1. Individual Decision Making Flashcards
What is an experiment?
An environment created and/or manipulated by an experimenter for the purpose of observing some variable (Y) of interest whilst controlling possible influences on Y
What was Knetch’s hypothesis?
That people tend to place more value on things they currently own
Describe the original experiment used to test for the endowment effect and its results
-select whether to take home a chocolate bar or a mug
-1st TG are given mug and offered a swap for chocolate
-2nd TG given chocolate and offered a swap for mug
-1st TG 89% kept mug
-2nd TG 90% kept chocolate
What is CVM?
The contingent valuation methodology. It is used to value non-marketed goods such as public goods
What are the 3 explanations of the WTA/WTP gap?
- Standard preference theory
- Measurement error theory
- Loss aversion theory
What does Hanemann say the WTA/WTP under standard preference theory is evidence of?
He says under standard preference theory the gap isn’t evidence of the endowment effect but is a wealth effect caused by evaluating WTA from a higher indifference curve than WTP
How does the measurement error theory attempt to explain the WTA/WTP gap?
-weaknesses in survey designs
-hypothetical bias, misunderstanding of good, quasi strategic reasoning
-suspicious of WTA values
What is quasi strategic reasoning?
Where people don’t reveal their true WTA value but instead give a larger number in an aim to receive a larger sum
How does loss aversion theory explain the WTA/WTP gap?
-Humans are loss averse so weigh losses more heavily than corresponding games)
-if this view is correct, the most relevant measure depends on which of these valuations you judge most relevant for the case in hand
How did Knetch overcome the test error theory of WTA/WTP gap?
By confronting individuals with more realistic/easily understood choice options that have real and immediate consequences.
Used a lottery format where subjects could choose to give up lottery ticket for £2
