IDEAS home Printed from https://ideas.repec.org/a/eee/mateco/v102y2022ics0304406822000891.html
   My bibliography  Save this article

Lack of prevalence of the endowment effect: An equilibrium analysis

Author

Listed:
  • Araujo, A.
  • Gama, J.
  • Suarez, C.E.

Abstract

We consider exchange economies with two types of agents: one risk-averse and the other consistent with Prospect Theory. We study equilibrium properties for the economy and explore the nature of optimal decisions of the different agents. Prospect Theory agents change their optimal decision by parting from the reference point in favor of a frontier allocation depending on conditions for aggregate uncertainty and the wealth distribution of the risk-averse agents. When the aggregate endowment of the risk-averse agent is sufficiently large, the equilibrium price will induce the Prospect Theory agents to abandon the reference point and instead choose a boundary allocation. This behavior contrasts with the predictions of the endowment effect. Assuming the reference point as initial endowment, we prove the prevalence of either a non-trading equilibrium or a frontier equilibrium.

Suggested Citation

  • Araujo, A. & Gama, J. & Suarez, C.E., 2022. "Lack of prevalence of the endowment effect: An equilibrium analysis," Journal of Mathematical Economics, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:mateco:v:102:y:2022:i:c:s0304406822000891
    DOI: 10.1016/j.jmateco.2022.102763
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304406822000891
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jmateco.2022.102763?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ulrich Schmidt & Horst Zank, 2008. "Risk Aversion in Cumulative Prospect Theory," Management Science, INFORMS, vol. 54(1), pages 208-216, January.
    2. Johannes Abeler & Armin Falk & Lorenz Goette & David Huffman, 2011. "Reference Points and Effort Provision," American Economic Review, American Economic Association, vol. 101(2), pages 470-492, April.
    3. Adam Booij & Bernard Praag & Gijs Kuilen, 2010. "A parametric analysis of prospect theory’s functionals for the general population," Theory and Decision, Springer, vol. 68(1), pages 115-148, February.
    4. Myagkov, Mikhail & Plott, Charles R, 1997. "Exchange Economies and Loss Exposure: Experiments Exploring Prospect Theory and Competitive Equilibria in Market Environments," American Economic Review, American Economic Association, vol. 87(5), pages 801-828, December.
    5. Mohammed Abdellaoui & Han Bleichrodt & Olivier L’Haridon, 2008. "A tractable method to measure utility and loss aversion under prospect theory," Journal of Risk and Uncertainty, Springer, vol. 36(3), pages 245-266, June.
    6. Bruno Jullien & Bernard Salanie, 2000. "Estimating Preferences under Risk: The Case of Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 503-530, June.
    7. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    8. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    9. Chateauneuf, Alain & Dana, Rose-Anne & Tallon, Jean-Marc, 2000. "Optimal risk-sharing rules and equilibria with Choquet-expected-utility," Journal of Mathematical Economics, Elsevier, vol. 34(2), pages 191-214, October.
    10. Aloisio Araujo & Alain Chateauneuf & Juan Pablo Gama & Rodrigo Novinski, 2018. "General Equilibrium With Uncertainty Loving Preferences," Econometrica, Econometric Society, vol. 86(5), pages 1859-1871, September.
    11. Azevedo, Eduardo M. & Gottlieb, Daniel, 2012. "Risk-neutral firms can extract unbounded profits from consumers with prospect theory preferences," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1291-1299.
    12. Nathalie Etchart-Vincent, 2004. "Is Probability Weighting Sensitive to the Magnitude of Consequences? An Experimental Investigation on Losses," Post-Print hal-03819328, HAL.
    13. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-686, May.
    14. Chateauneuf, Alain & Dana, Rose-Anne & Tallon, Jean-Marc, 2000. "Optimal risk-sharing rules and equilibria with Choquet-expected-utility," Journal of Mathematical Economics, Elsevier, vol. 34(2), pages 191-214, October.
    15. 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 1325-1348, December.
    16. Botond Koszegi & Matthew Rabin, 2007. "Reference-Dependent Risk Attitudes," American Economic Review, American Economic Association, vol. 97(4), pages 1047-1073, September.
    17. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
    18. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    19. Forsythe, Robert & Palfrey, Thomas R & Plott, Charles R, 1982. "Asset Valuation in an Experimental Market," Econometrica, Econometric Society, vol. 50(3), pages 537-567, May.
    20. David E. Bell, 1985. "Disappointment in Decision Making Under Uncertainty," Operations Research, INFORMS, vol. 33(1), pages 1-27, February.
    21. repec:dau:papers:123456789/5461 is not listed on IDEAS
    22. Helga Fehr-Duda & Manuele Gennaro & Renate Schubert, 2006. "Gender, Financial Risk, and Probability Weights," Theory and Decision, Springer, vol. 60(2), pages 283-313, May.
    23. John A. List, 2004. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," Econometrica, Econometric Society, vol. 72(2), pages 615-625, March.
    24. De Giorgi, Enrico & Hens, Thorsten & Rieger, Marc Oliver, 2010. "Financial market equilibria with cumulative prospect theory," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 633-651, September.
