Predicting Variation in Endowment Effect Magnitudes

Abstract

Hundreds of studies demonstrate human cognitive biases that are both inconsistent with “rational” decisionmaking and puzzlingly patterned. One such bias, the “endowment effect” (also known as “reluctance to trade”), occurs when people instantly value an item they have just acquired at a much higher price than the maximum they would have paid to acquire it. This bias impedes a vast range of real-world transactions, making it important to understand. Prior studies have documented items that do or do not generate endowment effects, and have noted that the effects vary in magnitude. But none has predicted any of the substantial between-item variation in those magnitudes across a large and novel set of items. Working from evolutionary theory, we derived six factors that predicted 52% of the between-item variation in magnitudes for a novel set of 24 items. These results deepen understanding of both the causes of and patterns in endowment effects. More broadly, they suggest that many other cognitive biases may be similarly approached, and potentially linked by a common theoretical framework.

Keywords: behavioral economics, behavioral law and economics, cognitive heuristics, biases, endowment effect, uncertainty, risky decision-making, willingness to pay, framing effect, reference dependence, prospect theory, loss aversion, neuroscience, evolution, cognitive neuroscience, psychology

JEL Classification: K00, D80, D81, K11, B25, D12, D90