individuals are represented as maximizing a weighted sum of
“utilities”, although the weights are not the same as probabilities and the “utilities” are
determined by what they call a “value function” rather than a utility function (Shiller, 1999).
The study has used loss aversion, regret aversion and mental accounting as evidence of the
prospect theory (Barberis, 2013). Tversky (1995) describes loss aversion as “the greater
impact of the downside than the upside”. Loss aversion partly accounts for documented
strong positive correlation between the volume and the prices in the real estate market
(Beracha and Skiba, 2014). Real estate investors with loss aversion are highly sensitive to
 losses, and they believe that property prices can be slightly better but infinitely worse Real estate
(Leung and Tsang, 2013). Loss aversion is an important determinant of real estate prices investment
(Genesove and Mayer, 2001; Bokhari and Geltner, 2011).
decisions in
Regret aversion refers to the phenomenon that people keep the status quo because they know India
from experience that options that seem to be favorable given the apparently correct information at
the time the decision is to be made, may later turn out to be less favorable than previously
assumed (Seiler et al., 2008).
Ritov and Baron (1992) link it to the theory of omission bias where people prefer omission to
commission. Regret theory explains that real estate investors defer selling the property that
has decreased in value and accelerates in selling the property that has increased in value
(Shefrin and Statman, 1985). “Individuals compartmentalize elements of their consumption
and the associated expenditures into mental accounts, following personal rules or
heuristics” (Thaler, 1985). Seiler et al. (2012) showed that real estate investors consider their
decision about the disposition in net, not gross, terms. According to Einiö et al. (2008), real
estate investors wait for a small increase (comparison to its purchase price) in the real estate
prices to sell it, and that while doing so, they do not consider the major gain they could have
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got by investing that money in the mixed portfolio. Mental accounting in real estate
investors leads to inefficient capital structure (Almenberg and Karapetyan, 2009).
“Heuristics are rules of thumb, or mental shortcuts, the human brain uses to quickly
solve complex problems” (Fuller, 1998). Daniel Kahneman and Amos Tversky, in the late
‘60s and the early ‘70s, came out with a lot of work regarding “heuristics and biases”.
Tversky and Kahneman (1974) described three general heuristics – representativeness,
availability and anchoring. Black and Diaz III (1996) describe representativeness as
“stereotyping”. Investors mistake the most recent price in case of real estate as the
representative of the full distribution of return (Salzman and Zwinkels, 2017). Owing to the
existence of a high degree of information asymmetry and the lack of transparency, real
estate market often suffers from availability bias (Adair et al., 1994). More often, investors
invest in investment avenues for which information is readily available (Wang et al., 2000;
Lin and Vandell, 2007). “Anchoring is the notion that people tend not to deviate from a given
starting point even if new information dictates they should” (Seiler et al., 2008). Genesove
and Mayer (2001) explain home purchase price as the anchoring point. Psychological
anchors affect the prices of real estate market (Bokhari and Geltner, 2011). In case of real
estate price, this effect is persistent: either it is generated externally, or, in the case of prices,
provided by the appraiser itself (Diaz III and Hansz, 1997). Apart from these, the study has
used overconfidence and the gambler’s fallacy to determine the use of heuristics. Even the
originators of heuristics, in due course of time as the research progressed in this area,
suggested new biases. According to Tversky and Kahneman (1974), the gambler’s fallacy is
the consequence of local representativeness. Tversky (1995) describes overconfidence as one
of the three areas of “cognitive illusion”, apart from risk attitude and mental accounting. In
an interview to the Guardian July 2015, Daniel Kahneman regarded overconfidence as the
most hazardous bias. According to Salzman and Zwinkels (2017), Overconfidence is the
major reason for mispricing in the real estate sector. Keren and Teigen (2004), in their paper,
“Yet Another Look at the Heuristics and Biases Approach”, explains the gambler’s fallacy
as the failure to understand statistical independence. Gambler’s fallacy leads investors and
developers to believe that they can surpass the results of previously successful property
market participants (Rottke et al., 2003). Pitz (1974) talks about overconfidence in probability
estimates; according to him, people have a tendency to treat the results associated with
inferential processes as with the early stages of inference, there was no uncertainty
 IJHMA associated. Fischhoff et al. (1977) connect it to the “best-guess” heuristic of cascaded
inference tasks (Gettys et al., 1973).

