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The Endowment Effect and Expected Utility


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  • Morrison, Gwendolyn C
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    The endowment effect, which is well documented in the contingent valuation literature, alters people's preferences according to a reference point established in an elicitation question. In particular, the utility that people place on a bundle is both a positive function of the quantities of the goods comprising the bundle, and a negative function of any loss (real or hypothetical) that the elicitation question asks them to incur. Biases such as this have lead some to reject the contingent valuation method as a means of quantifying costs and benefits in favour of other methods of preference elicitation such as standard gambles. But, most preference elicitation methods used by economists require people to express their preferences for one good in terms of their willingness to forego some of another good. Consequently, it is reasonable to expect that, and prudent to check whether, an endowment effect is also evident in other methods of preference elicitation such as von Neumann-Morgenstern's standard gambles. Internal inconsistencies in the standard gamble method from the experimental economics 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. Copyright 2000 by Scottish Economic Society.

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    Article provided by Scottish Economic Society in its journal Scottish Journal of Political Economy.

    Volume (Year): 47 (2000)
    Issue (Month): 2 (May)
    Pages: 183-97

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    Handle: RePEc:bla:scotjp:v:47:y:2000:i:2:p:183-97

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    Cited by:
    1. Han Bleichrodt & José María Abellán-Perpiñan & JoséLuis Pinto & Ildefonso Méndez-Martínez, 2005. "Resolving inconsistencies in utility measurement under risk: Tests of generalizations of expected utility," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 798, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Kuznar, Lawrence A. & Frederick, William G., 2003. "Environmental constraints and sigmoid utility: implications for value, risk sensitivity, and social status," Ecological Economics, Elsevier, Elsevier, vol. 46(2), pages 293-306, September.
    3. Anne Spencer, 2001. "The Time Trade-Off Method: An Exploratory Study," Working Papers, Queen Mary, University of London, School of Economics and Finance 437, Queen Mary, University of London, School of Economics and Finance.
    4. Abellan-Perpiñan, Jose Maria & Bleichrodt, Han & Pinto-Prades, Jose Luis, 2009. "The predictive validity of prospect theory versus expected utility in health utility measurement," Journal of Health Economics, Elsevier, Elsevier, vol. 28(6), pages 1039-1047, December.
    5. Ulrich Schmidt, 2012. "Insurance Demand and Prospect Theory," Kiel Working Papers 1750, Kiel Institute for the World Economy.
    6. Mann, Stefan, 2003. "Die Expertenbewertung als Alternative zur Kontingenzbewertung," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 52(8).
    7. Chen Li & Zhihua Li & Peter Wakker, 2014. "If nudge cannot be applied: a litmus test of the readers’ stance on paternalism," Theory and Decision, Springer, Springer, vol. 76(3), pages 297-315, March.
    8. Mandy Ryan & Cristina Ubach, 2003. "Testing for an experience endowment effect in health care," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 10(7), pages 407-410.


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