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.

The resulting pattern of research leaves open the possibility that the widely differing reports of a gap between WTP and WTA could be due to an incomplete science regarding subject misconceptions. The lack of a theory of misconceptions is replaced by what we will call a revealed theory methodology in which theories implicit in experimental procedures found in the literature are at the heart of the new experimental design. Thus, the approach reported here reflects an attempt to simultaneously control for all dimensions of concern found in the literature. To this end our procedures modify the Becker-DeGroot-Marschak mechanism used in previous studies to elicit values. In addition, our procedures supplement commonly used procedures by providing extensive training on the elicitation mechanism before subjects provide WTP and WTA responses.

Experiments were conducted using both lotteries and mugs, goods frequently used in endowment effect experiments. Using the modified procedures, we find no support for the hypothesis that WTA is significantly greater than WTP. In addition, we find no support that an observed gap can be convincingly interpreted as an endowment effect and conclude that further evidence is required before convincing interpretations of any observed gap can be advanced.