The Endowment Effect: Loss Aversion or a Buy-Sell Discrepancy?
Posted: 3 Jun 2020 Last revised: 16 Jan 2021
Date Written: September 15, 2020
Abstract
In a typical endowment effect experiment, individuals state a higher willingness-to-accept to sell an object than a willingness-to-pay to obtain the object. The leading explanation for the endowment effect is loss aversion for the object. An alternative explanation is based on a buy-sell discrepancy, according to which people price the object in a strategic way. Disentangling these two explanations is the goal of this research. To this end, we introduce a third condition, in which participants receive an object and are asked how much they are willing to pay to keep it (Pay-to-Keep). Comparing the three conditions we find no evidence for loss aversion in the endowment effect setting. We found support for the buy-sell strategy mechanism. Our results have important implications for the understanding of buyer and seller behaviors, subjective value, and elicitation methods.
Keywords: endowment effect, loss aversion, buyers versus sellers, utility theory, preference elicitation
Suggested Citation: Suggested Citation
Gal Smitizsky (Contact Author)
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States