By Karen Ye, Ali Hortacsu, John List
One of the main assumptions economists make is that consumers have stable valuations of consumer goods. That is, if “a purple hat is worth $15 to you, it should be worth $15 to you whether or not you have purchased it, and this value should remain consistent both before and after you purchase it” (Ariely, 2012). An implication of this is that consumers’ buying and
selling prices for an object should be the same. However, this assumption is challenged by a
well-known anomaly in economics research, the endowment effect.
Simply put, the endowment effect occurs when consumers deviate from the standard economic
prediction to value goods that they own more than identical goods that they do not own. In a
seminal paper, Daniel Kahneman, Jack Knetsch, and Richard Thaler (1990) randomly gave half
of their subjects a coffee mug, and created an experimental market in which the subjects with
mugs could sell their mugs to the subjects without mugs. Even though before the experiment,
the sellers and buyers would have valued the mug on average equally, the sellers’ ownership
caused them to demand more than twice the buying price to part with the mug. This effect has
been replicated in many experiments, across many different consumer goods.
In the real world, consequences of the endowment effect include under-trading, and the
distortion of bargaining outcomes. For example, Genesove and Mayer (2001) document that
condominium sellers are very likely to anchor their asking prices to the price they paid for the
unit, and that they are very reluctant to realize losses. Moreover, owner occupants are much more
likely to display such behavior compared to investors.
How can people become more financially “wise” to avoid such a mistake?
In a few experiments conducted in naturally occurring markets, we show that people who are
financial “experts” are less likely to experience the endowment effect. In one experiment, we
gave sportscard show participants one of two unique pieces of sports memorabilia – a Kansas
City Royals game ticket stub and a certificate commemorating the achievements of Nolan Ryan,
both equally desirable (List, 2003). After subjects received either the ticket stub or certificate,
we offered them the option to trade their gift for the alternative good. We found that
inexperienced nondealers at the sportscard show traded less than dealers with intense trading
experience. This implies that trading experience mitigates under-trading caused by the
In follow-up studies, we showed that frequent sportscard traders are less likely to experience the
endowment effect even with goods that they do not typically trade, such as coffee mugs (List,
2004). We also found that we can induce subjects to be more financially “wise”. List (2011)
incentivized a group of inexperienced nondealers to become more active traders at sportscard
shows over a period of six months. At the end of six months’ training, we found that these
subjects were less likely to experience the endowment effect.
We are currently conducting a neuroeconomics study to tease out reasons why financial expertise
may lead people to overcome anomalies such as the endowment effect. This research is funded
by the John Templeton Foundation, and is one of the current Wisdom Research projects studying
the interaction between expertise and wisdom. Using functional magnetic resonance imaging
(fMRI), we study differences in neurobiology between financially inexperienced and
experienced subjects while they are buying and selling consumer goods.
We focus on two possible reasons why frequent traders may be less likely to experience the
endowment effect. First, they may be less likely to experience loss aversion, a phenomenon
introduced by Daniel Kahneman and Amos Tversky (1979) that has often been proposed to
explain the endowment effect. Loss aversion states that people fear losing goods that they own
more than they care about gaining the same goods. This fear may push up owners’ selling prices
and cause them to be reluctant to trade. Through frequent trading, experienced traders may learn
to change their mindset so that they do not view selling an object as a loss (Kőszegi & Rabin,
Another line of literature proposes that people experience the endowment effect because the act
of owning an object pushes up their valuation for the object. This may be because owners
associate goods that they own with themselves (Morewedge et al., 2009). Or, owners may focus
on positive attributes of goods that they own more than buyers who are evaluating the goods
(Carmon & Ariely, 2000; Johnson et al., 2007). Experienced traders may learn to valuate goods
more objectively and consistently.
Our current experiment seeks to find out which of these two explanations plays a stronger role in
helping people to overcome the endowment effect. Stay tuned for our results in the next few
Ariely, D. (2012, September 20). Real-world endowment [Blog post]. Retrieved from
Carmon, Z. & Ariely, D. (2000). Focusing on the forgone: How value can appear so different to
buyers and sellers. Journal of Consumer Research, 27, 360-370.
Genesove, D. and Mayer, C. (2001). Loss Aversion and Seller Behavior: Evidence from the
Housing Market. Quarterly Journal of Economics, 116(4), 1233-1260.
Johnson, E. J., Haubl, G., & Keinan, A. (2007). Aspects of endowment: A query theory of value
construction. Journal of Experimental Psychology: Learning, Memory, and Cognition, 33(3),
Kahneman, D., Knetsch, J. L., & Thaler, R. (1990). Experimental tests of the endowment effect
and the Coase theorem. Journal of Political Economy, 98(6), 1325-1348.
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk.
Econometrica, 47, 263-291.
Kőszegi, B., & Rabin, M. (2006). A model of reference-dependent preferences. The Quarterly
Journal of Economics, 121, 1133-1165.
List, J. A. (2003). Does market experience eliminate market anomalies? The Quarterly Journal
of Economics, 118, 41-71.
List, J. A. (2004). Neoclassical theory versus prospect theory: Evidence from the marketplace.
Econometrica, 72(2), 615-625.
List, J. A. (2011). Does market experience eliminate market anomalies? The case of exogenous
market experience. American Economic Review: Papers & Proceedings 2011, 101(3), 313-317.
Morewedge, C. K., Shu, L. L., Gilbert, D. T., & Wilson, T. D. (2009). Bad riddance or good
rubbish? Ownership and not loss aversion causes the endowment effect. Journal of Experimental
Social Psychology, 45, 947-951.
Photo courtesy of Flickr Creative Commons.
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