Application of graded response model

As the study involves the behavioural data that combines insights from psychology and
sociology, a psychometric test was used for the study to evaluate the quality of the items.
According to Nering and Ostini (2011, p. 2), “Item Response Theory (IRT) is an extension of
CTT with mathematical roots that run deep in psychology”. IRT has been used by
researchers for psychological and behavioural measurements (Van Dam et al., 2010; Iversen
and Lattal, 2013). Theoretically, IRT analysis does not depend on a particular sample
(Christopher et al., 2009). As the study used a five-point Likert scale (polytomous in nature)
to measure a single latent variable, unidimensional graded response model (GRM) is the
appropriate IRT approach to be used for the study (Nering and Ostini, 2011; van der Linden
and Hambleton, 2013).
The GRM was introduced by Samejima (1969, 1972 and 1995) to handle ordered
polytomous categories such as letter grading, A, B, C, D and F, and polytomous responses to
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attitudinal statements (such as a Likert scale). The model is expressed as follows:

expð Dai ðu  bix ÞÞ

Pix* ðu Þ ¼ (1)
1 þ expð Dai ðu  bik ÞÞ

where P*ix(u ) is the probability of a randomly chosen examinee with the proficiency of u
scoring x or above on item i. This function is called the cumulative category response
function (CCRF). The probability of each score category can be given by the following:

Pix ðu Þ ¼ Pix* ðu Þ  Pixþ1

* ð Þ
u (2)

Thus, the score category response function (SCRF) of the GRM can be expressed as follows:

exp½Dai ðu  bixþ1 Þ  exp½Dai ðu  bix Þ

Pix ðu Þ ¼ (3)
½1 þ exp½Dai ðu  bix Þ½1 þ exp½Dai ðu  bixþ1 Þ

Sampling
According to Statman (2014), normal people are not rational, and they commit mistakes that
are caused by behavioural biases. These behavioural biases substitute normal people for
rational people in standard finance. As retail investors are well representative of normal
irrational investors, retail real estate investors are the sample for this study.
People in India using real estate as an investment vehicle are the target population for the
study. People who have invested in real estate for the purpose of earning profit from it (i.e.
buying a flat in an apartment or building floors for the purpose of renting) served as
sampling unit for the survey. People with investment after 2008 were eligible for inclusion in
the survey (The Indian real estate market withstood the adverse effects of the 2007-2008
financial crisis. However, it is wrong to say that it is free of adverse impacts. So, the study
has considered collecting the post-2008 data). In India, there is no source from where data
about people who are investing in real estate can be directly obtained. So no sampling frame
was available for the target population. Data were collected using multistage (three stages)
stratified sampling. “Stratified samples are samples within samples” where each stratum is
 “fairly homogeneous”. Patton (1990, p. 174) explains, “The purpose of a stratified purposeful Real estate
sample is to capture major variations rather than to identify a common core, although the investment
latter may also emerge in the analysis”. decisions in
The first stage of stratification was done based on regions. The country was stratified
into four regions, as in Table I (division was the same as it was used in census 2001). The India
sample was collected from Calcutta (east and north-eastern regions), Delhi (north and central
regions), Hyderabad (southern region) and Mumbai (western region). These particular cities
share a larger amount of alternative investment in their particular regions (RBI/NCAER
Household Survey 2011). At the second stage, each region was classified into two locations
(Table I). According to Brueggeman and Fisher (2006), location plays important role in the
pattern of real estate investment. Information about urban and suburban areas of particular
cities was collected from their respective urban development authorities. At the third stage,
each location was further stratified by two property types, i.e. apartments and rented
houses, as it was done in the study by Levinson and Niemann (2004).
Data were collected using structured and a close-ended questionnaire containing 14 items
measured on a five-point Likert scale, with 5 indicating “higher degree of agreement” and 1
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indicating “lowest degree of agreement”. Questionnaires were self-administered. At the

