Endowment Effects in the Field: Evidence from India's IPO Lotteries

Abstract

We study a unique field experiment in India in which 1.5 million stock investors face lotteries for the random allocation of shares. We find that the winners of these randomly assigned initial public offering (IPO) lottery shares are significantly more likely to hold them than lottery losers 1, 6, and even 24 months after the random allocation. This finding strongly evokes laboratory findings of an “endowment effect” for risky gambles, and persists in samples of highly active investors, suggesting along with additional evidence that this behavior is not driven by inertia alone. The effect decreases as experience in the IPO market increases but remains even for very experienced investors. Leading theories of the endowment effect based on reference-dependent preferences are unable to fully explain these and other findings in the data.

Keywords: endowment effect, exchange asymmetry, reference dependence, loss aversion, salience, inattention, lotteries, causal inference, India

JEL Classification: G11, G14, C93, D12