Ownership, Learning, and Beliefs
53 Pages Posted: 17 Oct 2019 Last revised: 14 Nov 2020
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. Comparing learning to normative benchmarks reveals that people over-extrapolate from signals about goods that they own, which leads to an overreaction to information; in contrast, learning is close to Bayesian for non-owned goods. We provide direct evidence that this effect is driven by ownership channeling greater attention towards associated information, which leads people to overweight recent signals when forming beliefs. The relationship between ownership and beliefs has testable implications for trade and market expectations. In line with these predictions, we show that the endowment effect doubles in response to positive information and disappears with negative information, and demonstrate a significant relationship between ownership and over-extrapolation in survey data about stock market expectations.
Keywords: biased beliefs, attention, ownership, attention, behavioral economics, learning, extrapolation
JEL Classification: D9, D12, C93
Suggested Citation: Suggested Citation