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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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Knutson, B. D., Wimmer, G. E., Rick, S. I., Hollon, N. G., Prelec, D., & Loewenstein, G. F. (2008) · Neuron · doi:10.1016/j.neuron.2008.05.018 · Cited by 162
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“…at the sale prices engages an expectations-based variant of the endowment effect first discussed by Thaler (1980) and documented, for instance, by Kahneman et al. (1990): if she plans not to buy at the high regular price, she expects to get the product with an interior probability, so she feels…”
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Busemeyer, J. R., & Johnson, J. G. (2004) · Wiley eBooks · doi:10.1002/9780470752937.ch7 · Cited by 151
“Kahneman, Knetsch, and Thaler (1990) gave one group of subjects a mug and asked them how much they would be willing to pay to give up the mug, whereas another group was simply given some money and asked how much they would be willing to pay to buy the mug.”
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“The willingness to switch from the own choice i to an alternative choice î is elicited by using the random price mechanism (Becker et al. 1964) with random prices (in probability) x from the interval x ∈ [x; x̄] with x < 0 < x̄ (16) and some density ϕ with ϕ(x) = { > 0 ∀x ∈ [x; x̄] = 0 otherwise.”
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“and Kahneman 1991), and the endowment effect ( Kahneman, Knetsch and Thaler 1990; Bar-Hillel and”
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“…the present, though they are willing to precommit to saving in the future because of loss aversion and a mechanism similar to an endowment effect (Kahneman, Knetsch, and Thaler 1990).4 However, alternative attached and set reservation selling prices substantially higher than the buyers’…”
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White, J. B., Tynan, R. O., Galinsky, A. D., & Thompson, L. (2004) · Organizational Behavior and Human Decision Processes · doi:10.1016/j.obhdp.2004.03.005 · Cited by 140
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“Recent claims that the BDM is incentive compatible (without conditions) for non-random goods can be found in Davis and Holt (1993, p.461), Kahneman et al. (1990, p. 1336) , Rutstro˜m (1998, p. 428), and Shogren et al. (2001, p. 98).”
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“Best estimate WTA-WTP ratios of 2.4-4.13 were reported in Stage 1, rising to 4.43-6.16 in Stage 2. Even on the more conservative M2 measure, which is less vulnerable to occasional cases where A*/P* is very high, the disparity was at least 1.95 in Stage 1, and at least 2.52 in Stage 2. These figures seem broadly simila…”
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ON AMBIGUITY IN PERCEPTIONS OF RISK:IMPLICATIONS FOR CRIMINAL DECISION MAKING AND DETERRENCE*
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“See for example Tversky and Kahneman (1991), and Kahneman et al. (1990) for support for a similar view.”
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“The essence of the endowment effect explanation is that, as Kahneman et al. (1990) state, there is "a genuine effect of reference positions on preferences" (p. 1326); "the value that an individual assigns to such objects as mugs . . . and chocolate bars appears to increase substantially as soon as the individual is gi…”
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“In a famous experiment Kahneman et al. (1990) distributed coffee mugs to every other student in a classroom.”
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“We are aware that the comparison of these twowelfare measures is a recurrent issue in CVM literature (Knetsch, 1989; Kahneman et al., 1990; Kahneman and Tversky, 1979; Hanemann, 1991; Brown and Gregory, 1999; Anderson et al., 2000; Morrison, 2000; Horowitz and McConnell, 2003; Basili et al., 2006; Lienhoop and MacMill…”
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“supporting this view (Knetsch and Sinden, 1984; Loewenstein, 1988; Samuelson and Zeckhauser, 1988; Knetsch, 1989; Kahneman et al., 1990).”
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“5. A similar technique has been used independently in Kahneman, Knetsch and Thaler (1990) , who ask subjects to indicate whether each of 18 prices is acceptable.”
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Reference Dependence in the Housing Market
Andersen, S., Badarinza, C., Liu, L., Marx, J., & Ramadorai, T. (2022) · American Economic Review · doi:10.1257/aer.20191766 · Cited by 111
“…about as much as final prices for final utility, and λ = 1.576 (s.e. 0.570), a modest degree of loss aversion, lower than early estimates between 2 and 2.5 (e.g., Kahneman et al. 1990, Tversky and Kahneman, 1992), but closer to those in more recent literature (e.g., Imas et al. 2016 find λ = 1.59).”
ResultInfluentialGoldstein, W. M., & Weber, E. U. (1995) · Psychology of Learning and Motivation · doi:10.1016/s0079-7421(08)60308-4 · Cited by 119
Powdthavee, N., & van den Berg, B. (2011) · Journal of Health Economics · doi:10.1016/j.jhealeco.2011.06.001 · Cited by 125
“…different to WTP for the same good is because of the endowment effect, i.e. our tendency to value something more once ownership has already been established – simply because we tend to believe that the utility of a loss is greater than the utility of an equivalent gain (Kahneman et al., 1990).”
BackgroundRamiah, V., Xiao-ming, X., & Moosa, I. A. (2015) · International Review of Financial Analysis · doi:10.1016/j.irfa.2015.05.021 · Cited by 136
International tourism demand and the business cycle
Smeral, E. (2011) · Annals of Tourism Research · doi:10.1016/j.annals.2011.07.015 · Cited by 121
Bounded rationality in the economics of organization: “Much cited and little used”
Foss, N. J. (2003) · Journal of Economic Psychology · doi:10.1016/s0167-4870(02)00206-4 · Cited by 121
“(e.g., Tversky & Kahneman, 1987; Kahneman, Knetsch, & Thaler, 1990 ), although he was aware of it. 15 In short, he was never out to do the kind of”
Background
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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Registry, retraction, Cites and statistics results are computed, not judged, with one exception: a printed reference that no index lists is read once by a model before it counts as a citation error. Claims are extracted by a model and kept only when their quote appears verbatim in the text; each cited source is then checked, with a model’s help, for whether it says what the claim relies on. Those verdicts can be wrong — read the claim’s quote and the cited source before relying on one.
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