    25. Mohammed Abdellaoui & Han Bleichrodt & Corina Paraschiv, 2007. "Loss Aversion Under Prospect Theory: A Parameter-Free Measurement," Management Science, INFORMS, vol. 53(10), pages 1659-1674, October.
    26. Peng Lian & Charles R. Plott, 1998. "General equilibrium, markets, macroeconomics and money in a laboratory experimental environment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(1), pages 21-75.
    27. Nathalie Etchart-Vincent, 2004. "Is Probability Weighting Sensitive to the Magnitude of Consequences? An Experimental Investigation on Losses," Journal of Risk and Uncertainty, Springer, vol. 28(3), pages 217-235, May.
    28. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279-279.
    29. Luca Rigotti & Chris Shannon & Tomasz Strzalecki, 2008. "Subjective Beliefs and ex ante Trade," Econometrica, Econometric Society, vol. 76(5), pages 1167-1190, September.
    30. Graham Loomes & Robert Sugden, 1986. "Disappointment and Dynamic Consistency in Choice under Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(2), pages 271-282.
    31. Mohammed Abdellaoui, 2000. "Parameter-Free Elicitation of Utility and Probability Weighting Functions," Management Science, INFORMS, vol. 46(11), pages 1497-1512, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ulrich Schmidt & Horst Zank, 2012. "A genuine foundation for prospect theory," Journal of Risk and Uncertainty, Springer, vol. 45(2), pages 97-113, October.
    2. Kpegli, Yao Thibaut & Corgnet, Brice & Zylbersztejn, Adam, 2023. "All at once! A comprehensive and tractable semi-parametric method to elicit prospect theory components," Journal of Mathematical Economics, Elsevier, vol. 104(C).
    3. Theo Offerman & Asa B. Palley, 2016. "Lossed in translation: an off-the-shelf method to recover probabilistic beliefs from loss-averse agents," Experimental Economics, Springer;Economic Science Association, vol. 19(1), pages 1-30, March.
    4. Charles-Cadogan, G., 2018. "Losses loom larger than gains and reference dependent preferences in Bernoulli’s utility function," Journal of Economic Behavior & Organization, Elsevier, vol. 154(C), pages 220-237.
    5. Géraldine Bocquého & Julien Jacob & Marielle Brunette, 2023. "Prospect theory in multiple price list experiments: further insights on behaviour in the loss domain," Theory and Decision, Springer, vol. 94(4), pages 593-636, May.
    6. Servaas van Bilsen & Roger J. A. Laeven & Theo E. Nijman, 2020. "Consumption and Portfolio Choice Under Loss Aversion and Endogenous Updating of the Reference Level," Management Science, INFORMS, vol. 66(9), pages 3927-3955, September.
    7. Matthew D. Rablen, 2023. "Loss Aversion, Risk Aversion, and the Shape of the Probability Weighting Function," Working Papers 2023013, The University of Sheffield, Department of Economics.
    8. Heiko Karle & Heiner Schumacher & Rune Vølund, 2020. "Consumer search and the uncertainty effect," Working Papers of Department of Economics, Leuven 657766, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    9. Aurélien Baillon & Han Bleichrodt & Vitalie Spinu, 2020. "Searching for the Reference Point," Management Science, INFORMS, vol. 66(1), pages 93-112, January.
    10. Aurélien Baillon & Han Bleichrodt & Vitalie Spinu, 2020. "Searching for the Reference Point," Management Science, INFORMS, vol. 66(1), pages 93-112, January.
    11. Rosato, Antonio & Tymula, Agnieszka A., 2019. "Loss aversion and competition in Vickrey auctions: Money ain't no good," Games and Economic Behavior, Elsevier, vol. 115(C), pages 188-208.
    12. Karle, Heiko & Schumacher, Heiner & Vølund, Rune, 2023. "Consumer loss aversion and scale-dependent psychological switching costs," Games and Economic Behavior, Elsevier, vol. 138(C), pages 214-237.
    13. Laurent Denant-Boemont & Olivier L’Haridon, 2013. "La rationalité à l'épreuve de l'économie comportementale," Revue française d'économie, Presses de Sciences-Po, vol. 0(2), pages 35-89.
    14. Peter Brooks & Simon Peters & Horst Zank, 2014. "Risk behavior for gain, loss, and mixed prospects," Theory and Decision, Springer, vol. 77(2), pages 153-182, August.
    15. Zhihua Li & Songfa Zhong, 2023. "Reference Dependence in Intertemporal Preference," Management Science, INFORMS, vol. 69(1), pages 475-490, January.
    16. Antonio Rosato, 2016. "Selling substitute goods to loss-averse consumers: limited availability, bargains, and rip-offs," RAND Journal of Economics, RAND Corporation, vol. 47(3), pages 709-733, August.
    17. Dennery, Charles & Direr, Alexis, 2014. "Optimal lottery," Journal of Mathematical Economics, Elsevier, vol. 55(C), pages 15-23.
    18. Horst Zank, 2010. "On probabilities and loss aversion," Theory and Decision, Springer, vol. 68(3), pages 243-261, March.
    19. Jakusch, Sven Thorsten & Meyer, Steffen & Hackethal, Andreas, 2019. "Taming models of prospect theory in the wild? Estimation of Vlcek and Hens (2011)," SAFE Working Paper Series 146, Leibniz Institute for Financial Research SAFE, revised 2019.
    20. Mohammed Abdellaoui & Olivier L'Haridon & Corina Paraschiv, 2011. "Experienced vs. Described Uncertainty: Do We Need Two Prospect Theory Specifications?," Management Science, INFORMS, vol. 57(10), pages 1879-1895, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:mateco:v:102:y:2022:i:c:s0304406822000891. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jmateco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.