Expectations as Endowments: Evidence on Reference-Dependent Preferences from Exchange and Valuation Experiments

37 Pages Posted: 14 Nov 2009 Last revised: 8 Jun 2010

See all articles by Keith M. Marzilli Ericson

Keith M. Marzilli Ericson

Boston University - Markets, Public Policy, and Law; National Bureau of Economic Research (NBER)

Andreas Fuster

Swiss National Bank - Financial Stability

Date Written: May 19, 2010

Abstract

Evidence on loss aversion and the endowment effect suggests that people evaluate outcomes with respect to a reference point. Yet little is known about what determines reference points. We conduct two experiments that show that reference points are determined by expectations. In the first experiment, we endow subjects with an item and randomize the probability they will be allowed to trade it for an alternative. Subjects that are less likely to be able to trade are more likely to choose to keep their item, as predicted when reference points are expectation-based, but not when reference points are determined by the status quo or when preferences are reference-independent. In the second experiment, we randomly assign subjects a high or low probability of obtaining an item for free and elicit their willingness-to-accept for it. Being in the high probability treatment increases valuation of the item by 20-30%.

Keywords: reference points, expectations, loss aversion, endowment effect, willingness-to-accept, experimental economics

JEL Classification: C91, D03, D11, D81, D84

Suggested Citation

Ericson, Keith M. Marzilli and Fuster, Andreas, Expectations as Endowments: Evidence on Reference-Dependent Preferences from Exchange and Valuation Experiments (May 19, 2010). Available at SSRN: https://ssrn.com/abstract=1505121 or http://dx.doi.org/10.2139/ssrn.1505121

Keith M. Marzilli Ericson

Boston University - Markets, Public Policy, and Law ( email )

Boston, MA
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andreas Fuster (Contact Author)

Swiss National Bank - Financial Stability ( email )

Boersenstrasse 15
Zurich, CH-8022
Switzerland

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