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Learning to Like What You Have - Explaining the Endowment Effect

  • Steffen Huck

    (Humboldt University, Berlin)

  • Georg Kirchsteiger

    (CentER, Tilburg)

  • Joerg Oechssler

    (Humboldt University, Berlin)

The endowment effect describes the fact that people demand much more to give up an object than they are willing to spend to acquire it. The existence of this effect has been documented in numerous experiments. We attempt to explain this effect by showing that evolution favors individuals whose preferences embody an endowment effect. The reason is that an endowment effect improves one's bargaining position in bilateral trades. We show that for a general class of evolutionary processes almost all individuals will have a strictly positive and finite endowment effect.

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Paper provided by EconWPA in its series Game Theory and Information with number 9702001.

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Date of creation: 06 Feb 1997
Date of revision: 15 May 1997
Handle: RePEc:wpa:wuwpga:9702001
Contact details of provider: Web page: http://128.118.178.162

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  1. Jorgen W. Weibull, 1997. "Evolutionary Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262731215, June.
  2. S. Huck & J. Oechssler, 1996. "The Indirect Evolutionary Approach To Explaining Fair Allocations," SFB 373 Discussion Papers 1996,13, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  3. Ellingsen, Tore, 1995. "The Evolution of Bargaining Behavior," SSE/EFI Working Paper Series in Economics and Finance 61, Stockholm School of Economics.
  4. Gale, John & Binmore, Kenneth G. & Samuelson, Larry, 1995. "Learning to be imperfect: The ultimatum game," Games and Economic Behavior, Elsevier, vol. 8(1), pages 56-90.
  5. Hanemann, W Michael, 1991. "Willingness to Pay and Willingness to Accept: How Much Can They Differ?," American Economic Review, American Economic Association, vol. 81(3), pages 635-47, June.
  6. 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 1325-48, December.
  7. Oechssler, Joerg & Frank Riedel, 1999. "Evolutionary Dynamics on Infinite Strategy Spaces," Discussion Paper Serie A 606, University of Bonn, Germany.
  8. Oechssler, Jorg & Riedel, Frank, 2002. "On the Dynamic Foundation of Evolutionary Stability in Continuous Models," Journal of Economic Theory, Elsevier, vol. 107(2), pages 223-252, December.
  9. Alvin E Roth & J K Murnighan, 1997. "The rule of information in bargaining: an experimental study," Levine's Working Paper Archive 1631, David K. Levine.
  10. Steven F. Venti & David A. Wise, 1990. "But They Don't Want to Reduce Housing Equity," NBER Chapters, in: Issues in the Economics of Aging, pages 13-32 National Bureau of Economic Research, Inc.
  11. H. Lorne Carmichael & W. Bentley MacLeod, 1997. "Territorial Bargaining," Boston College Working Papers in Economics 343., Boston College Department of Economics.
  12. Knetsch, Jack L & Sinden, J A, 1987. "The Persistence of Evaluation Disparities," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 691-95, August.
  13. Heifetz, Aviad & Shannon, Chris & Spiegel, Yossi, 2002. "What to Maximize If You Must," Department of Economics, Working Paper Series qt0hj6631n, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  14. Ely, Jeffrey C. & Yilankaya, Okan, 2001. "Nash Equilibrium and the Evolution of Preferences," Journal of Economic Theory, Elsevier, vol. 97(2), pages 255-272, April.
  15. Heifetz, Aviad & Shannon, Chris & Spiegel, Yossi, 2002. "What to Maximize If You Must," Department of Economics, Working Paper Series qt0300m6q8, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  16. Aviad Heifetz & Chris Shannon & Yossi Spiegel, 2002. "What to Maximize if You Must," Levine's Working Paper Archive 506439000000000063, David K. Levine.
  17. Binmore, Ken & Morgan, Peter & Snaked, Avner & Sutton, John, 1991. "Do people exploit their bargaining power? An experimental study," Games and Economic Behavior, Elsevier, vol. 3(3), pages 295-322, August.
  18. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
  19. Sethi, Rajiv & Somanathan, E., 2001. "Preference Evolution and Reciprocity," Journal of Economic Theory, Elsevier, vol. 97(2), pages 273-297, April.
  20. Knetsch, Jack L & Sinden, J A, 1984. "Willingness to Pay and Compensation Demanded: Experimental Evidence of an Unexpected Disparity in Measures of Value," The Quarterly Journal of Economics, MIT Press, vol. 99(3), pages 507-21, August.
  21. R. Cressman, K.H. Schlag, 1995. "The Dynamic (In)Stability of Backwards Induction," Discussion Paper Serie B 347, University of Bonn, Germany.
  22. Kandori, Michihiro & Mailath, George J & Rob, Rafael, 1993. "Learning, Mutation, and Long Run Equilibria in Games," Econometrica, Econometric Society, vol. 61(1), pages 29-56, January.
  23. Güth, Werner & Kliemt, Hartmut & Peleg, Bezalel, 1998. "Co-evolution of preferences and information in simple games of trust," SFB 373 Discussion Papers 1998,72, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  24. Young H. P., 1993. "An Evolutionary Model of Bargaining," Journal of Economic Theory, Elsevier, vol. 59(1), pages 145-168, February.
  25. repec:cup:cbooks:9780521576475 is not listed on IDEAS
  26. Knetsch, Jack L, 1989. "The Endowment Effect and Evidence of Nonreversible Indifference Curves," American Economic Review, American Economic Association, vol. 79(5), pages 1277-84, December.
  27. Ted To, 1999. "Risk and evolution," Economic Theory, Springer, vol. 13(2), pages 329-343.
  28. Coursey, Don L & Hovis, John L & Schulze, William D, 1987. "The Disparity between Willingness to Accept and Willingness to Pay Measures of Value," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 679-90, August.
  29. Crawford, Vincent P. & Varian, Hal R., 1979. "Distortion of preferences and the Nash theory of bargaining," Economics Letters, Elsevier, vol. 3(3), pages 203-206.
  30. Iris Bohnet & Bruno S. Frey & Steffen Huck, . "More Order with Less Law: On Contract Enforcement, Trust, and Crowding," IEW - Working Papers 052, Institute for Empirical Research in Economics - University of Zurich.
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