18 Pages Posted: 28 Oct 2006 Last revised: 6 Apr 2008
Systematic asymmetries in exchange behavior have been widely interpreted as support for endowment effect theory, an application of prospect theory positing that loss aversion associated with ownership explains observed exchange asymmetries. We offer an alternative explanation. Specifically, we conjecture that observed asymmetries can be explained by procedure-driven theories grounded in classical preference theory. To test this alternative explanation, we alter the procedures to preserve the predictions of endowment effect theory while ruling out procedure-driven explanations grounded in classical preference theory. The data reject endowment effect theory in favor of procedure-driven theories.
Suggested Citation: Suggested Citation
Plott, Charles R. and Zeiler, Kathryn, Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?. American Economic Review, Vol. 97, p. 1449, September 2007; New York University, Law and Economics Research Paper No. 06-47. Available at SSRN: https://ssrn.com/abstract=940633
By Lee Fennell