Ownership, Learning, and Beliefs

45 Pages Posted: 17 Oct 2019 Last revised: 28 Jan 2020

See all articles by Samuel M. Hartzmark

Samuel M. Hartzmark

University of Chicago - Booth School of Business

Samuel Hirshman

University of Chicago - Booth School of Business

Alex Imas

Carnegie Mellon University - Department of Social and Decision Sciences

Date Written: October 6, 2019

Abstract

We examine how owning a good affects learning and beliefs about its quality. We show that people have more extreme reactions to information about a good that they own compared to the same information about a non-owned good: ownership causes more optimistic beliefs after receiving a positive signal and more pessimistic beliefs after receiving a negative signal. This effect on beliefs impacts the valuation gap between the minimum owners are willing to accept to part with the good and the maximum non-owners are willing to pay to attain it, i.e. the endowment effect. We show that the endowment effect increases in response to positive information and disappears with negative information. Comparing learning to normative benchmarks reveals that people overreact to signals about goods that they own, but that learning is close to Bayesian for non-owned goods. In exploring the mechanism, we find that ownership increases attention to recent signals about owned goods, exacerbating over-extrapolation. We demonstrate a similar relationship between ownership and over-extrapolation in survey data about stock market expectations. Our findings have implications for any setting with trade and scope for learning, and provide a microfoundation for models of disagreement that generate volume in asset markets.

Keywords: biased beliefs, endowment effect, ownership, attention, behavioral economics, learning, extrapolation

JEL Classification: D9, D12, C93

Suggested Citation

Hartzmark, Samuel M. and Hirshman, Samuel and Imas, Alex, Ownership, Learning, and Beliefs (October 6, 2019). 10th Miami Behavioral Finance Conference. Available at SSRN: https://ssrn.com/abstract=3465246 or http://dx.doi.org/10.2139/ssrn.3465246

Samuel M. Hartzmark (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Samuel Hirshman

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Alex Imas

Carnegie Mellon University - Department of Social and Decision Sciences ( email )

Pittsburgh, PA 15213-3890
United States

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