24 - market experience and endowment effect

Question 1

what is the standard theory

Answer 1

• preferences captured by indifference map
• constraints = captured by feasible set of consumption bundles
• behaviour is the same in any 2 choices with the same feasible set
• when choosing between mug/chocolate you should make same decision - whichever you prefer

Question 2

what is the endowment effect

Answer 2

preferences depend on endowment
feasible set isnt the only aspect that affects choice

• people more attached to things they already own

Question 3

Knetsch 1989

mugs chocolate

Answer 3

• subjects divided into 3 groups
• uni students
• 1 = mug, 2 = chocolate, 3 = choose

Question 4

Knetsch

mugs chocolates

what does standard theory predict

Answer 4

• proportion of subjects who leave with mug should be the same in all groups
• no difference in proportion between treatment groups

Question 5

Knetsch

results

Answer 5

• large difference in proportion of people that take home mug in each group
• should be similar to group 3 = even proportion

Question 6

how does Kahneman build on Knetsch

what is wrong with Knetsch

Answer 6

• if people are indifferent between mug and chocolate they could be more likely to keep what already endowed with
• not because they prefer it because they are endowed with it
• what if money vs good, not good vs good

Question 7

Kahneman and Knetsch
1990

what does it test

Answer 7

endowment effect into repeated markets

Question 8

KKT 1990 design

Answer 8

11 rounds of market exchange
lab
- each round 50% of subjects endowed with the good
- ask people endowed - for what prices they would sell good at that price
- ask others - for what prices they would buy that good
* experimenters match demand and supply
* people trade

• 50% that like the good most = likers, and haters

Question 9

what does standard theory say about KKT 1990

Answer 9

• whether you are a liker/hater shouldnt be affected by endowment = preferences
• after trade - those holding the good should be likers - because haters will trade - endowed likers wont trade
• predicts 50% of goods will be traded each round (by the 50% of haters given the good)

Question 10

what is endowment effect prediction of KKT

Answer 10

• less than 50% of good will be traded each round

Question 11

what are the unit of goods used
KKT

Answer 11

• induced value tokens
• mugs
• pens

Question 12

why do KKT use induced value tokens

what are they testing

Answer 12

hypothesise = no endowement effect for goods that people dont expect to keep/use

endowment effect should be present in mugs/pens rounds

Question 13

KKT
results

Answer 13

induced value tokens
- no evidence of endowment effect

mugs and pens
- lower volume of trade than standard theory predicts - would forgoe cash just because endowed with

• endowment effect persists in repeated market but only for goods people expect to use

Question 14

List 2003

field design

Answer 14

• sports card show - memorabilia market place
• 2 goods
• subject given either good A/B
• ask subjects to fill out a survey - get to know trading experience
• after survey the other good is shown and they can decide to keep/swap
• subject pool is not random - men - does vary by experience

Question 15

what is standard theory prediction of
List
sports card

Answer 15

subjects preferences shouldnt vary according to which they are given first
- assumes that average swap rate should be 50% - people that prefer the other card will swap

Question 16

List
results

evidence that endowment effect reduces with dealership experience

Answer 16

results grouped for dealers and non-dealers, pooled also

• pooled = evidence for endowment effect (mainly driven by non-dealers)
• non-dealers = low swap rates - people that make the fewest deals have the lowest swap rates
• dealers = no statistically significant effect

Question 17

what are some issues with
List 2003
sports card

Answer 17

• dealers dont intend to keep the good - resale and KKT shows that no endowment effect unless you plan on keeping
• reverse causality - do people with weak endowment effect go into dealing?

Question 18

List
2004

same but with mugs and candy bars

Answer 18

• no evidence of endowment effect for dealers
• evidence for non-dealers

weaker endowment effect even for unrelated goods to what they normally trade

Question 19

main takeaways from List

Answer 19

endowment effect can be replicated outside of lab

effect reduced by market participation and dealership
- even for unrelated goods