This study examines cognitive biases that influence housing market decision-making in Israel. It focuses on four biases: the belief in price behavior myths, anchoring to initial home prices, framing effects, and relying on small samples. A survey of 300 people found clear evidence of these biases, with over half influenced by recent price changes, a third impacted by question framing, 20% refusing to sell for less than their purchase price, and 40% relying on anecdotes rather than data for price evaluations. The study also analyzed differences in biases based on demographics like education, gender, and residence type or location.

1. Original text:
In the literature, two main approaches exist concerning the decision making process in the
housing market: rational and behavioral. These two approaches are based on different
assumptions and lead to distinct results. The rational approach, resulting from the basic
traditional economic thought of the utility theory, considers that the aim of the individual is to
maximize all the benefits that can be obtained from the decision made. The decision-making
process, as described by this rational approach, is a normative one, i.e., people should make their
decisions in a rational steady manner. On the other hand, the basis of the behavioral approach is
the "prospect theory", according to which people reach their decisions by taking into account a
mix of economic and subjective emotional values, that are not necessarily rational.
According to the behavioral approach, any individual is influenced by cognitive biases
(heuristics) during the decision-making process. These biases lead individuals to make decisions
that can be inconsistent with rational hypotheses. The present research is focused on four
cognitive biases in the real estate market. The first of these is an examination of the fundamental
assumption of the behavioral approach, regarding the tendency of individuals to believe in myths
and faith. The other three are cognitive effects that are outcomes of cognitive biases: anchoring
prices, framing, and the Law of Small Numbers. The present study was performed in two stages.
The first stage examined the four biases among a sample of 300 participants. The second stage
dealt with differences between sub-groups, such as: gender, age, tenure choice, level of
education, and occupation, regarding place and type of residence.
After editing:
The present study examines the decision making process in the current Israeli housing market.
Within the framework of the behavioral approach, we investigate the tendency to rely on
cognitive biases in the decision-making process in the housing market. In particular, we focus on
the following four biases: the belief in price behavior, the Framing effect, the Anchor Price
effect, and the Law of Small Numbers. The data unambiguously reveal a tendency to rely on
such biases. Furthermore, socio-demographic variables, such as level of education, gender, and
place of residence, are shown to be correlated with the extent to which these biases play a role in
the decision-making process. This work is one of a handful of studies on the topic and with it, we

2. provide much needed empirical evidence that may contribute to the development of policies
within the public, the political and the commercial spheres.
This process has been approached in the literature from two main prisms, the rational and
the behavioral, each of which relies on opposite assumptions and brings about distinct
conclusions. According to the rational approach, which is grounded in the traditional economic
school of thought of Utility Theory, the individual, as a rational being, aims to maximize the
potential benefits of a decision; s/he will therefore make his/her decision such that it will result in
the realization of this purpose. The decision-making process described by the rational approach
is hence prescriptive, that is, it asserts how people should make decisions, rather than how
decisions are actually made.
The basis for the behavioral approach, on the other hand, is Prospect Theory, which was first
developed during the 1970's. In contrast to the rational approach, proponents of the behavioral
approach argue that people in fact reach their decisions by considering not only rational,
economic factors but also irrational, subjective and emotional aspects. Furthermore, it is
maintained that individuals are strongly influenced by cognitive biases (heuristics) during the
decision-making process. These biases cause individuals to make decisions that are not always
consistent with rational thought.
The current research focuses mainly on four cognitive biases (heuristics) as they manifest
themselves in the Israeli housing market. Importantly, these biases frequently cause the
individual to make decisions that do not necessarily follow from the fundamental assumptions of
the rational approach. First, we examine the tendency of individuals to believe in myths and
unfounded ideas and how this tendency translates into behavior in the real-estate market. We
also investigate three other cognitive effects that are the result of cognitive biases; these include
the Anchor Price effect, the Framing effect, and the Law of Small Numbers.
The study was conducted in two stages: first, we looked at whether these effects (and/or
biases) were represented in the attitudes of 300 individuals, using a questionnaire probing
precisely these issues. This was followed by an analysis of inter-group variance according to
gender, age, tenure choice, level of education, occupation, as well as place and type of residence.
Results clearly reveal the importance of the four biases among the sample examined. We
found that for a period of one year following either a rise or a decline in prices, people tend to
assume a "price behavior" corresponding to either the rise or the decline. This holds for more

3. than half of the participants. We also found that approximately one third of the participants were
influenced by a Framing bias, which caused them to change their decisions according to how
questions were formulated. In addition, the data show a significant effect of anchor price: 20% of
the sample population rejected the possibility of selling their home for less than it was originally
purchased for, a price which constitutes an anchor. Moreover, this rate increases when the
required price reduction is less than 10%. Finally, we found substantial support for the Law of
Small Numbers, with nearly 40% of the participants resorting to anecdotal evidence for the
evaluation of past trends of prices. However, only 10% of the sampled population used this type
of evidence in predicting future trends.