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Reconsidering the Effect of Market Experience on the "Endowment Effect"

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Author Info

  • Dirk Engelmann

    (Departement d'économie - université de Mannheim)

  • Guillaume Hollard

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

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

Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number hal-00633557.

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Date of creation: 2010
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Publication status: Published, Econometrica, 2010, 78, 6, 2005-2019
Handle: RePEc:hal:cesptp:hal-00633557

Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00633557
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Related research

Keywords: Endowment effect; exchange asymmetry; market experience;

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References

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  1. Seidl, Christian, 2002. " Preference Reversal," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 16(5), pages 621-55, December.
  2. John List, 2004. "Neoclassical theory versus prospect theory: Evidence from the marketplace," Framed Field Experiments, The Field Experiments Website 00174, The Field Experiments Website.
  3. John A. List, 2003. "Does Market Experience Eliminate Market Anomalies?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(1), pages 41-71, February.
  4. Jacinto Braga & Chris Starmer, 2005. "Preference Anomalies, Preference Elicitation and the Discovered Preference Hypothesis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 32(1), pages 55-89, 09.
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Citations

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Cited by:
  1. Anmol Ratan, 2012. "Mistakes, Closure and Endowment Effect in Laboratory Experiments," Development Research Unit Working Paper Series, Monash University, Department of Economics 22-12, Monash University, Department of Economics.
  2. Keith M. Marzilli Ericson & Andreas Fuster, 2014. "The Endowment Effect," Annual Review of Economics, Annual Reviews, Annual Reviews, vol. 6(1), pages 555-579, 08.
  3. 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, Economic and Social Research Institute (ESRI) WP479, Economic and Social Research Institute (ESRI).
  4. Frederik Schwerter, 2013. "Social Reference Points and Risk Taking," Bonn Econ Discussion Papers, University of Bonn, Germany bgse11_2013, University of Bonn, Germany, revised Jan 2014.
  5. Ori Heffetz & John A. List, 2011. "Is the Endowment Effect a Reference Effect?," NBER Working Papers 16715, National Bureau of Economic Research, Inc.
  6. Thomas A. Stephens & Jean-Robert Tyran, 2012. "“At least I didn’t lose money” - Nominal Loss Aversion Shapes Evaluations of Housing Transactions," Discussion Papers, University of Copenhagen. Department of Economics 12-14, University of Copenhagen. Department of Economics.
  7. John A. List, 2011. "Does Market Experience Eliminate Market Anomalies? The Case of Exogenous Market Experience," NBER Working Papers 16908, National Bureau of Economic Research, Inc.
  8. Steven J Humphrey & Luke Lindsay & Chris Starmer, 2012. "Consumption experience, choice experience and the endowment effect," Discussion Papers, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham 2012-16, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  9. Kingsley, David C. & Brown, Thomas C., 2013. "Value learning and the willingness to accept–willingness to pay disparity," Economics Letters, Elsevier, Elsevier, vol. 120(3), pages 473-476.

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