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Choice uncertainty and the endowment effect

Author

Listed:
  • Christina McGranaghan

    (University of Delaware)

  • Steven G. Otto

    (ISO New England)

Abstract

We experimentally test for the role of choice uncertainty in generating “endowment effects” - the robust empirical finding that endowing participants with an item raises their reported valuation relative to participants being asked to purchase it instead. While there is some compelling evidence concerning trade uncertainty in the literature, there is substantially less evidence regarding the importance of choice uncertainty. This paper provides novel support for the significance of choice uncertainty in the context of both trading and stated valuations. In a primary set of studies, we find that reducing choice uncertainty eliminates under-trading in the exchange setting and decreases (but does not eliminate) the difference in average valuations reported by buyers and sellers, mainly by decreasing the number of extreme valuations by sellers. Interestingly, our treatment does not lead to a significant increase in the number of mutually acceptable trades implied by stated valuations. Comparing the results from our two primary experiments therefore suggests that value uncertainty continues to play a role in generating valuation asymmetries even after relevant product uncertainty has been resolved. A set of follow-up studies with modified designs replicates this finding in the exchange setting but fails to generate a valuation asymmetry in the control condition, possibly due to pandemic-related mitigation measures and less participant time with the endowed item.

Suggested Citation

  • Christina McGranaghan & Steven G. Otto, 2022. "Choice uncertainty and the endowment effect," Journal of Risk and Uncertainty, Springer, vol. 65(1), pages 83-104, August.
  • Handle: RePEc:kap:jrisku:v:65:y:2022:i:1:d:10.1007_s11166-022-09387-8
    DOI: 10.1007/s11166-022-09387-8
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    2. Dor Morag & George Loewenstein, 2023. "Narratives and Valuations," CESifo Working Paper Series 10714, CESifo.

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    More about this item

    Keywords

    Choice uncertainty; Value learning; Endowment effect; Exchange asymmetry;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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