The Endowment Effect: Loss Aversion or a Buy-Sell Discrepancy?

2020 ◽  
Author(s):  
Gal Smitizsky ◽  
Wendy Liu ◽  
Uri Gneezy
Keyword(s):  
Loss Aversion ◽  
Endowment Effect

scholarly journals The empirical relationship between nonstandard economic behaviors

2019 ◽  
Vol 116 (33) ◽  
pp. 16262-16267 ◽  
Author(s):  
Mark Dean ◽  
Pietro Ortoleva
Keyword(s):  
Loss Aversion ◽  
Time Preference ◽  
Ambiguity Aversion ◽  
Empirical Relationship ◽  
Endowment Effect ◽  
Behavioral Characteristics ◽  
Strong Correlations ◽  
Behavioral Economic ◽  
Economic Choice ◽  
And Gender

We study the joint distribution of 11 behavioral phenomena in a group of 190 laboratory subjects and compare it to the predictions of existing models as a step in the development of a parsimonious, general model of economic choice. We find strong correlations between most measures of risk and time preference, between compound lottery and ambiguity aversion, and between loss aversion and the endowment effect. Our results support some, but not all attempts to unify behavioral economic phenomena. Overconfidence and gender are also predictive of some behavioral characteristics.

Prospect Theory and Foreign Policy Analysis

2017 ◽  
Author(s):  
Jeffrey W. Taliaferro
Keyword(s):  
Decision Making ◽  
Foreign Policy ◽  
Policy Analysis ◽  
Prospect Theory ◽  
Loss Aversion ◽  
Reference Point ◽  
Endowment Effect ◽  
Risk Averse ◽  
Foreign Policy Analysis ◽  
Point Selection

Prospect theory is one of the most influential behavioral theories in the international relations (IR) field, particularly among scholars of security studies, political psychology, and foreign policy analysis. Developed by Israeli psychologists Daniel Kahneman and Amos Tversky, prospect theory provides key insights into decision making under conditions of risk and uncertainty. For example, most individuals are risk averse to secure gains, but risk acceptant to avoid losses (loss aversion). In addition, most people value items they already posses more than they value items they want to acquire (endowment effect), and tend to be risk averse if they perceive themselves to be facing gains relative to their reference point (risk propensity). Prospect theory has generated an enormous volume of scholarship in IR, which can be divided into two “generations”. The first generation (1990–1999) sought to establish prospect theory’s plausibility in the “real world” by testing hypotheses derived from it against subjective expected-utility theory or rational choice models of foreign policy decision making. The second generation (2000–present) began to incorporate concepts associated with prospect theory and related experimental literature on group risk taking into existing mid-level theories of IR and foreign policy behavior. Two substantive areas covered by scholars during this period are coercive diplomacy and great power intervention in the periphery as they relate to loss aversion. Both generations of prospect theory literature suffer from conceptual and methodological difficulties, mainly around the issues of reference point selection, framing, and preference reversal outside laboratory settings.

scholarly journals Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias

1991 ◽  
Vol 5 (1) ◽  
pp. 193-206 ◽  
Author(s):  
Daniel Kahneman ◽  
Jack L Knetsch ◽  
Richard H Thaler
Keyword(s):  
Loss Aversion ◽  
Status Quo ◽  
Endowment Effect ◽  
Status Quo Bias ◽  
Current State ◽  
Auction Price

A wine-loving economist we know purchased some nice Bordeaux wines years ago at low prices. The wines have greatly appreciated in value, so that a bottle that cost only $10 when purchased would now fetch $200 at auction. This economist now drinks some of this wine occasionally, but would neither be willing to sell the wine at the auction price nor buy an additional bottle at that price. Thaler (1980) called this pattern—the fact that people often demand much more to give up an object than they would be willing to pay to acquire it—the endowment effect. The example also illustrates what Samuelson and Zeckhauser (1988) call a status quo bias, a preference for the current state that biases the economist against both buying and selling his wine. These anomalies are a manifestation of an asymmetry of value that Kahneman and Tversky (1984) call loss aversion—the disutility of giving up an object is greater that the utility associated with acquiring it. This column documents the evidence supporting endowment effects and status quo biases, and discusses their relation to loss aversion.

scholarly journals Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?

