Economist] There is a tendency to fall in love with your assets
(portfolio, knowledge, etc.) and then think up all the reasons why
to hold what you already own. The "endowment effect" -
one of the chief tenets of prospect theory
- put simply, means that people place an extra value on things they
already own. Think of a favourite sweater, or your house: would
you swap either for something of equal market value? Over the past
decade, prospect theorists have found support for the endowment
effect in scores of experiments. In one of the best-known, researchers
at Cornell University began by giving university students either
a coffee mug or a chocolate bar, each with identical market values.
First the experimenters confirmed that roughly half the students
preferred each good. After the goodies were handed out, they let
the students trade: those who had wanted mugs but got chocolate
(or vice versa) could swap. With barely 10% of students opting to
trade, the endowment effect seemed established (you would expect
50% to have swapped, given the random allocation of gifts). Even
after a short time with things of little value, ownership had overwhelmed
the students' prior tastes. Dozens of other tests have produced
similar results, and have produced a wave of criticism of neoclassical
economics. The criticism has been taken seriously, as it should
be: if the endowment effect is real, people's economic decisions
are fundamentally different from what economists have assumed".
"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 - is called the endowment effect".
|[Gezgin] "The endowment
effect is the asymmetry between the amount that a given individual
would like to pay for a certain good and the amount that this individual
would like to accept to sell the same good".
of Intelligence Analysis (CIA), Heuer, 1999
"A researcher takes a deck of 52 cards and holds one card up.
Watchers pay a dollar for the chance to win $100 if that card is
picked out of the deck. Keep in mind the expected payout is 1/52
- 100 = 1.92 (Las Vegas would quickly go broke with such odds).
Then they are asked if they would like to sell their chances: roughly
80 percent would sell if they could, asking for an average price
of $1.86. (If you could get such a price, it would be a reasonable
sell. For someone who could buy all 52 chances, it would be a good
purchase or arbitrage. He would make a quick 3.18 percent). Now
it gets interesting. The next time, someone is allowed to pick a
card out of the deck and offered the same chance, but now he has
a personal attachment to the card because he touched it. Only about
60 percent of those who picked cards were willing to sell their
chances, and they wanted an average price of just over $6. And when
this same trick was performed at MBA schools the average sale price
has been over $9. 'I know this card. I have studied it. I have a
personal involvement with the card; therefore it is worth more',
thinks the investor. Of course, it is worth no more than in the
first case, but the psychology of 'owning' the card makes
investors value it more".
to Like What You Have - Explaining the Endowment Effect, Huck,
Kirchsteiger and Oechssler, 2003
The endowment effect describes the fact that people demand much
more to give up an object than they are willing to spend to acquire
it. The existence of this effect has been documented in numerous
experiments. We attempt to explain this effect by showing that evolution
favors individuals whose preferences embody an endowment effect.
The reason is that an endowment effect improves one's bargaining
position in bilateral trades. We show that for a general class of
evolutionary processes strictly positive endowment effects will
survive in the long run".
have we learnt about Loss Aversion and Endowment Effects? Still
an anomaly?, Dalton, 2003
"This paper presents an insight into the theoretical and empirical
literature of Loss Aversion and Endowment Effect. The definition
and conceptualisation of both ideas is introduced in order to define
a framework for further analysis. Their presence implies a radical
change in some of the basic standard postulates of microeconomic
foundation. These concepts robustly predict a divergence between
Willingness to Accept and Willingness to Pay, even in a perfect-market
framework and invalidate the standard assumptions of transitivity
and reversibility of preferences under the neoclassical theory of
consumer choice, which would imply fewer trades, inertia in the
economy and sticky prices, among others. Twenty years of successive
positive evidence on Loss Aversion and Endowment Effect support
the theoretical implications showed in this paper. I conclude that
Loss Aversion and Endowment Effects truly matter and their existence
must not be taken into account just as an anomaly or puzzle, but
as part of a new theory in itself, leading to new questions and
challenges for future economic research".
the endowment effect: underestimation of owners’ selling prices
by buyer’s agents, Van-Boven, Loewenstein and Dunning,
"People tend to value objects more simply because they own
them. Prior research indicates that people underestimate the impact
of this endowment effect on both their own and other people's preferences.
We show that underestimating the endowment effect and hence owner'
selling prices can lead to suboptimal behavior in settings with
Endowment Effect, Status Quo Bias and Loss Aversion: Rational Alternative
Explanation, Dupont and Lee, 2001
"The endowment effect, status quo bias, and loss aversion are
robust and well documented results from experimental psychology.
They introduce a wedge between the prices at which one is willing
to sell or buy a good. The objective of this paper is to address
this wedge. We show that the presence of asymmetric information
in a rational-agent framework can account for the endowment effect,
status quo bias and loss aversion as well as psychology-based explanations
proposed in the past".
Value of Information: The Endowment Effect, Raban and Rafaeli
"Value judgments about information and its value are vital
for a functioning information society. Subjective valuations, formulated
by individuals determine the demand for information and trading
in it. Theoretically, these subjective value determinations should
be influenced by ownership rights, a phenomenon coined the "Endowment
Effect" in psychological study of trading situations. This
study examines the Endowment Effect in the context of evaluating
information. In a simple computer simulated game fifty five participants
conducted a task in which they were provided opportunities to buy
or sell information. The bidding mechanism was incentive compatible.
Results show that, in agreement with Endowment Effect theory, people
value information they own much more than information not owned
by them. Our findings indicate that the ratio between Willingness
to Accept (WTA) and Willingness to Purchase (WTP) for information
is similar to that for market goods, and as with market goods, other
than rational. Participants exhibited a strong inclination to purchase
but not to sell information even though profit data suggests that
the use of information had no objective benefit for profit-making.
This preference is attributed to risk aversion rather than to loss
aversion which is the most widely-accepted explanation of the Endowment
Effect. Holding on to information and undertrade in it have strong
implications for the information society".
Endowment Effect, Kujal1 and Smith, 2003
"In this paper we show that one can observe undertrading in
markets even if the WTA-WTP discrepancy is negligible. Due to underrevelation
of intramarginal units very flat reported inverse supply and demand
curves are obtained. As a result very small deviations in reported
WTA and WTP can lead to undertrading".
Endowment Effect and Expected Utility, Morrison, 1998
"The endowment effect, which is well documented in the contingent
valuation literature, alters people's preferences according to a
reference point established in the elicitation question. Experimental
results from the literature and from a study into the value of non-fatal
road injuries are shown to be evidence that an endowment effect
is also at work in standard gambles".