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The Endowment Effect As Blessing

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  • Sivan Frenkel
  • Yuval Heller
  • Roee Teper

Abstract

We study the idea that seemingly unrelated behavioral biases can coevolve if they jointly compensate for the errors that any one of them would give rise to in isolation. We suggest that the “endowment effect” and the “winner's curse” could have jointly survived natural selection together. We develop a new family of “hybrid‐replicator” dynamics. Under such dynamics, biases survive in the population for a long period of time even if they only partially compensate for each other and despite the fact that the rational type's payoff is strictly larger than the payoffs of all other types.

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  • Sivan Frenkel & Yuval Heller & Roee Teper, 2018. "The Endowment Effect As Blessing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(3), pages 1159-1186, August.
    • Handle: RePEc:wly:iecrev:v:59:y:2018:i:3:p:1159-1186
    DOI: 10.1111/iere.12300
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    2. Häfner, Samuel, 2018. "Stable biased sampling," Games and Economic Behavior, Elsevier, vol. 107(C), pages 109-122.
    3. Yuval Heller & Eyal Winter, 2016. "Rule Rationality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(3), pages 997-1026, August.
    4. Jae-Do Song & Young-Hwan Ahn, 2019. "Cognitive Bias in Emissions Trading," Sustainability, MDPI, vol. 11(5), pages 1-13, March.
    5. Jakub Steiner & Colin Stewart, 2016. "Perceiving Prospects Properly," American Economic Review, American Economic Association, vol. 106(7), pages 1601-1631, July.
    6. Lindsay, Luke, 2019. "Adaptive loss aversion and market experience," Journal of Economic Behavior & Organization, Elsevier, vol. 168(C), pages 43-61.
    7. Herold, Florian & Netzer, Nick, 2023. "Second-best probability weighting," Games and Economic Behavior, Elsevier, vol. 138(C), pages 112-125.
    8. Heller, Yuval & Mohlin, Erik, 2019. "Coevolution of deception and preferences: Darwin and Nash meet Machiavelli," Games and Economic Behavior, Elsevier, vol. 113(C), pages 223-247.
    9. Jonathan Newton, 2018. "Evolutionary Game Theory: A Renaissance," Games, MDPI, vol. 9(2), pages 1-67, May.
    10. Heller, Yuval & Sturrock, David, 2017. "Promises and Endogenous Reneging Costs," MPRA Paper 78803, University Library of Munich, Germany.

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