2007 ◽  
Vol 97 (4) ◽  
pp. 1449-1466 ◽  
Author(s):  
Charles R Plott ◽  
Kathryn Zeiler
Keyword(s):  
Utility Function ◽  
Prospect Theory ◽  
Loss Aversion ◽  
Alternative Explanation ◽  
Endowment Effect ◽  
Effect Theory

Systematic asymmetries in exchange behavior have been widely interpreted as support for “endowment effect theory,” an application of prospect theory positing that loss aversion and utility function kinks set by entitlements explain observed asymmetries. We experimentally test an alternative explanation, namely, that asymmetries are explained by classical preference theories finding influence through the experimental procedures typically used. Contrary to the predictions of endowment effect theory, we observe no asymmetries when we modify procedures to remove the influence of classical preference theories. When we return to traditional-type procedures, however, the asymmetries reappear. The results support explanations based in classical preference theories and reject endowment effect theory. (JEL D01)

scholarly journals Buying and selling exchange goods: Loss aversion and the endowment effect

1996 ◽  
Vol 17 (4) ◽  
pp. 517-524 ◽  
Author(s):  
Eric van Dijk ◽  
Daan van Knippenberg
Keyword(s):  
Loss Aversion ◽  
Endowment Effect

On the Psychology of Loss Aversion: Possession, Valence, and Reversals of the Endowment Effect: Table 1

2007 ◽  
Vol 34 (3) ◽  
pp. 369-376 ◽  
Author(s):  
Lyle Brenner ◽  
Yuval Rottenstreich ◽  
Sanjay Sood ◽  
Baler Bilgin
Keyword(s):  
Loss Aversion ◽  
Endowment Effect

Bad riddance or good rubbish? Ownership and not loss aversion causes the endowment effect

2009 ◽  
Vol 45 (4) ◽  
pp. 947-951 ◽  
Author(s):  
Carey K. Morewedge ◽  
Lisa L. Shu ◽  
Daniel T. Gilbert ◽  
Timothy D. Wilson
Keyword(s):  
Loss Aversion ◽  
Endowment Effect

scholarly journals The Willingness to Pay–Willingness to Accept Gap, the “Endowment Effect,” Subject Misconceptions, and Experimental Procedures for Eliciting Valuations

2005 ◽  
Vol 95 (3) ◽  
pp. 530-545 ◽  
Author(s):  
Charles R Plott ◽  
Kathryn Zeiler
Keyword(s):  
Experimental Design ◽  
Willingness To Pay ◽  
Loss Aversion ◽  
Endowment Effect ◽  
Willingness To Accept ◽  
Incentive Compatible ◽  
Fundamental Properties ◽  
Extensive Training ◽  
Different Types ◽  
And Training

We conduct experiments to explore the possibility that subject misconceptions, as opposed to a particular theory of preferences referred to as the “endowment effect,” account for reported gaps between willingness to pay (“WTP”) and willingness to accept (“WTA”). The literature reveals two important facts. First, there is no consensus regarding the nature or robustness of WTP-WTA gaps. Second, while experimenters are careful to control for subject misconceptions, there is no consensus about the fundamental properties of misconceptions or how to avoid them. Instead, by implementing different types of experimental controls, experimenters have revealed notions of how misconceptions arise. Experimenters have applied these controls separately or in different combinations. Such controls include ensuring subject anonymity, using incentive-compatible elicitation mechanisms, and providing subjects with practice and training on the elicitation mechanism before employing it to measure valuations. The pattern of results reported in the literature suggests that the widely differing reports of WTP-WTA gaps could be due to an incomplete science regarding subject misconceptions. We implement a “revealed theory” methodology to compensate for the lack of a theory of misconceptions. Theories implicit in experimental procedures found in the literature are at the heart of our experimental design. Thus, our approach to addressing subject misconceptions reflects an attempt to control simultaneously for all dimensions of concern over possible subject misconceptions found in the literature. To this end, our procedures modify the Becker-DeGroot-Marschak mechanism used in previous studies to elicit values. In addition, our procedures supplement commonly used procedures by providing extensive training on the elicitation mechanism before subjects provide WTP and WTA responses. Experiments were conducted using both lotteries and mugs, goods frequently used in endowment effect experiments. Using the modified procedures, we observe no gap between WTA and WTP. Therefore, our results call into question the interpretation of observed gaps as evidence of loss aversion or prospect theory. Further evidence is required before convincing interpretations of observed gaps can be advanced.

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