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The endowment effect and the reference state: Evidence and manipulations

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  • Knetsch, Jack L.
  • Wong, Wei-Kang

Abstract

Recent reports suggest that the "endowment effect" may be due to conditions under which it is observed and explained by incentives long recognized in standard theory. Evidence from new experiments, reported here, provides empirical support for the role of the economic environment on people's perceived reference state and consequently on their valuations, as suggested by Köszegi and Rabin [Köszegi, B., Rabin, M., 2006. A model of reference-dependent preferences. Quarterly Journal of Economics 121, 1133-1165], and indicates that the disappearance of the valuation disparity is more likely due instead to conditions that weaken the perception of reference states. Further, these conditions appear to be poor approximations of those that prevail in most cases for which valuations are normally made.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 71 (2009)
Issue (Month): 2 (August)
Pages: 407-413

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Handle: RePEc:eee:jeborg:v:71:y:2009:i:2:p:407-413

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Web page: http://www.elsevier.com/locate/jebo

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Keywords: Endowment effect Exchange experiments Reference state;

References

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  1. 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.
  2. Randall, Alan & Stoll, John R, 1980. "Consumer's Surplus in Commodity Space," American Economic Review, American Economic Association, vol. 70(3), pages 449-55, June.
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  11. Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
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  13. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
  14. Shefrin, Hersh & Statman, Meir, 1985. " The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-90, July.
  15. Bukszar, Ed & Knetsch, Jack L, 1997. "Fragile Redistribution Choices behind a Veil of Ignorance," Journal of Risk and Uncertainty, Springer, vol. 14(1), pages 63-74, January.
  16. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
  17. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
  18. Horowitz, John K. & McConnell, Kenneth E., 2002. "A Review of WTA/WTP Studies," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 426-447, November.
  19. Jack Knetsch & Fang-Fang Tang & Richard Thaler, 2001. "The Endowment Effect and Repeated Market Trials: Is the Vickrey Auction Demand Revealing?," Experimental Economics, Springer, vol. 4(3), pages 257-269, December.
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Citations

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Cited by:
  1. Whittington, Dale & Adamowicz, Wiktor, 2011. "The Use of Hypothetical Baselines in Stated Preference Surveys," Discussion Papers dp-11-11-efd, Resources For the Future.
  2. Ahrens, Steffen & Pirschel, Inske & Snower, Dennis J., 2014. "A theory of price adjustment under loss aversion," Economics Working Papers 2014-05, Christian-Albrechts-University of Kiel, Department of Economics.
  3. Beja Jr, Edsel, 2012. "Two explanations to the willingness to accept and willingness to pay gap plus an alternative," MPRA Paper 36239, University Library of Munich, Germany.
  4. Kogler, Christoph & Kühberger, Anton & Gilhofer, Rainer, 2013. "Real and hypothetical endowment effects when exchanging lottery tickets: Is regret a better explanation than loss aversion?," Journal of Economic Psychology, Elsevier, vol. 37(C), pages 42-53.
  5. Keith M. Marzilli Ericson & Andreas Fuster, 2009. "Expectations as Endowments: Reference-Dependent Preferences and Exchange Behavior," Levine's Working Paper Archive 814577000000000415, David K. Levine.
  6. Munro, Alistair & Ferreira De Sousa, Yannick, 2008. "Truck, barter and exchange versus the endowment effect: virtual field experiments in an online game environment," MPRA Paper 8977, University Library of Munich, Germany.
  7. Makoto Nakada, 2012. "Attachment or Ownership: Reference Point Shifts and an Experimental Test of Attachment," Keio/Kyoto Joint Global COE Discussion Paper Series 2012-012, Keio/Kyoto Joint Global COE Program.
  8. Andrea Isoni & Graham Loomes & Robert Sugden, 2009. "The willingness to pay-willingness to accept gap, the "endowment effect," subject misconceptions, and experiemntal procedures for eliciting valuations: A reassessment," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 09-14, School of Economics, University of East Anglia, Norwich, UK..
  9. Isabel Marcin & Andreas Nicklisch, 2014. "Testing the Endowment Effect for Default Rules," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2014_01, Max Planck Institute for Research on Collective Goods.
  10. Bilgin, Baler, 2012. "Losses loom more likely than gains: Propensity to imagine losses increases their subjective probability," Organizational Behavior and Human Decision Processes, Elsevier, vol. 118(2), pages 203-215.
  11. Loureiro, Maria L. & Gracia, Azucena & Nayga, Rodolfo M., 2013. "Do experimental auction estimates pass the scope test?," Journal of Economic Psychology, Elsevier, vol. 37(C), pages 7-17.
  12. Keith M. Marzilli Ericson & Andreas Fuster, 2014. "The Endowment Effect," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 555-579, 08.
  13. Ori Heffetz & John A. List, 2011. "Is the Endowment Effect a Reference Effect?," NBER Working Papers 16715, National Bureau of Economic Research, Inc.
  14. Jack Knetsch, 2010. "Values of Gains and Losses: Reference States and Choice of Measure," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 46(2), pages 179-188, June.

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