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A Shock Therapy Against the “Endowment Effect”

Author

Listed:
  • Dirk Engelmann

    (Royal Holloway, University of London)

  • Guillaume Hollard

    (Paris School of Economics)

Abstract

Simple exchange experiments have identified the fact that participants trade their endowment less frequently than standard demand theory predicts. List (2003) finds, however, that the most experienced dealers acting on a well functioning market are not subject to this “endowment effect”. Thus, it seems that a lot of market experience is needed to overcome the “endowment effect”. In order to understand the effect of market experience, we introduce a distinction between two types of uncertainty, choice uncertainty and trade uncertainty, which could both lead to an “endowment effect”. While List’s own explanation is related to choice uncertainty, we conjecture that trade uncertainty is important for the “endowment effect”. To test this conjecture, we design a simple 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 the “endowment effect” in a subsequent test. We discuss why markets might not succeed in providing sufficient incentives for learning to overcome the “endowment effect”.

Suggested Citation

  • Dirk Engelmann & Guillaume Hollard, 2009. "A Shock Therapy Against the “Endowment Effect”," Discussion Papers 09-04, University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:kuiedp:0904
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    File URL: http://www.econ.ku.dk/english/research/publications/wp/dp_2009/0904.pdf/
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    References listed on IDEAS

    as
    1. John A. List, 2004. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," Econometrica, Econometric Society, vol. 72(2), pages 615-625, March.
    2. Charles R. Plott & Kathryn Zeiler, 2007. "Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?," American Economic Review, American Economic Association, vol. 97(4), pages 1449-1466, September.
    3. 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.
    4. Andrea Isoni & Graham Loomes & Robert Sugden, 2011. "The Willingness to Pay—Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations: Comment," American Economic Review, American Economic Association, vol. 101(2), pages 991-1011, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    endowment effect; robustness; experimental economics;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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