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Endowment as a blessing

  • Frenkel, Sivan
  • Heller, Yuval
  • Teper, Roee

Experimental evidence and field data suggest that agents hold two seemingly unrelated biases: failure to account for the fact that the behavior of others reflects their private information (“winner's curse”), and a tendency to value a good more once it is owned (“endowment effect”). In this paper we propose that these two phenomena are closely related: the biases fully compensate for each other in various economic interactions, and induce an “as-if rational” behavior. We pay specific attention to barter trade, of the kind that was common in prehistoric societies, and suggest that the endowment effect and the winner's curse could have jointly survived natural selection together.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39430.

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Date of creation: 30 Apr 2012
Date of revision: 30 Apr 2012
Handle: RePEc:pra:mprapa:39430
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  9. Fershtman, Chaim & Judd, Kenneth L & Kalai, Ehud, 1991. "Observable Contracts: Strategic Delegation and Cooperation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 551-59, August.
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  18. Hansen, Robert G, 1986. "Sealed-Bid versus Open Auctions: The Evidence," Economic Inquiry, Western Economic Association International, vol. 24(1), pages 125-42, January.
  19. Ball, Sheryl B. & Bazerman, Max H. & Carroll, John S., 1991. "An evaluation of learning in the bilateral winner's curse," Organizational Behavior and Human Decision Processes, Elsevier, vol. 48(1), pages 1-22, February.
  20. Jack Knetsch & Fang-Fang Tang & Richard Thaler, 2001. "The Endowment Effect and Repeated Market Trials: Is the Vickrey Auction Demand Revealing?," Experimental Economics, Springer, vol. 4(3), pages 257-269, December.
  21. Boone, Audra L. & Harold Mulherin, J., 2008. "Do auctions induce a winner's curse? New evidence from the corporate takeover market," Journal of Financial Economics, Elsevier, vol. 89(1), pages 1-19, July.
  22. Kliemt, Hartmut, 2001. "Rationality and Reality," Kyklos, Wiley Blackwell, vol. 54(2-3), pages 309-16.
  23. 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.
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  25. Heifetz, Aviad & Segev, Ella, 2004. "The evolutionary role of toughness in bargaining," Games and Economic Behavior, Elsevier, vol. 49(1), pages 117-134, October.
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