Experimental Tests of the Endowment Effect and the Coase Theorem
Abstract
Contrary to theoretical expectations, measures of willingness to accept greatly exceed measures of willingness to pay. This paper reports several experiments that demonstrate that this "endowment effect" persists even in market settings with opportunities to learn. Consumption objects (e.g., coffee mugs) are randomly given to half the subjects in an experiment. Markets for the mugs are then conducted. The Coase theorem predicts that about half the mugs will trade, but observed volume is always significantly less. When markets for "induced-value" tokens are conducted, the predicted volume is observed, suggesting that transactions costs cannot explain the undertrading for consumption goods.
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Laboratory studies have demonstrated that humans can show loss aversion for objects such as mugs, money, and simulated investments.
“Laboratory studies have since demonstrated that humans can show loss aversion for objects such as mugs (22), money (23), and simulated investments (24, 25).”
From Thinking like a trader selectively reduces individuals' loss aversion (2009) · cites this paper as [22]
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“A famous example is college students demanding more money to relinquish a coffee mug that has been allocated to them than they would be willing to pay to buy the mug from someone else (Kahneman et al., 1990).”
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Individual-Level Loss Aversion in Riskless and Risky ChoicesPreprint
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“For example, voters recognize the strengths of the candidates they opposed once those candidates are elected (Gilbert et al., 1998), contestants realize how valuable prizes are moments after winning them (Beggan, 1992; Kahneman, Knetsch, & Thaler, 1990, 1991; Loewenstein & Adler, 1995), high school students become acu…”
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BackgroundInfluentialLoss Aversion Is an Affective Forecasting Error
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“Dozens of studies on theendowmenteffect, however, have shown that once people are given something, they consider it their own and are reluctant to part with it (e.g., Kahneman, Knetsch, & Thaler, 1990 ).”
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“…that for the first time de-confounded these factors and thus put the ownership and loss aversion accounts into direct competition. studies of the endowment effect have elicited both buying prices and choice prices, and the difference appears to be inconsequential (Kahneman et al., 1990).”
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The high demand for international reserves in the Far East: What is going on?
Aizenman, J., & Marion, N. P. (2003) · Journal of the Japanese and International Economies · doi:10.1016/s0889-1583(03)00008-x · Cited by 328 · see citing works
From Cashews to Nudges: The Evolution of Behavioral Economics
Thaler, R. H. (2018) · American Economic Review · doi:10.1257/aer.108.6.1265 · Cited by 338 · see citing works
Self-citationDo investors exhibit behavioral biases in investment decision making? A systematic review
Zahera, S. A., & Bansal, R. (2018) · Qualitative Research in Financial Markets · doi:10.1108/qrfm-04-2017-0028 · Cited by 369 · see citing works
“Kartasova (2013) identified the irrational behavior of the investors with the help of certain biases like anchoring, mental accounting, confirmation and hindsight bias, herd behavior, overconfidence, overreaction and availability bias. Besides this, emotions and intuition like investor mood, financial crisis, weather…”
BackgroundLoewenstein, G. F., Rick, S. I., & Cohen, J. D. (2007) · Annual Review of Psychology · doi:10.1146/annurev.psych.59.103006.093710 · Cited by 342 · see citing works
“Kahneman et al. (1990), for example, demonstrated the effect by endowing one group of participants (sellers) with an object and giving them the option of selling it for various amounts of cash.”
Shafir, E., & LeBoeuf, R. A. (2002) · Annual Review of Psychology · doi:10.1146/annurev.psych.53.100901.135213 · Cited by 317 · see citing works
Habits, Addictions, and Traditions
Becker, G. S. (1992) · Kyklos · doi:10.1111/j.1467-6435.1992.tb02119.x · Cited by 319 · see citing works
Mellers, B. A., Schwartz, A., & Cooke, A. D. J. (1998) · Annual Review of Psychology · doi:10.1146/annurev.psych.49.1.447 · Cited by 318 · see citing works
“The endowment effect refers to the observation that people value objects they own more than objects that are not part of their subjective endowment (Kahneman et al 1990).”
BackgroundPossession, feelings of ownership and the endowment effect
Reb, J. M., & Connolly, T. (2007) · Judgment and Decision Making · doi:10.1017/s1930297500000085 · Cited by 315 · see citing works
“The effect has since been widely replicated (e.g., Kahneman, Knetsch, & Thaler, 1990; Kahneman, Knetsch, & Thaler, 1991).”
- Authors
- Kahneman, D., Knetsch, J. L., & Thaler, R. H.
- ORCID
- Thaler, Richard H.
- Venue
- Journal of Political Economy
- Publisher
- University of Chicago Press
- Published
- 1990-12
- Volume
- 98
- Issue
- 6
- Pages
- 1325-1348
- ISSN
- 0022-3808 (ISSN-L)
- 1537-534X
- OpenAlex
- W4251252946
- Cited by
- 3,194
- References
- 0
- Citations by year
- 2026: 93 · 2025: 127 · 2024: 124 · 2023: 150 · 2022: 168 · 2021: 165 · 2020: 152 · 2019: 194 · 2018: 166 · 2017: 165 · 2016: 149 · 2015: 131 · 2014: 105 · 2013: 133 · 2012: 102
- FWCI
- 43.39
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- Journal of Political Economy (publishedVersion)
- Topics
- Social Sciences › Safety Research › Experimental Behavioral Economics Studies
- Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic and Environmental Valuation
- Keywords
- endowment effect, Coase theorem, willingness to accept, willingness to pay, consumer goods, transaction costs, market learning, asset markets
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