A Shock Therapy Against the 'Endowment Effect'

25 Pages Posted: 19 Mar 2009

See all articles by Dirk Engelmann

Dirk Engelmann

University of London - Royal Holloway - Department of Economics

Guillaume Hollard

Ecole Polytechnique, Paris

Date Written: February 13, 2009

Abstract

Simple exchange experiments have identified the fact that participants trade their endowment less frequently than standard demand theory predicts. List (2003) finds, however, that the most experienced dealers acting on a well functioning market are not subject to this "endowment effect". Thus, it seems that a lot of market experience is needed to overcome the "endowment effect". In order to understand the effect of market experience, we introduce a distinction between two types of uncertainty, choice uncertainty and trade uncertainty, which could both lead to an "endowment effect". While List's own explanation is related to choice uncertainty, we conjecture that trade uncertainty is important for the "endowment effect". To test this conjecture, we design a simple experiment where the two treatments impact differently on trade uncertainty, while controlling for choice uncertainty. Supporting our conjecture, we find that "forcing" subjects to give away their endowment in a series of exchanges, eliminates the "endowment effect" in a subsequent test. We discuss why markets might not succeed in providing sufficient incentives for learning to overcome the "endowment effect".

Keywords: endowment effect, robustness, experimental economics

JEL Classification: C91, D12

Suggested Citation

Engelmann, Dirk and Hollard, Guillaume, A Shock Therapy Against the 'Endowment Effect' (February 13, 2009). Univ. of Copenhagen Dept. of Economics Discussion Paper No. 09-04. Available at SSRN: https://ssrn.com/abstract=1362540 or http://dx.doi.org/10.2139/ssrn.1362540

Dirk Engelmann (Contact Author)

University of London - Royal Holloway - Department of Economics ( email )

Egham, TW20 0EX
United Kingdom

Guillaume Hollard

Ecole Polytechnique, Paris ( email )

1 rue Descartes
Paris, 75005
France

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