a brief introduction to the endowment effect kam leung yeung feb 19, 2013
TRANSCRIPT
Introduction
• $$$$• $$
• Endowment effect (EE): what is given to a person is valued more by that person than by someone who does not receive the same item
An example (Kahneman, Knetsch, and Thaler, 1990)
Introduction
Sellers Buyers Choosers
Given a mug Shown a mug -
Indicate selling price
Indicate buying price
Choose between a mug and
cash
Pick a price ranging from $0 - $9.25
Only 3 trades took place (out of 77 students)
Introduction
Sellers Buyers Choosers0
1
2
3
4
5
6
7
87.12
2.87 3.12
Me
dia
n P
ric
e (
$)
First identified in 1980 by Richard ThalerHave generated research interest for over 30 yearsThe effect was replicated extensively across many
types of goods, including mugs, candy bars, binoculars, pens, wine, and intangible goods such as hunting permits, clean air, and time
One of the most robust psychological effectsLet’s look at factors that affect the price disparity
Introduction
Transaction demand
Definition: The motivation to complete a transaction (Mandel, 2002)
Prediction: as transaction demand increases, what happen to buy/sell price? Owners will sell at lower price Buyer will buy at higher price
Transaction demand
High transaction demand of the merchant A. A decade ago, you purchased a case of good wine for £5 per bottle. A wine
merchant is now interested in buying the case. How much would you be willing to sell it for per bottle?
B. A decade ago, a wine merchant purchased a case of good wine for £5 per bottle. He is now interested in selling the case. How much would you be willing to buy it for per bottle?
High transaction demand of the participant C. A decade ago, you purchased a case of good wine for £5 per bottle. You are
now interested in selling the case to a wine merchant. How much would you be willing to sell it for per bottle?
D. A decade ago, a wine merchant purchased a case of good wine for £5 per bottle. You are now interested in buying the case. How much would you be willing to buy it for per bottle?
Transaction demand
Results EE is observed when merchants are in
high transaction demand EE is eliminated when participants are in
high transaction demand
Market Value Heuristic People predominantly prefer the hedonic goods BUT at the
same time sell the less attractive good at higher price
Market Value Heuristic
Normatively speaking, one’s monetary valuation of an object should follow one’s preference
But market value heuristic significantly distort sellers’ price
Boothe, Schwartz and Chapman, 2007
Virtual Goods & Trading Experience
EE is not limited to goods with physical entity Reluctance to trade is demonstrated on low-experience
online gamers (De Sousa and Munro, 2012)
What about Physical Possession?
Would the fact that being able to hold and examine an object affect valuation? (Reb and Connolly, 2007)
2 (Ownership vs. no ownership) x 2 (Possession vs. no possession
Object: chocolate bar (Exp 1) and mug with university logo (Exp 2)
What about Physical Possession?
And that is not the end of the story … The price disparity is completely
mediated by feeling of ownership, measured by “How much do you feel like you own X (even though you don’t legally own it)?”
While other factors are interesting, loss aversion from the Prospect Theory remains the primary explanation of the EE (Kahneman & Tversky, 1979)
Loss Aversion
+
-
Preference follows ownership Preference for letters of one’s own name
(Heider, 1958)
Owning a coupon increases preference for the corresponding product (Sen and Johnson, 1997)
Psychological Ownership
Various behavioral evidence support augmented valuation follows psych ownership Psych ownership, not factual ownership,
explains price difference (Reb and Connolly, 2007)
Psych ownership, driven by positive valence of touch, explains price difference (Peck and Shu, 2009)
Psychological Ownership
Usually loss aversion and ownership are confounded:
Morewedge et al. (2009)
• Lose the object from owning• Own the object
• Gain the object from owning nothing• Do not own the object
Loss aversion: Sellers > Buyers Ownership: Owners > Non-owners
Morewedge et al. (2009)
Owner sellerNon-owner buyer Owner buyer
Loss aversion: Sellers > Buyers Ownership: Owners > Non-owners
Morewedge et al. (2009)
Owner sellerNon-owner buyer Owner buyer
No effect of factual ownership Selling price > Buying price
Yeung & Weber (2010)
• Sell price for self• Buy price for other• Sell price for other
• Buy price for self• Buy price for other• Sell price for other
No transaction took place