Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace
AbstractSeveral experimental studies have provided evidence that suggest indifference curves have a kink around the current endowment level. These results, which clearly contradict closely held economic doctrines, have led some influential commentators to call for an entirely new economic paradigm to displace conventional neoclassical theory-e.g., prospect theory, which invokes psychological effects. This paper pits neoclassical theory against prospect theory by investigating data drawn from more than 375 subjects actively participating in a well-functioning marketplace. The pattern of results suggests that prospect theory adequately organizes behavior among inexperienced consumers, but consumers with intense market experience behave largely in accordance with neoclassical predictions. Moreover, the data are consistent with the notion that consumers learn to overcome the endowment effect in situations beyond specific problems they have previously encountered. This "transference of behavior" across domains has important implications in both a positive and normative sense. Copyright The Econometric Society 2004.
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Bibliographic InfoArticle provided by Econometric Society in its journal Econometrica.
Volume (Year): 72 (2004)
Issue (Month): 2 (03)
Other versions of this item:
- John A. List, 2003. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," NBER Working Papers 9736, National Bureau of Economic Research, Inc.
- John List, 2004. "Neoclassical theory versus prospect theory: Evidence from the marketplace," Framed Field Experiments 00174, The Field Experiments Website.
- C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
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