Endowment effect: Difference between revisions

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Inn [[psychology]] and [[behavioral economics]], the '''endowment effect''' (also known as '''divestiture aversion''' and related to the [[mere ownership effect]] in [[social psychology]]<ref name=":0">{{Cite journal|url =|title = On the social nature of nonsocial perception: The mere ownership effect|last = Beggan|first = J.|date = 1992|journal = Journal of Personality and Social Psychology|doi = 10.1037/0022-3514.62.2.229|pmid = |access-date =|volume=62|issue = 2|pages=229–237}}</ref>) is the finding that people are more likely to retain an object they own than acquire that same object when they do not own it.<ref name="Roeckelein2006">{{cite book |first=J. E. |last=Roeckelein |title=Elsevier's Dictionary of Psychological Theories |url=https://books.google.com/books?id=1Yn6NZgxvssC&pg=PA147 |year=2006 |publisher=Elsevier |isbn=978-0-08-046064-2 |page=147 }}</ref><ref name="Morewedge2015" /><ref name=":1" /><ref name="KahnemanKnetschThaler" /> The endowment theory can be defined as "an application of prospect theory positing that loss aversion associated with ownership explains observed exchange asymmetries."<ref>{{Cite journal|last=Zeiler|first=Kathryn|date=2007-01-01|title=Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?|url=https://scholarship.law.bu.edu/faculty_scholarship/454|journal=American Economic Review|volume=97|pages=1449}}</ref>

This is typically illustrated in two ways.<ref name="Morewedge2015">{{Cite journal|title = Explanations of the endowment effect: an integrative review|url = |journal = Trends in Cognitive Sciences|date = 2015|pages = 339–348|volume = 19|issue = 6|doi = 10.1016/j.tics.2015.04.004|pmid = 25939336|first = Carey K.|last = Morewedge|first2 = Colleen E.|last2 = Giblin}}</ref> In a valuation paradigm, people's maximum [[willingness to pay]] (WTP) to acquire an object is typically lower than the least amount they are [[Willingness to accept|willing to accept]] (WTA) to give up that same object when they own it—even when there is no cause for attachment, or even if the item was only obtained minutes ago.<ref name="KahnemanKnetschThaler" /> In an exchange paradigm, people given a good are reluctant to trade it for another good of similar value. For example, participants first given a Swiss chocolate bar were generally unwilling to trade it for a coffee mug, whereas participants first given the coffee mug were generally unwilling to trade it for the chocolate bar.<ref name="KKT91" />

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A more controversial third paradigm used to elicit the endowment effect is the [[Mere ownership effect|mere ownership]] paradigm, primarily used in experiments in psychology, marketing, and organizational behavior. In this paradigm, people who are randomly assigned to receive a good ("owners") evaluate it more positively than people who are not randomly assigned to receive the good ("controls").<ref name=":0" /><ref name="Morewedge2015" /> The distinction between this paradigm and the first two is that it is not [[incentive compatibility|incentive-compatible]]. In other words, participants are not explicitly incentivized to reveal the extent to which they truly like or value the good.

The endowment effect can be equated to the behavioural model [[willingness to accept|Willingness to Accept or Pay (WTAP)]], a formula sometimes used to find out how much a consumer or person is willing to put up with or lose for different outcomes. However, this model has come under recent criticism as potentially inaccurate.<ref>{{Cite journal|last=Zeiler|first=Kathryn|date=2005-01-01|title=The Willingness to Pay-Willingness to Accept Gap, the 'Endowment Effect,' Subject Misconceptions, and Experimental Procedures for Eliciting Valuations|url=https://scholarship.law.bu.edu/faculty_scholarship/781|journal=American Economic Review|volume=95|pages=530}}</ref><ref>{{Cite journal|last=Zeiler|first=Kathryn|date=2007-01-01|title=Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?|url=https://scholarship.law.bu.edu/faculty_scholarship/454|journal=American Economic Review|volume=97|pages=1449}}</ref>

==Examples==

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==Criticisms==

Some economists have questioned the effect's existence.<ref>{{Cite journal|last=Klass|first=Greg|last2=Zeiler|first2=Kathryn|date=2013-01-01|title=Against Endowment Theory: Experimental Economics and Legal Scholarship|url=https://scholarship.law.bu.edu/faculty_scholarship/199|journal=UCLA Law Review|volume=61|issue=1|pages=2}}</ref><ref>{{Cite journal|last=Zeiler|first=Kathryn|date=2005-01-01|title=The Willingness to Pay-Willingness to Accept Gap, the 'Endowment Effect,' Subject Misconceptions, and Experimental Procedures for Eliciting Valuations|url=https://scholarship.law.bu.edu/faculty_scholarship/781|journal=American Economic Review|volume=95|pages=530}}</ref> Hanemann (1991)<ref name="Hanemann" /> noted that [[economic theory]] only suggests that WTP and WTA should be equal for goods which are close substitutes, so observed differences in these measures for goods such as environmental resources and personal health can be explained without reference to an endowment effect. Shogren, et al. (1994)<ref name="Shogren" /> noted that the experimental technique used by Kahneman, Knetsch and Thaler (1990)<ref name="KahnemanKnetschThaler" /> to demonstrate the endowment effect created a situation of artificial scarcity. They performed a more robust experiment with the same goods used by Kahneman, Knetsch and Thaler (chocolate bars and mugs) and found little evidence of the endowment effect. Others have argued that the use of hypothetical questions and experiments involving small amounts of money tells us little about actual behavior (e.g. Hoffman and Spitzer, 1993, p.&nbsp;69, n. 23<ref name="Hoffman" />) with some research supporting these points (e.g., Kahneman, Knetsch and Thaler, 1990,<ref name="KahnemanKnetschThaler" /> Harless, 1989<ref name="Harless" />) and others not (e.g. Knez, Smith and Williams, 1985<ref name="Knez" />). More recently, [[Kathryn Zeiler|Zeiler]] and [[Charles Plott|Plotts]] have challenged the endowment effect theory by arguing that observed disparities between [[Willingness to accept|WTA]] and [[Willingness-to-pay|WTP]] measures are not reflective of human preferences, but rather such disparities stem from faulty experimental designs.<ref>{{Cite journal|last=Zeiler|first=Kathryn|date=2005-01-01|title=The Willingness to Pay-Willingness to Accept Gap, the 'Endowment Effect,' Subject Misconceptions, and Experimental Procedures for Eliciting Valuations|url=https://scholarship.law.bu.edu/faculty_scholarship/781|journal=American Economic Review|volume=95|pages=530}}</ref><ref>{{Cite journal|last=Zeiler|first=Kathryn|date=2011-01-01|title=The Willingness to Pay-Willingness to Accept Gap, the 'Endowment Effect,' Subject Misconceptions, and Experimental Procedures for Eliciting Valuations: Reply|url=https://scholarship.law.bu.edu/faculty_scholarship/521|journal=American Economic Review|volume=101|pages=1012}}</ref>

==Implications==