lowest level of stratification, data were collected using purposive and snowball sampling
methods. The logic and power of purposeful sampling lie in selecting information-rich cases
for study in depth (Patton, 1990, p. 169).
Following principles that ought to guide the sample size for the synthesis: “the data
should be sufficient to permit comparisons among selected dimensions and constructs”; “the
reports should reflect the work of several distinct and independent investigators”; and “the
data should be sufficient to answer the research question” (Paterson and Canam, 2001, p. 37).
With a sample size >30, normal distribution can be used as the approximation to the
sampling distribution (Richard and Rubin, 2002, p. 319), so the study used 35 (keeping some
adjustment for the missing data) as the sample size at the lowest level of data collection
(Table II).
A sample size of 560 was used in the study (Table II). Research done in the same type of
field have used sample sizes of Shim et al. (2008, p. 147, Waweru et al., 2014; p. 155;
Ngoc, 2013, p. 188). A sample of at least 500 is required for adequate calibration under
unidimensional graded model (Reise and Yu, 1990). For a five-point Likert scale, polytomous
data 500 is the required sample size (Reeve and Fayers, 2005, p. 71). A sample size of 560
fulfills all the above-mentioned conditions.

Results and discussion

Items and their notation
Table III describes items used in the study to measure different behavioural biases.

Stage Units

1st Region
Four regions – north and central India, east and north-east India, southern India, western India
2nd Location
Two types – urban, suburban Table I.
3rd Property type Three levels of
Two types – apartments, rented houses stratification
 IJHMA Levels of stratification Sample size

North and central India

Urban
Apartments 35
Rented houses 35
Suburban
Apartments 35
Rented houses 35
East and north-east India
Urban
Apartments 35
Rented houses 35
Suburban
Apartments 35
Rented houses 35
Southern India
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Urban 35
Apartments 35
Rented houses 35
Suburban
Apartments 35
Rented houses 35
Western India
Urban
Apartments 35
Rented houses 35
Suburban
Table II. Apartments 35
Sample size Rented houses 35

Sample characteristics
SPSS 20 was used to find out the sample characteristics. After adjusting for missing data,
the sample was reduced to 543 from 560. There were two univariate outliers (Z score > þ/
3.29). There was one multivariate outlier, Mahalanobis distances above the critical score
36.1233 (14 df and p < 0.001). Instead of N-1, the study used N (no. of variables, which are 14
in this case) for df, as according to Tabachnick and Fidell (2007, p. 99), “Mahalanobis
distance is evaluated as C2 with degrees of freedom equal to the number of variables”. All 3
outliers were removed, so the sample size after this was 540. Overall scale is approximately
normally distributed with skewness 0.254 (S.E. = 0.105) and kurtosis 0.677(S.E. = 0.210;
Cramer and Howitt, 2004; Doane and Seward, 2011). All individual items were normally
distributed with the skewness statistic divided by its standard error between z score þ/
3.29 (p < 0.001, two-tailed test; Tabachnick and Fidell, 2007). There were no cases of
singularity and multicollinearity as all variables have SMC (1 – Tolerance) closer to 0.00
(Tabachnick and Fidell, 2007). (See Appendix I-IV.).

