Reconsidering the Effect of Market Experience on the "Endowment Effect"

Dirk Engelmann and Guillaume Hollard

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: Simple exchange experiments have revealed that participants trade their endowment less frequently than standard demand theory would predict. List (2003a) finds that the most experienced dealers acting in a well-functioning market are not subject to this exchange asymmetry, suggesting that a significant amount of market experience is required to overcome it. In order to understand this market-experience effect, we introduce a distinction between two types of uncertainty, choice uncertainty and trade uncertainty, both of which could lead to exchange asymmetry. We conjecture that trade uncertainty is most important for exchange asymmetry. To test this conjecture, we design an 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 exchange asymmetry in a subsequent test. We discuss why markets might not provide sufficient incentives for learning to overcome exchange asymmetry.

Keywords: Endowment effect; exchange asymmetry; market experience (search for similar items in EconPapers)
Date: 2010
Note: View the original document on HAL open archive server: https://hal.science/hal-00633557v1
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Citations: View citations in EconPapers (58)

Published in Econometrica, 2010, 78 (6), pp.2005-2019. ⟨10.3982/ECTA8424⟩

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Journal Article: Reconsidering the Effect of Market Experience on the “Endowment Effect” (2010)
Working Paper: Reconsidering the Effect of Market Experience on the "Endowment Effect" (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:hal-00633557

DOI: 10.3982/ECTA8424

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