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Reconsidering the Effect of Market Experience on the “Endowment Effect”

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  • Dirk Engelmann
  • Guillaume Hollard

Abstract

Simple exchange experiments have revealed that participants trade their endowment less frequently than standard demand theory would predict. List (2003a) finds that the most experienced dealers acting in a well-functioning market are not subject to this exchange asymmetry, suggesting that a significant amount of market experience is required to overcome it. In order to understand this market-experience effect, we introduce a distinction between two types of uncertainty, choice uncertainty and trade uncertainty, both of which could lead to exchange asymmetry. We conjecture that trade uncertainty is most important for exchange asymmetry. To test this conjecture, we design an experiment where the two treatments impact differently on trade uncertainty, while controlling for choice uncertainty. Supporting our conjecture, we find that "forcing" subjects to give away their endowment in a series of exchanges eliminates exchange asymmetry in a subsequent test. We discuss why markets might not provide sufficient incentives for learning to overcome exchange asymmetry.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 78 (2010)
Issue (Month): 6 (November)
Pages: 2005-2019

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Handle: RePEc:ecm:emetrp:v:78:y:2010:i:6:p:2005-2019

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References

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  1. John List, 2003. "Does market experience eliminate market anomalies?," Natural Field Experiments 00297, The Field Experiments Website.
  2. Seidl, Christian, 2002. " Preference Reversal," Journal of Economic Surveys, Wiley Blackwell, vol. 16(5), pages 621-55, December.
  3. Jacinto Braga & Chris Starmer, 2005. "Preference Anomalies, Preference Elicitation and the Discovered Preference Hypothesis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(1), pages 55-89, 09.
  4. John List, 2004. "Neoclassical theory versus prospect theory: Evidence from the marketplace," Framed Field Experiments 00174, The Field Experiments Website.
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Cited by:
  1. Frederik Schwerter, 2013. "Social Reference Points and Risk Taking," Bonn Econ Discussion Papers bgse11_2013, University of Bonn, Germany, revised Jan 2014.
  2. Thomas A. Stephens & Jean-Robert Tyran, 2012. "“At least I didn’t lose money” - Nominal Loss Aversion Shapes Evaluations of Housing Transactions," Discussion Papers 12-14, University of Copenhagen. Department of Economics.
  3. John A. List, 2011. "Does Market Experience Eliminate Market Anomalies? The Case of Exogenous Market Experience," American Economic Review, American Economic Association, vol. 101(3), pages 313-17, May.
  4. Keith M. Marzilli Ericson & Andreas Fuster, 2013. "The Endowment Effect," NBER Working Papers 19384, National Bureau of Economic Research, Inc.
  5. Kingsley, David C. & Brown, Thomas C., 2013. "Value learning and the willingness to accept–willingness to pay disparity," Economics Letters, Elsevier, vol. 120(3), pages 473-476.
  6. Lunn,Pete & Lunn, Mary, 2014. "What Can I Get For It? The Relationship Between the Choice Equivalent, Willingness to Accept and Willingness to Pay," Papers WP479, Economic and Social Research Institute (ESRI).
  7. Anmol Ratan, 2012. "Mistakes, Closure and Endowment Effect in Laboratory Experiments," Development Research Unit Working Paper Series 22-12, Monash University, Department of Economics.
  8. Steven J Humphrey & Luke Lindsay & Chris Starmer, 2012. "Consumption experience, choice experience and the endowment effect," Discussion Papers 2012-16, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  9. Ori Heffetz & John A. List, 2011. "Is the Endowment Effect a Reference Effect?," NBER Working Papers 16715, National Bureau of Economic Research, Inc.

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