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Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace

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John A. List

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Abstract

Several 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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File URL: http://hdl.handle.net/10.1111/j.1468-0262.2004.00502.x
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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 72 (2004)
Issue (Month): 2 (03)
Pages: 615-625
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Handle: RePEc:ecm:emetrp:v:72:y:2004:i:2:p:615-625

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Coursey, Don L & Hovis, John L & Schulze, William D, 1987. "The Disparity between Willingness to Accept and Willingness to Pay Measures of Value," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 679-90, August. [Downloadable!] (restricted)
  2. Shogren, Jason F. & Seung Y. Shin & Dermot J. Hayes & James B. Kliebenstein, 1994. "Resolving Differences in Willingness to Pay and Willingness to Accept," American Economic Review, American Economic Association, vol. 84(1), pages 255-70, March.
  3. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December. [Downloadable!] (restricted)
  4. Loewenstein, George, 1999. "Experimental Economics from the Vantage-Point of Behavioural Economics," Economic Journal, Royal Economic Society, vol. 109(453), pages F23-34, February. [Downloadable!] (restricted)
  5. Knetsch, Jack L, 1989. "The Endowment Effect and Evidence of Nonreversible Indifference Curves," American Economic Review, American Economic Association, vol. 79(5), pages 1277-84, December. [Downloadable!] (restricted)
  6. Munro, Alistair & Sugden, Robert, 2003. "On the theory of reference-dependent preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 50(4), pages 407-428, April. [Downloadable!] (restricted)
  7. Camerer, Colin F. & Hogarth, Robin M., 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Working Papers 1059, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  8. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  9. Knez, Peter & Smith, Vernon L & Williams, Arlington W, 1985. "Individual Rationality, Market Rationality, and Value Estimation," American Economic Review, American Economic Association, vol. 75(2), pages 397-402, May. [Downloadable!] (restricted)
  10. Knetsch, Jack L & Sinden, J A, 1987. "The Persistence of Evaluation Disparities," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 691-95, August. [Downloadable!] (restricted)
  11. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December. [Downloadable!] (restricted)
  12. John A. List, 2001. "Do Explicit Warnings Eliminate the Hypothetical Bias from Elicitation Procedures? Evidence from Field Auctions for Sportscards," Framed Field Experiments 0043, The Field Experiments Website.
  13. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November. [Downloadable!] (restricted)
  14. John A. List, 2001. "Do Explicit Warnings Eliminate the Hypothetical Bias in Elicitation Procedures? Evidence from Field Auctions for Sportscards," American Economic Review, American Economic Association, vol. 91(5), pages 1498-1507, December. [Downloadable!] (restricted)
  15. John A. List, 2003. "Does Market Experience Eliminate Market Anomalies?," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 41-71, February. [Downloadable!] (restricted)
  16. Brookshire, David S & Coursey, Don L, 1987. "Measuring the Value of a Public Good: An Empirical Comparison of Elicitation Procedures," American Economic Review, American Economic Association, vol. 77(4), pages 554-66, September. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Paolo Pin, 2006. "Selection matters," Working Papers 138, Department of Applied Mathematics, University of Venice. [Downloadable!]
  2. 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!]
  3. Marianne Bertrand & Dean S. Karlan & Sendhil Mullainathan & Eldar Shafir & Jonathan Zinman, 2005. "What's Psychology Worth? A Field Experiment in the Consumer Credit Market," Working Papers 918, Economic Growth Center, Yale University. [Downloadable!]
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  4. Bandiera, Oriana & Barankay, Iwan & Rasul, Imran, 2005. "The Evolution of Cooperative Norms: Evidence from a Natural Field Experiment," CEPR Discussion Papers 5358, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. De Borger B. & Mogens F., 2006. "Discrete choices and the trade off between money and time: Another test of the theory of reference dependent preferences," Working Papers 2006034, University of Antwerp, Faculty of Applied Economics. [Downloadable!]
  6. Emmanuel Flachaire & Guillaume Hollard, 2008. "Individual sensitivity to framing effects," Post-Print halshs-00176025_v1, HAL. [Downloadable!]
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  7. Sanjit Dhami & Ali al-Nowaihi, 2005. "Why Do People Pay Taxes? Prospect Theory Versus Expected Utility Theory," Discussion Papers in Economics 05/23, Department of Economics, University of Leicester, revised Aug 2006. [Downloadable!]
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  8. Giovanna Devetag & Andreas Ortmann, 2006. "When and Why? A Critical Survey on Coordination Failure in the Laboratory," CEEL Working Papers 0605, Computable and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia. [Downloadable!]
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  9. Jonathan E. Alevy & Michael S. Haigh & John List, 2006. "Information Cascades: Evidence from An Experiment with Financial Market Professionals," NBER Working Papers 12767, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Dean Karlan & Xavier Gine & Jonathan Morduch & Pamela Jakiela, 2006. "Microfinance Games," Working Papers 936, Economic Growth Center, Yale University. [Downloadable!]
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  11. Pavlo Blavatskyy & Ganna Pogrebna, 2006. "Loss Aversion? Not with Half-a-Million on the Table!," IEW - Working Papers iewwp274, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  12. Erwin Bulte & Shelby Gerking & Aart de Zeeuw & John List, 2004. "Do causes of environmental problems affect Hicksian equivalent surplus? Evidence from the field," Framed Field Experiments 0003, The Field Experiments Website. [Downloadable!]
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  13. John A. List, 2005. "The Behavioralist Meets the Market: Measuring Social Preferences and Reputation Effects in Actual Transactions," NBER Working Papers 11616, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Michael Haigh & John A. List, 2005. "Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis," Artefactual Field Experiments 0045, The Field Experiments Website. [Downloadable!]
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  15. De Borger, Bruno & Fosgerau, Mogens, 2007. "The Trade-off between money and time: A test of the theory of reference-dependent preferences," MPRA Paper 3904, University Library of Munich, Germany, revised 07 Sep 2007. [Downloadable!]
  16. Michael Greenstone & Ted Gayer, 2007. "Quasi-Experimental and Experimental Approaches to Environmental Economics," Working Papers 0713, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
  17. Edward J. Lopez & W. Robert Nelson, 2005. "The Endowment Effect in a Public Good Experiment," Experimental 0512001, EconWPA. [Downloadable!]
  18. Emmanuel Flachaire & Guillaume Hollard & Stephane Luchini, 2007. "Heterogeneous anchoring in dichotomous choice valuation framework," Post-Print halshs-00176056_v1, HAL. [Downloadable!]
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