Goodness of fit
To ensure a good model fit, two dimensions need to be satisfied, item fit and person fit
(Steven P Reise, 1990). To confirm a good person fit at the initial level, Person-level outliers
 Item
Real estate
acronym Items Behavioural theory * investment
decisions in
BF1 I use my predictive skills to time and outperform the market Overconfidence (H)
BF2 I use trend analysis to make investment decisions Representativeness (H) India
BF3 I have high expectations of property returns beyond market Overconfidence (H)
expectations
BF4 When faced with a sure loss, I am a risk-taker Loss aversion (P)
BF5 I use past performance as an indicator of future performance and rely Representativeness (H)
on this to make property investment decisions
BF6 I set the value of property based on the recent selling/buying price Anchoring (H)
BF7 I avoid selling property that has decreased in value Regret aversion (P)
BF8 I am normally able to anticipate the end of good or poor property Gambler’s fallacy (H)
market returns
BF9 I am willing to sell a losing investment because the account shows a Mental accounting (P)
loss
BF10 When faced with a sure gain, I am risk-averse Loss aversion (P)
BF11 I prefer buying local property to trading in property that is not local Availability bias (H)
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BF12 I use the property purchase price as a reference point in trading Anchoring (H)
BF13 I sell property that has increased in value faster Regret aversion (P)
BF14 I tend to treat each element/account in their investment portfolio Mental accounting (P)
separately
Table III.
Notes: *H = heuristic; P = prospect; italic data denotes the items which were found significant according Items and their
to this study notations

(Felt et al., 2017), which identify “a typical” patterns of responses across items, were
removed keeping in mind the criteria such as univariate and multivariate outliers.
Local independence and data unidimensionality are two major assumptions for
performing IRT (Emberston and Reise, 2000, p. 187). These were checked by confirmatory
factor analysis (Currivan, 2006, p. 262) using AMOS 20. The initial unidimensional model
was created with one construct behavioural factors of property investment (BFPI) and 14
items (Figure 1). Items with factor loading <0.5 were deleted except BF6 (factor loading of
0.493). So the final model with six items was used for further analysis (Figure 2; Fornell and
Larcker, 1981). Although no software exists to check local independence (Currivan, 2006,
p. 256), the study has used error covariance to establish local independence. According to
Byrne (2005), “Error covariances can reflect overlapping content between two items on a
measuring instrument. This psychometric phenomenon is termed violation of local
independence”. CFA was used to produce variance–covariance matrix for the estimates
(Table IV). Table IV shows no covariance between error terms, proving local independence
of the items.
For the six-factor reduced model, the parsimonious fit index was achieved as the
value of ChiSq/df for x 2 (9) = 22.208 is 2.468, which is less than 4 (Marsh and Hocevar,
1985). Absolute fit index values, i.e. goodness of fit index(GFI) = 0.986(>0.95), adjusted
goodness of fit index (AGFI)= 0.968(>0.90), root mean square residual (RMR/RMSR) =
0.032(<0.05), meet the criteria of excellent fit (Joreskog and Sorbom, 1984; Tanaka and
Huba, 1985).
Incremental fit index values, i.e. comparative fit index (CFI) = 0.976, normed fit index
(NFI) 0.960 (>0.90), Tucker-–Lewis index (TLI) = 0.959 (>0.90), incremental fit index (IFI) =
0.976 (>0.90) meet the criteria for good fit (Bentler and Bonett, 1980; Bollen, 1989; Bentler,
1990).
 IJHMA
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Figure 1.
CFA for initial model

Figure 2.
CFA for reduced
model
 Parsimonious fit index value, i.e. root mean square error of approximation (RMSEA) Real estate
0.052 (<0.08) is good (Browne and Cudeck, 1993; MacCallum and Austin, 2000). investment
decisions in
Estimated item parameters
Unidimensional GRM with STATA 14 was used to find the item Fit. In GRM, each item has
India
a few difficulty parameters (bi) and a discrimination parameter (ai). u j describes the ability
of person j. Each cell in the person–item matrix represents an encounter between a person of
ability u and an item of difficulty b. The estimates can be improved by taking account of
item discrimination (Samejima, 1997). The discrimination or slope parameter (ai) shows the
item’s ability to differentiate among respondents at different levels of agreement (Currivan,
2006, p. 251). Category characteristic curve (CCC) shows the relationship between the
person’s response to an item and the latent variable (Currivan, 2006, p. 249).
Table V represents all item parameters. Item discrimination ai ranges from 0.95 to 1.52,
with an average value of 1.29, which shows moderate discrimination (0.65-1.34; Baker, 2001,
p. 34). Item difficulty parameter bi is unevenly distributed across trait levels, with all of them
exhibiting negative skewness. This indicates that most of the respondents are unable to
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choose a higher level of agreement.

