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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 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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“…our objective is to cast a large net using a revealed theory methodology in the hopes of determining whether the procedures themselves cause gaps between WTA and WTP. Section II reports the results from our replication of an experiment reported by Daniel Kahneman et al. (1990) (“KKT”).”
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Reference-Dependent Consumption Plans
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Hirshleifer, D. (2015) · Annual Review of Financial Economics · doi:10.1146/annurev-financial-092214-043752 · Cited by 497
Thinking like a trader selectively reduces individuals' loss aversion
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“, k z 2) so that people would require a 50% chance of gaining at least $200 to make up for a 50% of losing $100 ([123], see also [2,64,63] for an explanation of why loss aversion is needed to explain risk aversion for mixed gambles see [97]).”
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Chapter 13 Financial decision-making in markets and firms: A behavioral perspective
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Self-citationIf money doesn't make you happy, then you probably aren't spending it right
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“Additional support for the behavioral basis for the disposition effect and associated costs is provided by Kahneman and Tversky (1979), Kahneman et al. (1990), Heisler (1996), Weber and Camerer (1998), Barber and Odean (2000, 2001) and Shapira and Venezia (2001).”
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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).”
BackgroundPROSPECT THEORY AND POLITICAL SCIENCE
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Individual-Level Loss Aversion in Riskless and Risky ChoicesPreprint
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Self-citationSvenson, O. (1992) · Acta Psychologica · doi:10.1016/0001-6918(92)90044-e · Cited by 348
Decisions and revisions: The affective forecasting of changeable outcomes.
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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…”
BackgroundHo, T., & Zhang, J. (2008) · Management Science · doi:10.1287/mnsc.1070.0788 · Cited by 318
“Kahneman et al. (1990) find 2.”
BackgroundInfluentialLoss Aversion Is an Affective Forecasting Error
Kermer, D. A., Driver‐Linn, E., Wilson, T. D., & Gilbert, D. T. (2006) · Psychological Science · doi:10.1111/j.1467-9280.2006.01760.x · Cited by 354
“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 ).”
BackgroundExplanations of the endowment effect: an integrative review
Morewedge, C. K., & Giblin, C. E. (2015) · Trends in Cognitive Sciences · doi:10.1016/j.tics.2015.04.004 · Cited by 371
Rational choice with status quo bias
Masatlioglu, Y., & Ok, E. A. (2005) · Journal of Economic Theory · doi:10.1016/j.jet.2004.03.007 · Cited by 343
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Morewedge, C. K., Shu, L. L., Gilbert, D. T., & Wilson, T. D. (2009) · Journal of Experimental Social Psychology · doi:10.1016/j.jesp.2009.05.014 · Cited by 346
“…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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“In a classic paper, Kahneman et al. (1990) find that initial ownership of an item seems to affect valuation of that item.”
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“Finally, given seemingly con-flicting evidence about the extent to which the endowment effect requires actual possession of the good in question (e.g., Kahneman et al. 1990; Sen and Johnson 1997), it will be interesting to explore boundary conditions of mental en-dowment effects.”
BackgroundAuctions with Anticipated Regret: Theory and Experiment
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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 418
“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…”
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“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.”
Habits, Addictions, and Traditions
Becker, G. S. (1992) · Kyklos · doi:10.1111/j.1467-6435.1992.tb02119.x · Cited by 320
Mellers, B. A., Schwartz, A., & Cooke, A. D. J. (1998) · Annual Review of Psychology · doi:10.1146/annurev.psych.49.1.447 · Cited by 332
“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).”
BackgroundShafir, E., & LeBoeuf, R. A. (2002) · Annual Review of Psychology · doi:10.1146/annurev.psych.53.100901.135213 · Cited by 317
Possession, feelings of ownership and the endowment effect
Reb, J. M., & Connolly, T. (2007) · Judgment and Decision Making · doi:10.1017/s1930297500000085 · Cited by 320
“The effect has since been widely replicated (e.g., Kahneman, Knetsch, & Thaler, 1990; Kahneman, Knetsch, & Thaler, 1991).”
Metadata
- 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 › Economics, Econometrics and Finance › Economics and Econometrics › 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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