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Endowments and risky choice

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  • Crockett, Erin
  • Crockett, Sean

Abstract

We report evidence of an endowment effect for risk, extending previous results to the popular paired-choice lottery setting. Specifically, we observe a distribution of revealed preferences consistent with risk aversion that diminishes in endowed variance, although the effect is considerably weaker for compound relative to simple lotteries. We also find that in the absence of an obvious endowment, subjects behave as if the comparatively lower-variance lottery is a cognitive reference point, revealing a distribution of preferences indistinguishable from subjects who are explicitly endowed with the low-variance lottery. Finally, we report no significant difference in elicited preferences between two popular mechanisms (the Multiple Price List and a variant on the Becker, DeGroot, and Marshak mechanism) when no endowment is induced, suggesting previously reported differences in behavior between the two mechanisms may be in part a consequence of relative responsiveness to endowment framing.

Suggested Citation

  • Crockett, Erin & Crockett, Sean, 2019. "Endowments and risky choice," Journal of Economic Behavior & Organization, Elsevier, vol. 159(C), pages 344-354.
  • Handle: RePEc:eee:jeborg:v:159:y:2019:i:c:p:344-354
    DOI: 10.1016/j.jebo.2019.01.015
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    References listed on IDEAS

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    More about this item

    Keywords

    Endowment effect; Reference dependent preferences; Risk aversion; Risk elicitation; Experiment;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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