The Right Coast
January 10, 2005
The Vanishing Endowment Effect
By Mike Rappaport
Unless you are familiar with academic discussions of "the endowment effect," the following abstract from a recent article will not mean much to you, but it is important. For those not interesting in slogging through the abstract, here is the bottom line. There is a a very influential theory, the endowment effect, which holds that people do not behave in a economically rational way. It has been supported, more or less, by numerous experimental studies. But it now appears to be the case that the experiments were not well-conducted. When strong efforts were made to train the participants, they behaved in an economically rational manner.
We conduct experiments to explore the possibility that subject misconceptions, as opposed to a particular theory of preferences referred to as the "endowment effect," account for reported gaps between willingness to pay ("WTP") and willingness to accept ("WTA"). Two facts are evident in the literature. First, there is no consensus regarding the nature or robustness of the WTA-WTP gap. Secondly, while experimenters are very concerned to avoid subject misconceptions, there is no consensus about the fundamental properties of misconceptions or how they might be avoided. Instead, experimenters have revealed different conceptions of the phenomena through different types of experimental procedures and controls. Such controls involve the role of anonymity, elicitation mechanisms, practice and training applied separately or in different combinations.