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The Endowment Effect and Beliefs About the Market
Elena Achtypi1, Nathaniel J S Ashby2, Gordon D A Brown1
1Department of Psychology, University of Warwick.
Decision (Washington, D.C.)
|April 5, 2021
Summary
The endowment effect, where owners value items more, may not stem from ownership bias. Instead, it reflects buyers and sellers making rational decisions based on market price beliefs.
Area of Science:
- Behavioral Economics
- Cognitive Psychology
- Decision Science
Background:
- The endowment effect describes how owners value possessions more than non-owners.
- This is often attributed to ownership altering intrinsic value perceptions.
- Recent research suggests market price beliefs influence valuations.
Purpose of the Study:
- To investigate if the endowment effect is driven by beliefs about market prices.
- To quantify the role of "good deal" perceptions in transactions.
- To examine ownership's effect on beliefs about item quality and market price.
Main Methods:
- A meta-analysis of existing research.
- Three laboratory experiments eliciting beliefs about market price distributions.
- Quantifying "good deal" perceptions in buyer and seller valuations.
Main Results:
- Ownership did not affect beliefs about item quality or appropriate market price.
- Sellers set prices based on perceived quality and market price distributions.
- Buyers offered prices below their perceived market value.
Conclusions:
- The endowment effect may reflect adaptive, rational behavior based on market beliefs, not ownership bias.
- Buyer and seller decisions are influenced by their beliefs about market conditions.
- This challenges the traditional view of the endowment effect as solely an ownership-induced preference change.
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