Compared to other items, CCC for Item 1 is not very much spread across the trait level
(level of agreement), with least discrimination (proved from Table V and Figure 3). “The
concept of reliability is replaced in IRT by the concepts of the item and test information”
(Guion, 2011, p. 220). The standard error of measurement (SEM) shows expected observed
score fluctuation owing to an error in measurement tool (Emberston and Reise, 2000). The
study used test information function(TIF) to check for information and SEM. Steeper curves
(low ai) increases the standard error as there is a narrower range for more data (people;
Currivan, 2006, p. 265).
Expected score (“summed score”) of test characteristic curve (TCC) for a 6-item five-point
Likert scale can vary between 5 and 30. TCC shows the relationship between the true score

Estimates e1 e5 e6 e7 e11 e12

e1 0.001
e5 0 0.002
e6 0 0 0.002
e7 0 0 0 0.002 Table IV.
e11 0 0 0 0 0.005 Variance-covariance
e12 0 0 0 0 0 0.003 matrix

bi
Items ai >=2 >=3 >=4 .=5

BF1 0.951855 5.41171 1.23379 0.507411

BF5 1.501217 4.21828 2.2039 0.39229 0.870951
BF6 1.274984 4.3201 2.42755 0.41952 0.882359
BF7 1.519563 4.18055 2.06001 0.3942 0.707749
BF11 1.238249 5.66435 1.77707 0.28919 0.109232
BF12 1.258201 4.76347 2.25829 0.45772 0.719369 Table V.
Average 1.290678 Item parameters
 IJHMA

Figure 3.
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Category
characteristic curves
for items

from classical test theory and the u from item response theory (Feinberg and van der
Linden, 2005, p. 44). TCC (Figure 4), here, is neither flat nor steep – the test provides a spread
of summed score for a broad range of u -score. Item information function (IIF) for all the six
(Figure 5) items also shows that Item 1 provides not much information compared to other
items. TIF for the model without Item 1 (Figure 7) is almost same as TIF with all items
(Figure 6), so the removal of Item 1 does not substantially alter the curve shape, which
shows that Item 1 contribute very little to scale utility.
Test information curve tells that as the level of agreement increases the information
decreases. So it can be concluded that the items have done a pretty good job of assessing the
lower level of agreement. For the higher level of agreement, the scale came out to be less
precise with less information and higher standard error. Looking at the bis from Table V
and the CCC (Figure 3), it is clear that information above u = 0.75 is less precise.

Figure 4.
Test characteristic
curve (TCC)
 Discussion Real estate
This study used GRM (IRT) for the examination of responses relating to biases affecting investment
property market investment. The study started with a 14-item scale measuring 8
behavioural biases that influence investment decisions of real estate investors. Of the 14
decisions in
items 6 qualify for IRT as remaining items do not fulfil the pre-required assumptions for India
IRT (i.e. local independence and unidimensionality). On the basis of IIC and TIC, it is
concluded that out of these six items, BF1 (measuring overconfidence bias) contributes very
little to scale utility. So the study concludes that only five items, four of which belong to
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Figure 5.
Item information
function (IIF)

Figure 6.
TIF for all six items

Figure 7.
TIF removing BF1
 IJHMA three heuristic biases (two for anchoring, one for representativeness and one for availability
bias) and only one belong to the prospect theory (regret aversion) are sufficient to measure
the behavioural attitude of property market investors in the Indian scenario. Thus, the paper
concludes that Indian real estate investors heavily influenced by heuristic biases. For a
developing country such as India, where property investment is still through direct channels
(as REITs have still in their formulation stage), the dominance of heuristics as behavioural
biases is quite obvious as people go for shortcuts or rule of thumb. Gut feelings, which are
derived from heuristic behaviour and biases, are an integral part of the Indian real estate
(Das and Sharma, 2013, p. 10). Four behavioural biases came out to be most prominent:
(1) anchoring biases, i.e. setting value of the property on the basis of recent buying or
selling price (item – BF6) and using property purchase price as reference point
(item – BF12);
(2) representativeness bias as past performance of the property plays decisive role in
real estate investment (item – BF5);
(3) availability bias as investing in local property (item – BF11); and
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(4) investors holding onto property that dives despite being assumed to soar (prospect
theory, regret aversion and item – BF7).

