Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?
Charles R. Plott
California Institute of Technology - Division of the Humanities and Social Sciences
Boston University - School of Law
American Economic Review, Vol. 97, p. 1449, September 2007
New York University, Law and Economics Research Paper No. 06-47
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.
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Date posted: October 28, 2006 ; Last revised: April 6, 2008