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Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?

18 Pages Posted: 28 Oct 2006 Last revised: 6 Apr 2008

Charles R. Plott

California Institute of Technology - Division of the Humanities and Social Sciences

Kathryn Zeiler

Boston University - School of Law

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Abstract

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

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

Charles Plott

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
337 Baxter Hall
Pasadena, CA 91125
United States
626-395-4209 (Phone)

Kathryn Zeiler (Contact Author)

Boston University - School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

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