A Process Account of the Endowment Effect: Voluntary Debiasing Through Agents and Markets
New York University School of Law
Stephan W. Tontrup
Max Planck Institute for Research on Collective Goods
May 10, 2013
NYU School of Law, Public Law Research Paper No. 13-26
NYU Law and Economics Research Paper No. 13-16
We contest the loss aversion theory of the endowment effect, in which the effect depends on the status of endowment alone. Instead, we propose that the nature of the trading process determines whether people resist or accept an exchange by affecting the responsibility people feel for their choice. The more they feel responsible for the decision, the more they expect experiencing regret over a negative outcome. Aversion to regret causes people to resist a rational trade and exhibit the endowment effect. In a series of experiments, we analyze two institutions that alter the trading process and reduce perceived responsibility - agency and markets. We find that both mute the endowment effect; moreover, participants intentionally use them to self-debias. Since many institutions shift responsibility, we conclude that the endowment effect is not present in many domains previously thought to implicate it. Institutional design often need not rely on paternalistic intervention.
Number of Pages in PDF File: 53working papers series
Date posted: May 11, 2013
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