1932

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 given the rich psychology behind the effect, a version of the theory that encompasses multiple reference points may be required.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-economics-080213-041320
2014-08-02
2024-03-28
Loading full text...

Full text loading...

/deliver/fulltext/economics/6/1/annurev-economics-080213-041320.html?itemId=/content/journals/10.1146/annurev-economics-080213-041320&mimeType=html&fmt=ahah

Literature Cited

  1. Abeler J, Falk A, Goette L, Huffman D. 2011. Reference points and effort provision. Am. Econ. Rev. 101:470–92 [Google Scholar]
  2. Apicella CL, Azevedo EM, Fowler JH, Christakis NA. 2014. Evolutionary origins of the endowment effect: evidence from hunter-gatherers. Am. Econ. Rev In press [Google Scholar]
  3. Ariely D, Simonson I. 2003. Buying, bidding, playing, or competing? Value assessment and decision dynamics in online auctions. J. Consum. Psychol. 13:113–23 [Google Scholar]
  4. Barberis NC. 2013. Thirty years of prospect theory in economics: a review and assessment. J. Econ. Perspect. 27:1173–96 [Google Scholar]
  5. Barone MJ, Shimp TA, Sprott DE. 1997. Mere ownership revisited: a robust effect?. J. Consum. Psychol. 6:257–84 [Google Scholar]
  6. Beggan JK. 1992. On the social nature of nonsocial perception: the mere ownership effect. J. Pers. Soc. Psychol. 62:229–37 [Google Scholar]
  7. Bell DE. 1985. Disappointment in decision making under uncertainty. Oper. Res. 33:1–27 [Google Scholar]
  8. Bordalo P, Gennaioli N, Shleifer A. 2012. Salience in experimental tests of the endowment effect. Am. Econ. Rev. 102:47–52 [Google Scholar]
  9. Brosnan SF, Jones OD, Lambeth SP, Mareno MC, Richardson AS, Schapiro SJ. 2007. Endowment effect in chimpanzees. Curr. Biol. 17:1704–7 [Google Scholar]
  10. Brown TC. 2005. Loss aversion without the endowment effect, and other explanations for the WTA-WTP disparity. J. Econ. Behav. Organ. 57:367–79 [Google Scholar]
  11. Burson K, Faro D, Rottenstreich Y. 2012. Multiple-unit holdings yield attenuated endowment effects. Manag. Sci. 59:545–55 [Google Scholar]
  12. Bushong B, King LM, Camerer CF, Rangel A. 2010. Pavlovian processes in consumer choice: the physical presence of a good increases willingness-to-pay. Am. Econ. Rev. 100:1556–71 [Google Scholar]
  13. Camerer CF. 2000. Prospect theory in the wild: evidence from the field. In Choices, Values and Frames, ed. D Kahneman, A Tversky, pp. 288–300. Cambridge, UK: Cambridge Univ. Press
  14. Carmon Z, Ariely D. 2000. Focusing on the forgone: how value can appear so different to buyers and sellers. J. Consum. Res. 27:360–70 [Google Scholar]
  15. Carmon Z, Wertenbroch K, Zeelenberg M. 2003. Option attachment: when deliberating makes choosing feel like losing. J. Consum. Res. 30:15–29 [Google Scholar]
  16. Cason T, Plott C. 2012. Misconceptions and game form recognition of the BDM method: challenges to theories of revealed preference and framing. SSRN Work. Pap
  17. Chapman GB. 1998. Similarity and reluctance to trade. J. Behav. Decis. Making 11:47–58 [Google Scholar]
  18. Crawford V, Meng J. 2011. New York City cab drivers’ labor supply revisited: reference-dependent preferences with rational expectations targets for hours and income. Am. Econ. Rev. 101:1912–32 [Google Scholar]
  19. De Martino B, Kumaran D, Holt B, Dolan RJ. 2009. The neurobiology of reference-dependent value computation. J. Neurosci. 29:3833–42 [Google Scholar]
