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The endowment effect: Loss aversion or a buy-sell discrepancy?
Gal Smitizsky1, Wendy Liu1, Uri Gneezy2
1Department of Marketing.
Journal of Experimental Psychology. General
|January 14, 2021
Summary
This study challenges the loss aversion explanation for the endowment effect. Researchers found evidence supporting a buy-sell strategy as the primary driver of higher selling prices compared to buying prices.
Area of Science:
- Behavioral Economics
- Cognitive Psychology
Background:
- The endowment effect describes the tendency for individuals to value an object more when they own it than when they do not.
- Loss aversion is the predominant theory, suggesting owners fear losing the object more than gaining it.
Purpose of the Study:
- To differentiate between loss aversion and a buy-sell discrepancy as explanations for the endowment effect.
- To investigate the strategic pricing behavior of individuals in ownership scenarios.
Main Methods:
- Introduced a novel 'Pay-to-Keep' condition alongside traditional willingness-to-accept (sell) and willingness-to-pay (buy) conditions.
- Compared stated values across the three experimental conditions to identify underlying mechanisms.
Main Results:
- No empirical support was found for loss aversion as the primary driver of the endowment effect.
- Significant evidence emerged supporting the buy-sell strategy mechanism, where participants strategically adjust prices based on their role (buyer or seller).
Conclusions:
- The findings suggest that strategic pricing, rather than loss aversion, better explains the endowment effect.
- Implications for understanding market behavior, subjective valuation, and the effectiveness of different elicitation methods are discussed.
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