Though regret aversion came out to be significant bias owing to the utility of Item BF7, one
more item (BF13) was used in the study to measure this bias, which shows that property
investors avoid selling property that has increased in value faster.
Other four biases do not show significant influence on property investment decisions of
the property investors:
(1) loss aversion, which is demonstrated by attitude of the investors to deal with the
risk in case of sure gain and sure loss (items – BF4 and BF10);
(2) mental accounting, which has been measured by how investors treat different
elements in their investment portfolio (item – BF14) and willingness of the investors
to sell the losing investment because the account shows a loss (item – BF9);
(3) overconfidence evaluated by dependence on predictive skill to time and outperform the
market (item – BF1) and higher expectation than the market expectations (item – BF3);
and
(4) the gambler’s fallacy, gauged by the anticipating ability of the investors about the
end of good or poor property market returns (item – BF8).

These findings are consistent with Waweru et al. (2014), in whose study heuristic factors
came out to be the influential behavioural factor for real estate investors. Anchoring among
real estate investors was also found out by (Diaz III and Hansz, 1997; Seiler et al., 2008).
Bokhari and Geltner (2011; Salzman and Zwinkels, 2017) found the evidence of
representativeness bias in the marketplace. Wang et al. (2000, Lin and Vandell, 2007)
indicated that real estate investors overly on easily available information. Shefrin and
Statman (1985; Seiler et al., 2008) noted the presence of regret aversion among investors
while dealing with properties.
Owing to the anchoring bias, people are not able to adjust sufficiently away from the
anchor to arrive at an otherwise fair market price. As far as representativeness bias is
concerned, people need to be careful in making predictions; just because something has done
well in past is not a guarantee for the future success. Myopic behaviour, which arises owing
to the availability bias, can lead people to choose suboptimal portfolio. Regret-adverse
 investors fear the penalties of both omission (i.e. not buying the optimal investment Real estate
property) and commission (buying suboptimal investment property). investment
By examining the anchor points of the response thresholds, it can be said that items have
done a pretty good job of assessing the lower level of agreement. For the higher level of
decisions in
agreement, the scale came out to be less precise with less information and higher standard error India
of measurement. This shows items prove to be incapable of differentiating high from very high.

Implications
As stated by Von Neumann and Morgenstern (1945), financial markets are a “real game”
(Wood, 1995). This is true for real estate market also. The study favours that real estate
market is neither rational nor irrational but something in between these. It depends on the
rationality of the investors, based on their knowledge. Their irrationality can be predicted to
maximise the profitability, but the knowledge of analytic tools and methods is needed (Das
and Sharma, 2013, p. 10). The study used GRM (IRT), as a required psychological tool, to
point out the biases while making investment decisions. As stated by De Bondt (1995) these
biases are shared, differently sophisticated, often false and not easily changeable. As they
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are often false the study suggests the investors not to repeat these nasty biases to improve
investment strategies. As they are shared and not easily changeable, understanding these
biases may also help them in beating the market by acting as “noise traders”. One should act
like “quantitate manager” (Fuller, 1998) to be able to exploit the information (such as
traditional managers) as well as exploit the behaviour (such as behavioural managers).
Investors should change their course of action in accordance with the new information and
their acquired experiences. It requires that they should not be super active in taking
decisions and all decisions should not be taken together. As, with due course of time, they
will gain experience and can use newly available information. Decisions should be taken
with a long-term perspective. Investors should be open to accepting their mistakes and
should learn from them. They should not try to predict which is unpredictable. They should
keep in mind the opportunity cost attached to alternative pathways.
The traditional price index is incomplete in some essential respects. Volatility in prices is
systematic rather than random. The inclusion of these behavioural biases into the
construction of price index will greatly improve the traditional price index, policymakers
should seriously think about it. The shelter is one of the basic needs, a dwelling unit is needed
to stay, develop and contribute to economy and society. These behavioural biases are one of
the major reasons for mispricing in real estate sector as people are not able to adjust
sufficiently to arrive at an otherwise fair market price. If investors try to minimise these
biases and policymakers keep a track of these while making strategies, mispricing in this
sector can be controlled to some extent, which will ultimately help in the well-being of the
society. The study has tried to contribute to the limited research by investigating the
behavioural biases influencing the real estate market investment decisions of normal non-
professional investors. It contributes to the lacking academe on the real estate market in India.

