Working Paper: NBER ID: w19384
Authors: Keith M. Marzilli Ericson; Andreas Fuster
Abstract: The endowment effect is among the best known findings in behavioral economics, and has been used as evidence for theories of reference-dependent preferences and loss aversion. However, a recent literature has questioned the robustness of the effect in the laboratory, as well as its relevance in the field. In this review, we provide a summary of the evidence, and describe recent theoretical developments that can potentially reconcile the different findings, with a focus on expectation-based reference points. We also survey recent work from psychology that provides either alternatives to or refinements of the usual loss aversion explanation. We argue that loss aversion is still the leading paradigm for understanding the endowment effect, but that given the rich psychology behind the effect, a version of the theory that encompasses multiple reference points may be required.
Keywords: No keywords provided
JEL Codes: C91; D03; D11; D87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Multiple reference points (Y91) | Endowment effect (D11) |
| Ownership (H13) | Perceived value (D46) |
| Loss aversion (G41) | Willingness to accept (WTA) (D69) |
| Ownership (H13) | Valuation gap (WTA > WTP) (D46) |
| Experimental conditions (C90) | Endowment effect (D11) |
| Expectations of future ownership (D84) | Endowment effect (D11) |
| Trading opportunities (F19) | Endowment effect (D11) |