Abstract

This paper investigates the correlation between individualism and housing bubbles. Individualistic culture could affect human behavior by cultivating overconfidence. People in individualistic environments are more confident about themselves and more likely to attribute their success to their own effort than those in collectivist areas. I measure individualism by extending a collectivism index proposed by Vandello and Cohen (1999). Housing bubble/bust is measured as the absolute value of the proportion of housing price unexplained by housing market fundamentals. Based on a panel data of 6,730 observations in 355 U.S. MSAs during 1990-2015, I find that individualism is positively associated with the housing bubble/bust proxy (HBP), indicating that housing markets are less efficient and investors are more irrational in more individualistic areas. To mitigate the concern of endogeneity and omitted variables, I construct an instrumental variable (IV) using the total number of local congregations. My findings are robust to IV tests, alternative sample periods and model specifications.