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

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Author Info
Charles R. Plott
Kathryn Zeiler
Abstract

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)

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File URL: http://hdl.handle.net/10.1257/aer.97.4.1449
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 97 (2007)
Issue (Month): 4 (September)
Pages: 1449-1466
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Handle: RePEc:aea:aecrev:v:97:y:2007:i:4:p:1449-1466

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  1. Marco Castillo & Ragan Petrie & Maximo Torero, 2008. "Rationality and the Nature of the Market," Experimental Economics Center Working Paper Series 2008-12, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University. [Downloadable!]
  2. Dirk Engelmann & Guillaume Hollard, 2009. "A Shock Therapy Against the “Endowment Effect”," Discussion Papers 09-04, University of Copenhagen. Department of Economics. [Downloadable!]
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