Anchoring and Adjustment in the Mortgage Market: A Regulatory Experiment

  • Yevgeny MugermanEmail author
  • Moran Ofir


This research examines the seminal heuristic of anchoring and adjustment and its effects on the mortgage market. In recent years, the Israeli central bank has imposed protective regulation on mortgage loans in order to protect the banking system from systemic risk associated with highly leveraged homeowners. Using a unique and detailed dataset on mortgage loans from 2011 to 2016, we empirically estimate the impact of these restrictions on household choices and the housing market. In particular, we examine borrowers’ response to the three following regulatory restrictions: a payment-to-income (PTI) limit of 50%, a 2/3 limit on the adjustable rate component, and a 30-year maturity limit. We found that overall, the regulatory provisions tested served as an anchor to the borrowers. The most unexpected result we obtained was an increase in mortgage loans maturity following the imposed maturity limit. We concluded that the anchoring and adjustment heuristic may have influenced households’ decision in such a way that they perceived the maximum maturity limit as a relevant average maturity anchor and consequentially increased mortgage maturity.


  1. Ariely, D., Loewenstein, G., & Prelec, D. (2003). “Coherent arbitrariness”: Stable demand curves without stable preferences. The Quarterly Journal of Economics, 118, 73–105.CrossRefGoogle Scholar
  2. Ayal, S., Bar-Haim, D., & Ofir, M. (2018). In I. Venezia (Ed.), Behavioral biases in peer-to-peer (P2P) lending, behavioral finance: the coming of age. Singapore: World Scientific Publishers.Google Scholar
  3. Chapman, G. B., & Johnson, E. J. (1999). Anchoring, activation, and the construction of values. Organizational Behavior and Human Decision Processes, 79, 1–39.CrossRefGoogle Scholar
  4. Critcher, C. R., & Gilovich, T. (2008). Incidental environmental anchors. Journal of Behavioral Decision Making, 21, 241–251.CrossRefGoogle Scholar
  5. Crowe, C., Dell’Ariccia, G., Igan, D., Rabanal, P. (2011). Policies for Macrofinancial Stability: Options to Deal with Real Estate Booms, IMF Staff Discussion Note 11/02.Google Scholar
  6. Englich, B., Mussweiler, T., & Strack, F. (2005). The last word in court- a hidden disadvantage for the defense. Law and Human Behavior, 29, 705–722.CrossRefGoogle Scholar
  7. Epley, N., & Gilovich, T. (2001). Putting adjustment Back into the anchoring and adjustment heuristic: Differential processing of self-generated and experimenter-provided anchors. Psychological Science, 12, 391–396.CrossRefGoogle Scholar
  8. Furnham, A., & Boo, H. C. (2011). A literature review of the anchoring effect. The Journal of Socio-Economics, 40, 35–42.CrossRefGoogle Scholar
  9. Hastie, R., Schkade, D. A., & Payne, J. W. (1999). Juror judgment in civil cases: Effects of Plaintiff’s requests and Plaintiff’s identity on punitive damages awards. Law and Human Behavior, 23, 445–470.CrossRefGoogle Scholar
  10. Hurwitz, A., Sade, O., & Winter, E. (2018). Can mandatory minimum annuity laws have unintended consequences? An experimental study. Jerusalem: Hebrew University.Google Scholar
  11. International Monetary Fund. (2011). Macro prudential policy: An organizing framework, IMF Policy Paper SM/11/54.Google Scholar
  12. International Monetary Fund. (2014). Israel: Selected Issues, IMF Country Report 14/48.Google Scholar
  13. Krznar, I., & Morsink J. (2014). With great power comes great responsibility: Macro prudential tools at work in Canada, IMF Working Paper WP/14/83.Google Scholar
  14. Lim, C.H., Columba, F., Costa, A., Kongsamut, P., Otani, A., Saiyid, M., Wezel, T., Wu X. (2011). Macro prudential policy: What instruments and how are they used? Lessons from country experiences, IMF Working Paper WP/11/238.Google Scholar
  15. Marti, M. W., & Wissler, R. L. (2000). Be careful what you ask for: The effect of anchors on personal injury damages awards. Journal of Experimental Psychology: Applied, 6, 91–103.Google Scholar
  16. McElroy, T., & Dowd, K. (2007). Susceptibility to anchoring effects: How openness-to-experience influences responses to anchoring cues. Judgement and Decision Making, 2, 48–53.Google Scholar
  17. Mugerman, Y., Ofir, M., & Wiener, Z. (2016). How do homeowners choose between fixed and adjustable rate mortgages. Quarterly Journal of Finance, 6(4), 1–21.CrossRefGoogle Scholar
  18. Mugerman, Y., Tzur, J., & Jacobi, A. (2018). Mortgage loans and Bank risk taking: Finding the risk sweet spot. Quarterly Journal of Finance, 8(4), 1840008.CrossRefGoogle Scholar
  19. Mussweiler, T., & Englich, B. (2005). Subliminal anchoring: Judgmental consequences and underlying mechanisms. Organizational Behavior and Human Decision Processes, 98, 133–143.CrossRefGoogle Scholar
  20. Plous, S. (1989). Thinking the unthinkable: The effects of anchoring on likelihood estimates of nuclear war. Journal of Applied Social Psychology, 19, 67–91.CrossRefGoogle Scholar
  21. Strack, F., & Mussweiler, T. (1997). Explaining the enigmatic anchoring effect: Mechanisms of selective accessibility. Journal of Personality and Social Psychology, 73, 437–446.CrossRefGoogle Scholar
  22. Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124–1131.CrossRefGoogle Scholar
  23. Tzur-Ilan N. (2017). The effect of credit constraints on housing choices: The case of LTV limit, Bank of Israel discussion paper 2017.03.Google Scholar
  24. Van Exel, N., Brouwer, W., van den Berg, B., & Koopmanschap, M. (2006). With little help from an anchor. Discussion and evidence of anchoring effects in contingent valuation. The Journal of Socio-Economics, 35, 836–853.CrossRefGoogle Scholar

Copyright information

© Springer Nature Switzerland AG 2020

Authors and Affiliations

  1. 1.Finance DepartmentBar-Ilan UniversityRamat GanIsrael
  2. 2.Harry Radzyner Law School, Interdisciplinary Center (IDC)HerzliyaIsrael

Personalised recommendations