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Reconsidering the Effect of Market Experience on the "Endowment Effect"

  • Dirk Engelmann

    (Departement d'économie - université de Mannheim)

  • Guillaume Hollard

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)

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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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number hal-00633557.

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Date of creation: 2010
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Handle: RePEc:hal:cesptp:hal-00633557
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00633557
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  1. John List, 2003. "Does market experience eliminate market anomalies?," Natural Field Experiments 00297, The Field Experiments Website.
  2. John List, 2004. "Neoclassical theory versus prospect theory: Evidence from the marketplace," Framed Field Experiments 00174, The Field Experiments Website.
  3. 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.
  4. Seidl, Christian, 2002. " Preference Reversal," Journal of Economic Surveys, Wiley Blackwell, vol. 16(5), pages 621-55, December.
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