Sunk Decision Points: A Unified Theory of the Endowment Effect and Present Bias

35 Pages Posted: 16 Feb 2016

See all articles by Peter Landry

Peter Landry

University of Toronto - Rotman School of Management

Date Written: January 16, 2016

Abstract

This paper presents a simple, utility-based model in which situational cues compel an agent to consider the associated consumption decision. The premise gives rise to a unified account of the endowment effect and present bias that, unlike prevailing theories based on inconsistent preferences, captures both anomalies at once. The theory also fits with evidence that the endowment effect and present bias are often activated by cues (such as exposure to the good), the magnitude effect in discounting, as well as key properties of prospective memory — e.g. the effect of mere reminders and value in forgetting in that successful recall carries an opportunity cost. Stemming from the hypothesis that the anomalies are linked, the model offers testable new predictions, including a form of crowding out between the endowment effect and present bias. In addition, a method to counteract both anomalies is proposed, the viability of which fits with related evidence.

Keywords: cues, endowment effect, present bias

JEL Classification: D11

Suggested Citation

Landry, Peter, Sunk Decision Points: A Unified Theory of the Endowment Effect and Present Bias (January 16, 2016). Rotman School of Management Working Paper No. 2732626, Available at SSRN: https://ssrn.com/abstract=2732626 or http://dx.doi.org/10.2139/ssrn.2732626

Peter Landry (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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