  20. DellaVigna S. 2009. Psychology and economics: evidence from the field. J. Econ. Lit. 47:315–72 [Google Scholar]
  21. Engelmann D, Hollard G. 2010. Reconsidering the effect of market experience on the “endowment effect.”. Econometrica 78:2005–19 [Google Scholar]
  22. Ericson KMM, Fuster A. 2010. Expectations as endowments: evidence on reference-dependent preferences from exchange and valuation experiments. SSRN Work. Pap
  23. Ericson KMM, Fuster A. 2011. Expectations as endowments: evidence on reference-dependent preferences from exchange and valuation experiments. Q. J. Econ. 126:1879–907 [Google Scholar]
  24. Flemming TM, Jones OD, Mayo L, Stoinski T, Brosnan SF. 2012. The endowment effect in orangutans. Int. J. Comp. Psychol. 25:285–98 [Google Scholar]
  25. Fryer RG, Levitt SD, List J, Sadoff S. 2012. Enhancing the efficacy of teacher incentives through loss aversion: a field experiment. NBER Work. Pap. 18237
  26. Gill D, Prowse V. 2012. A structural analysis of disappointment aversion in a real effort competition. Am. Econ. Rev. 102:469–503 [Google Scholar]
  27. Harbaugh WT, Krause K, Vesterlund L. 2001. Are adults better behaved than children? Age, experience, and the endowment effect. Econ. Lett. 70:175–81 [Google Scholar]
  28. Hastings JS, Shapiro JM. 2013. Fungibility and consumer choice: evidence from commodity price shocks. Q. J. Econ. 128:1449–98 [Google Scholar]
  29. Heberlein TA, Bishop RC. 1986. Assessing the validity of contingent valuation: three field experiments. Sci. Total Environ. 56:99–107 [Google Scholar]
  30. Heffetz O, List JA. 2014. Is the endowment effect an expectations effect?. J. Eur. Econ. Assoc. In press [Google Scholar]
  31. Heidhues P, Kőszegi B. 2008. Competition and price variation when consumers are loss averse. Am. Econ. Rev. 98:1245–68 [Google Scholar]
  32. Herweg F, Müller D, Weinschenk P. 2010. Binary payment schemes: moral hazard and loss aversion. Am. Econ. Rev. 100:2451–77 [Google Scholar]
  33. Heyman JE, Orhun Y, Ariely D. 2004. Auction fever: the effect of opponents and quasi-endowment on product valuations. J. Interact. Market 18:47–21 [Google Scholar]
  34. Hoffman E, Spitzer ML. 1993. Willingness to pay vs. willingness to accept: legal and economic implications. Wash. Univ. Law Rev. 71:159–114 [Google Scholar]
  35. Horowitz JK, McConnell KE. 2002. A review of WTA/WTP studies. J. Environ. Econ. Manag. 44:426–47 [Google Scholar]
  36. Hossain T, List JA. 2012. The behavioralist visits the factory: increasing productivity using simple framing manipulations. Manag. Sci. 58:2151–67 [Google Scholar]
  37. Isoni A. 2011. The willingness-to-accept/willingness-to-pay disparity in repeated markets: loss aversion or “bad-deal” aversion?. Theory Decis. 71:409–30 [Google Scholar]
  38. Isoni A, Loomes G, Sugden R. 2011. The willingness to pay–willingness to accept gap, the “endowment effect,” subject misconceptions, and experimental procedures for eliciting valuations. Comment Am. Econ. Rev. 101:991–1011 [Google Scholar]
  39. Johnson EJ, Häubl G, Keinan A. 2007. Aspects of endowment: a query theory of value construction. J. Exp. Psychol. Learn. Mem. Cogn. 33:461–74 [Google Scholar]
  40. Jolls C, Sunstein CR, Thaler R. 1998. A behavioral approach to law and economics. Stanford Law Rev. 50:1471–550 [Google Scholar]
  41. Kahneman D. 1992. Reference points, anchors, norms, and mixed feelings. Organ. Behav. Hum. Decis. Process. 51:296–312 [Google Scholar]
  42. Kahneman D, Knetsch JL, Thaler RH. 1990. Experimental tests of the endowment effect and the Coase theorem. J. Polit. Econ. 98:1325–48 [Google Scholar]