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Further reading
Allen, M., Kilpatrick, D., Armstrong, M., Briggs, R., Course, G. and Pérez, N. (2002), “Multistage cluster
sampling design and optimal sample sizes for estimation of fish discards from commercial
trawlers”, Fisheries Research, Vol. 55 Nos 1/3, pp. 11-24.
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interview
Nassiuma, D.K. (2000), “Survey sampling”, Theory and Methods, Prentice Hall India Learning Private
Limited.
 IJHMA Appendix

Zscore Minimum Maximum Zscore Minimum Maximum

BF1 2.57362 1.05619 BF8 2.99572 1.63868

BF2 2.24207 1.44716 BF9 3.48033 1.22950
BF3 2.26469 1.15835 BF10 2.97833 1.28596
BF4 1.84935 1.46757 BF11 2.43560 0.97079
BF5 2.88317 1.24487 BF12 2.81480 1.14744
BF6 2.87979 1.21641 BF13 1.42217 2.66374
Table AI. BF7 2.83473 1.17115 BF14 2.05069 1.23404
Univariate outlier
detection Note: Italic data denotes Z score > þ/ 3.29 (univariate outlier)
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Items N Skewness Std. error of skewness Skewness/std. error

BF1 540 0.337 0.105 3.204

BF2 540 0.334 0.105 3.181
BF3 540 0.340 0.105 3.233
BF4 540 0.251 0.105 2.386
BF5 540 0.281 0.105 2.670
BF6 540 0.321 0.105 3.050
BF7 540 0.320 0.105 3.043
BF8 540 0.074 0.105 0.708
BF9 540 0.228 0.105 2.170
BF10 540 0.317 0.105 3.019
BF11 540 0.341 0.105 3.242
Table AII. BF12 540 0.336 0.105 3.195
Normality for the BF13 540 0.328 0.105 3.119
items BF14 540 0.329 0.105 3.133

Normality measures Statistic Std. error Statistics/std. error

Table AIII.
Normality for the Skewness 0.254 0.105 2.42
scale Kurtosis 0.677 0.210 3.23
 Coefficientsa
Real estate
Collinearity statistics investment
Model Tolerance VIF decisions in
1 BF1 0.720 1.390
India
BF2 0.911 1.098
BF3 0.705 1.419
BF4 0.923 1.083
BF5 0.721 1.387
BF6 0.741 1.349
BF7 0.691 1.446
BF8 0.824 1.213
BF9 0.829 1.207
BF10 0.797 1.255
BF11 0.703 1.422
BF12 0.694 1.442
BF13 0.907 1.102
BF14 0.768 1.303
Table AIV.
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Note: aDependent Variable: Res Collinearity

About the authors

Richa Pandey did her MBA from CIMP, Patna, and is currently associated with the School of
Management Studies, University of Hyderabad, as a PhD Scholar. Richa Pandey is the corresponding
author and can be contacted at: richa31.cimp@gmail.com
V. Mary Jessica did her M Com (University Topper) and PhD from Osmania University, and is
associated with the School of Management Studies, University of Hyderabad, as a Professor (Finance)
and a Co-ordinator (PGDPM and CDVL). She has presented papers in national and international
conferences, both at home and abroad, including a research presentation at the World Investment
Forum, 2014, UNCTAD, in Geneva, Switzerland. She has organised national seminars, workshops
and symposia. She has over 40 articles published in reputed journals, conference proceedings and
books.

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