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The Endowment Effect

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Listed:
  • Keith M. Marzilli Ericson

    (School of Management, Boston University, Boston, Massachusetts 02115
    National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Andreas Fuster

    (Federal Reserve Bank of New York, New York, NY 10045)

Abstract

The endowment effect is among the best known findings in behavioral economics and has been used as evidence for theories of reference-dependent preferences and loss aversion. However, a recent literature has questioned the robustness of the effect in the laboratory, as well as its relevance in the field. In this review, we provide a summary of the evidence and describe recent theoretical developments that can potentially reconcile the different findings, with a focus on expectation-based reference points. We also survey recent work from psychology that provides either alternatives to or refinements of the usual loss-aversion explanation. We argue that loss aversion is still the leading paradigm for understanding the endowment effect, but given the rich psychology behind the effect, a version of the theory that encompasses multiple reference points may be required.

Suggested Citation

  • Keith M. Marzilli Ericson & Andreas Fuster, 2014. "The Endowment Effect," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 555-579, August.
    • Handle: RePEc:anr:reveco:v:6:y:2014:p:555-579
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-economics-080213-041320
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    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D87 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Neuroeconomics

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