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

  • Dirk Engelmann
  • Guillaume Hollard

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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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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  1. John List, 2004. "Neoclassical theory versus prospect theory: Evidence from the marketplace," Framed Field Experiments 00174, The Field Experiments Website.
  2. John A. List, 2003. "Does Market Experience Eliminate Market Anomalies?," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 41-71, February.
  3. Seidl, Christian, 2002. " Preference Reversal," Journal of Economic Surveys, Wiley Blackwell, vol. 16(5), pages 621-55, December.
  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, vol. 32(1), pages 55-89, 09.
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