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The Endowment Effect and the Role of Uncertainty

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  • Brett Inder
  • Terry O'Brien

Abstract

This paper explains the endowment effect, whereby sellers generally demand considerably more for a good than buyers are prepared to pay, and related anomalies. Many decisions, including nominating buying or selling prices, involve uncertainty, and we assert that people experience negative psychological reactions to uncertainty. These reactions can affect a person's valuation of the various options, biasing the person's actions towards the status quo, thus producing the endowment effect. Our model also proposes positive or negative reactions to unlikely prospects, which are able to explain commonly observed behaviour in the presence of ambiguity.

Suggested Citation

  • Brett Inder & Terry O'Brien, 2003. "The Endowment Effect and the Role of Uncertainty," Bulletin of Economic Research, Wiley Blackwell, vol. 55(3), pages 289-301, July.
    • Handle: RePEc:bla:buecrs:v:55:y:2003:i:3:p:289-301
    DOI: 10.1111/1467-8586.00176
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    2. Goodman, James, 2014. "Evidence for ecological learning and domain specificity in rational asset pricing and market efficiency," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 48(C), pages 27-39.
    3. Giannoccaro, Ilaria & Galesic, Mirta & Massari, Giovanni Francesco & Barkoczi, Daniel & Carbone, Giuseppe, 2020. "Search behavior of individuals working in teams: A behavioral study on complex landscapes," Journal of Business Research, Elsevier, vol. 118(C), pages 507-516.
    4. Wang, Yu-Yin & Wang, Yi-Shun & Lin, Tung-Ching, 2018. "Developing and validating a technology upgrade model," International Journal of Information Management, Elsevier, vol. 38(1), pages 7-26.
    5. Marin, Alejandra & Dass, Mayukh & Boal, Kimberly, 2019. "Critic-buyer effects on valuation of ambiguously appraised products," Journal of Business Research, Elsevier, vol. 103(C), pages 45-55.
    6. Pope, Robin, 2004. "Biases from omitted risk effects in standard gamble utilities," Journal of Health Economics, Elsevier, vol. 23(4), pages 695-735, July.
    7. Kim, Dong-hyu & Lee, Heejin, 2016. "Effects of user experience on user resistance to change to the voice user interface of an in‑vehicle infotainment system: Implications for platform and standards competition," International Journal of Information Management, Elsevier, vol. 36(4), pages 653-667.
    8. Pope, Robin & Selten, Reinhard & Kube, Sebastian, 2009. "Nominalist Heuristics and Economic Theory," Bonn Econ Discussion Papers 17/2009, University of Bonn, Bonn Graduate School of Economics (BGSE).
    9. Roth, Gerrit, 2006. "Predicting the Gap between Willingness to Accept and Willingness to Pay," Munich Dissertations in Economics 4901, University of Munich, Department of Economics.
    10. von Hagen, Jürgen & Kube, Sebastian & Kaiser, Johannes & Selten, Reinhard & Pope, Robin, 2006. "Prominent Numbers and Ratios in Exchange Rate Determination: Field and Laboratory Evidence," Bonn Econ Discussion Papers 29/2006, University of Bonn, Bonn Graduate School of Economics (BGSE).
    11. Christina McGranaghan & Steven G. Otto, 2022. "Choice uncertainty and the endowment effect," Journal of Risk and Uncertainty, Springer, vol. 65(1), pages 83-104, August.
    12. Andreas Glöckner & Janet Kleber & Stephan Tontrup & Stefan Bechtold, 2009. "The Endowment Effect in Groups with and without Strategic Incentives," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2009_35, Max Planck Institute for Research on Collective Goods.
    13. Feng, Lei & Zhang, Minghui & Li, Yixin & Jiang, Yan, 2020. "Satisfaction principle or efficiency principle? Decision-making behavior of peasant households in China’s rural land market," Land Use Policy, Elsevier, vol. 99(C).

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