The Endowment Effect

Posted: 8 Aug 2014

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

Multiple version iconThere are 2 versions of this paper

Date Written: August 2014

Abstract

The endowment effect is among the best known findings in behavioral economics and has been used as evidence for theories of reference-dependent preferences and loss aversion. However, a recent literature has questioned the robustness of the effect in the laboratory, as well as its relevance in the field. In this review, we provide a summary of the evidence and describe recent theoretical developments that can potentially reconcile the different findings, with a focus on expectation-based reference points. We also survey recent work from psychology that provides either alternatives to or refinements of the usual loss-aversion explanation. We argue that loss aversion is still the leading paradigm for understanding the endowment effect, but given the rich psychology behind the effect, a version of the theory that encompasses multiple reference points may be required.

Suggested Citation

Ericson, Keith M. Marzilli and Fuster, Andreas, The Endowment Effect (August 2014). Annual Review of Economics, Vol. 6, pp. 555-579, 2014, Available at SSRN: https://ssrn.com/abstract=2477775 or http://dx.doi.org/10.1146/annurev-economics-080213-041320

Keith M. Marzilli Ericson (Contact Author)

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

Swiss National Bank - Financial Stability ( email )

Boersenstrasse 15
Zurich, CH-8022
Switzerland

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