  43. Kahneman D, Knetsch JL, Thaler RH. 1991. Anomalies: the endowment effect, loss aversion, and status quo bias. J. Econ. Perspect. 5:1193–206 [Google Scholar]
  44. Kahneman D, Tversky A. 1979. Prospect theory: an analysis of decision under risk. Econometrica 47:263–91 [Google Scholar]
  45. Kanngiesser P, Santos LR, Hood BM, Call J. 2011. The limits of endowment effects in great apes (Pan paniscus, Pan troglodytes, Gorilla gorilla, Pongo pygmaeus). J. Comp. Psychol. 125:436–45 [Google Scholar]
  46. Karle H, Kirchsteiger G, Peitz M. 2013. Loss aversion and consumption choice: theory and experimental evidence. Work. Pap., Cent. Econ. Policy Res., London
  47. Klass G, Zeiler K. 2013. Against endowment theory: experimental economics and legal scholarship. UCLA Law Rev. 61:12–64 [Google Scholar]
  48. Knetsch JL. 1989. The endowment effect and evidence of nonreversible indifference curves. Am. Econ. Rev. 79:1277–84 [Google Scholar]
  49. Knetsch JL, Riyanto YE, Zong J. 2012. Gain and loss domains and the choice of welfare measure of positive and negative changes. J. Benefit-Cost Anal. 3:41 doi: 10.1515/2152-2812.1084 [Google Scholar]
  50. Knetsch JL, Sinden JA. 1984. Willingness to pay and compensation demanded: experimental evidence of an unexpected disparity in measures of value. Q. J. Econ. 99:507–21 [Google Scholar]
  51. Knetsch JL, Tang FF, Thaler RH. 2001. The endowment effect and repeated market trials: Is the Vickrey auction demand revealing?. Exp. Econ. 4:257–69 [Google Scholar]
  52. Knetsch JL, Wong W-K. 2009. The endowment effect and the reference state: evidence and manipulations. J. Econ. Behav. Organ. 71:407–13 [Google Scholar]
  53. Knutson B, Wimmer GE, Rick S, Hollon NG, Prelec D, Loewenstein G. 2008. Neural antecedents of the endowment effect. Neuron 58:814–22 [Google Scholar]
  54. Koh W, Wong W-K. 2011. The endowment effect and the willingness to accept–willingness to pay gap: subject misconceptions or reference dependence? Work. Pap., Natl. Univ. Singapore
  55. Kőszegi B, Rabin M. 2006. A model of reference-dependent preferences. Q. J. Econ. 121:1133–65 [Google Scholar]
  56. Kőszegi B, Rabin M. 2007. Reference-dependent risk attitudes. Am. Econ. Rev. 97:1047–73 [Google Scholar]
  57. Kőszegi B, Rabin M. 2009. Reference-dependent consumption plans. Am. Econ. Rev. 99:909–36 [Google Scholar]
  58. Lakshminaryanan V, Chen MK, Santos LR. 2008. Endowment effect in capuchin monkeys. Philos. Trans. R. Soc. Lond. B Biol. Sci. 363:3837–44 [Google Scholar]
  59. Levitt SD, List J, Neckermann S, Sadoff S. 2012. The behavioralist goes to school: leveraging behavioral economics to improve educational performance. NBER Work. Pap. 18165
  60. List JA. 2003. Does market experience eliminate market anomalies?. Q. J. Econ. 118:41–71 [Google Scholar]
  61. List JA. 2004. Neoclassical theory versus prospect theory: evidence from the marketplace. Econometrica 72:615–25 [Google Scholar]
  62. List JA. 2011. Does market experience eliminate market anomalies? The case of exogenous market experience. Am. Econ. Rev. 101:313–17 [Google Scholar]
  63. Loewenstein GF. 1988. Frames of mind in intertemporal choice. Manag. Sci. 34:200–14 [Google Scholar]
  64. Loewenstein GF, Adler D. 1995. A bias in the prediction of tastes. Econ. J. 105:929–37 [Google Scholar]
  65. Loewenstein GF, Issacharoff S. 1994. Source dependence in the valuation of objects. J. Behav. Decis. Making 7:157–68 [Google Scholar]
