What have we learnt about Loss Aversion and Endowment Effects? Still an anomaly?

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What have we learnt about Loss Aversion and Endowment Effects? Still an anomaly?

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Patricio Santiago Dalton (University of Warwick)

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Patricio Santiago Dalton Dr.

Abstract

This paper presents an insight into the theoretical and empirical literature of Loss Aversion and Endowment Effect. The definition and conceptualisation of both ideas is introduced in order to define a framework for further analysis. Their presence implies a radical change in some of the basic standard postulates of microeconomic foundation. These concepts robustly predict a divergence between Willingness to Accept and Willingness to Pay, even in a perfect-market framework and invalidate the standard assumptions of transitivity and reversibility of preferences under the neoclassical theory of consumer choice. Twenty years of successive positive evidence on Loss Aversion and Endowment Effect support the theoretical implications showed in this paper. I conclude that Loss Aversion and Endowment Effects truly matter and their existence must not be taken into account just as an anomaly or puzzle, but as part of a new theory in itself, leading to new questions and challenges for future economic research.

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Paper provided by EconWPA in its series Microeconomics with number 0307005.

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Length: 27 pages
Date of creation: 09 Jul 2003
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Handle: RePEc:wpa:wuwpmi:0307005

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Find related papers by JEL classification:
A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

This paper has been announced in the following NEP Reports:

NEP-DCM-2003-07-13 (Discrete Choice Models)
NEP-MIC-2003-07-13 (Microeconomics)

References listed on IDEAS
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Hanemann, W Michael, 1991. "Willingness to Pay and Willingness to Accept: How Much Can They Differ?," American Economic Review, American Economic Association, vol. 81(3), pages 635-47, June. [Downloadable!] (restricted)
Hartman, Raymond S & Doane, Michael J & Woo, Chi-Keung, 1991. "Consumer Rationality and the Status Quo," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 141-62, February. [Downloadable!] (restricted)
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)
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)

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