A Shock Therapy Against the “Endowment Effect”

Dirk Engelmann and Guillaume Hollard

No 09-04, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: Simple exchange experiments have identified the fact that participants trade their endowment less frequently than standard demand theory predicts. List (2003) finds, however, that the most experienced dealers acting on a well functioning market are not subject to this “endowment effect”. Thus, it seems that a lot of market experience is needed to overcome the “endowment effect”. In order to understand the effect of market experience, we introduce a distinction between two types of uncertainty, choice uncertainty and trade uncertainty, which could both lead to an “endowment effect”. While List’s own explanation is related to choice uncertainty, we conjecture that trade uncertainty is important for the “endowment effect”. To test this conjecture, we design a simple experiment where the two treatments impact differently on trade uncertainty, while controlling for choice uncertainty. Supporting our conjecture, we find that “forcing” subjects to give away their endowment in a series of exchanges, eliminates the “endowment effect” in a subsequent test. We discuss why markets might not succeed in providing sufficient incentives for learning to overcome the “endowment effect”.

Keywords: endowment effect; robustness; experimental economics (search for similar items in EconPapers)
JEL-codes: C91 D12 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2009-02
New Economics Papers: this item is included in nep-cbe and nep-exp
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:0904

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