  66. Morewedge CK, Shu LL, Gilbert DT, Wilson TD. 2009. Bad riddance or good rubbish? Ownership and not loss aversion causes the endowment effect. J. Exp. Soc. Psychol. 45:947–51 [Google Scholar]
  67. Norton MI, Mochon D, Ariely D. 2012. The IKEA effect: when labor leads to love. J. Consum. Psychol. 22:453–60 [Google Scholar]
  68. Novemsky N, Kahneman D. 2005. The boundaries of loss aversion. J. Mark. Res. 42:119–28 [Google Scholar]
  69. Peck J, Shu SB. 2009. The effect of mere touch on perceived ownership. J. Consum. Res. 36:434–47 [Google Scholar]
  70. Pierce JL, Kostova T, Dirks KT. 2003. The state of psychological ownership: integrating and extending a century of research. Rev. Gen. Psychol. 7:84–107 [Google Scholar]
  71. Plott CR, Zeiler K. 2005. The willingness to pay–willingness to accept gap, the “endowment effect,” subject misconceptions, and experimental procedures for eliciting valuations. Am. Econ. Rev. 95:530–45 [Google Scholar]
  72. Plott CR, Zeiler K. 2007. Exchange asymmetries incorrectly interpreted as evidence of endowment effect theory and prospect theory?. Am. Econ. Rev. 97:1449–66 [Google Scholar]
  73. Plott CR, Zeiler K. 2011. The willingness to pay–willingness to accept gap, the “endowment effect,” subject misconceptions, and experimental procedures for eliciting valuations. Reply Am. Econ. Rev. 101:1012–28 [Google Scholar]
  74. Pope DG, Schweitzer ME. 2011. Is Tiger Woods loss averse? Persistent bias in the face of experience, competition, and high stakes. Am. Econ. Rev. 101:129–57 [Google Scholar]
  75. Reb J, Connolly T. 2007. Possession, feelings of ownership and the endowment effect. Judgm. Decis. Mak. 2:107–14 [Google Scholar]
  76. Rick S. 2011. Losses, gains, and brains: Neuroeconomics can help to answer open questions about loss aversion. J. Consum. Psychol. 21:453–63 [Google Scholar]
  77. Samuelson W, Zeckhauser R. 1988. Status quo bias in decision making. J. Risk Uncertain. 1:7–59 [Google Scholar]
  78. Smith A. 2012. Lagged beliefs and reference-dependent utility. Work. Pap., Calif. Inst. Technol., Pasadena
  79. Sprenger C. 2011. An endowment effect for risk: experimental tests of stochastic reference points. Work. Pap., Stanford Univ., Stanford, CA
  80. Strahilevitz MA, Loewenstein G. 1998. The effect of ownership history on the valuation of objects. J. Consum. Res. 25:276–89 [Google Scholar]
  81. Thaler RH. 1980. Toward a positive theory of consumer choice. J. Econ. Behav. Organ. 1:39–60 [Google Scholar]
  82. Thaler RH, Sunstein CR. 2008. Nudge: Improving Decisions About Health, Wealth, and Happiness New York: Penguin
  83. Tom SM, Fox CR, Trepel C, Poldrack RA. 2007. The neural basis of loss aversion in decision-making under risk. Science 315:515–18 [Google Scholar]
  84. Tversky A, Kahneman D. 1991. Loss aversion in riskless choice: a reference-dependent model. Q. J. Econ. 106:1039–61 [Google Scholar]
  85. Weaver R, Frederick S. 2012. A reference price theory of the endowment effect. J. Mark. Res. 49:696–707 [Google Scholar]
  86. Weber B, Aholt A, Neuhaus C, Trautner P, Elger CE, Teichert T. 2007. Neural evidence for reference-dependence in real-market transactions. Neuroimage 35:441–47 [Google Scholar]
  87. Wenner LM. 2013. Expected prices as reference points—theory and experiments. Work. Pap., Univ. Coll. London
/content/journals/10.1146/annurev-economics-080213-041320
Loading
/content/journals/10.1146/annurev-economics-080213-041320
Loading

Data & Media loading...

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error