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Choice uncertainty and the endowment effect
Christina McGranaghan1, Steven G Otto2
1University of Delaware, 531 S College Ave, Newark, DE 19716 USA.
Journal of Risk and Uncertainty
|June 22, 2022
Summary
Choice uncertainty significantly impacts endowment effects, reducing under-trading and valuation differences between buyers and sellers. Value uncertainty remains a key factor even when product uncertainty is resolved.
Area of Science:
- Behavioral Economics
- Decision Science
- Psychology
Background:
- Endowment effects, where ownership increases valuation, are well-documented.
- Existing research highlights trade uncertainty's role, but choice uncertainty's impact is less explored.
Purpose of the Study:
- To experimentally investigate the role of choice uncertainty in generating endowment effects.
- To provide novel evidence on the significance of choice uncertainty in trading and stated valuations.
Main Methods:
- Experimental manipulation of choice uncertainty in valuation and exchange tasks.
- Comparison of buyer and seller valuations under varying levels of choice uncertainty.
Main Results:
- Reducing choice uncertainty eliminated under-trading and decreased valuation disparities between buyers and sellers.
- The effect was primarily driven by a reduction in extreme seller valuations.
- Mutually acceptable trades implied by stated valuations did not significantly increase.
Conclusions:
- Choice uncertainty plays a significant role in endowment effects and valuation asymmetries.
- Value uncertainty continues to influence valuations even after product uncertainty is addressed.
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