Memory and Reference Prices: An Application to Rental Choice

Pedro Bordalo · Nicola Gennaioli · Andrei Shleifer

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Decision-Making and Behavioral Economics Housing Market and Economics Consumer Market Behavior and Pricing

Abstract

Loewenstein and Simonsohn (2006) found that movers across US cities anchor their rental choices to rents in the city of origin, but subsequently converge to comparable local households. We explain this finding using the authors' (2019) model of memory and attention. Rents in the destination city cue recall of “normal” rents in the city of origin, making the former surprisingly high or low, causing movers to under- or overspend, respectively. Over time, experience with new city rents allows the memory database to adapt, and the effect fades away. The model yields two new predictions, for which we find supportive evidence.

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1992Choice in Context: Tradeoff Contrast and Extremeness Aversion 2013Salience and Consumer Choice

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