How Do Personal Real Estate Transactions Affect Productivity and Risk Taking? Evidence From Professional Asset Managers

Abstract

Housing decisions require intensive attention from households. However, the existing housing literature has not examined the potential connection between costly and time-consuming real estate purchases and the behavior and work productivity of individuals involved in the housing search and acquisition process. In addition, micro evidence on the link between home purchase decisions and the investment/risk choices of households is limited and inconclusive. Our study fills these gaps in the literature by examining the real estate acquisitions of professional asset managers. Overall, we find evidence that major purchases, such as real estate acquisitions, lead to distractions, as evidenced by reduced performance, less active trading, and increased susceptibility to behavioral biases such as the disposition effect. We also find evidence that managers tend to increase the riskiness of their professional portfolios after real estate purchases. This increase in risk is concentrated in cases of purchases of investment properties and purchases using extensive leverage, suggesting consistent risk-taking appetites across personal and professional portfolios. These findings suggest that housing transactions may shed light on the decision making, risk taking, and work productivity of a broad set of homeowners, such as asset managers, corporate executives, and even rank and file employees.