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The Endowment Effect

Author

Listed:
  • Keith M. Marzilli Ericson

    (School of Management, Boston University, Boston, Massachusetts 02115
    National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Andreas Fuster

    (Federal Reserve Bank of New York, New York, NY 10045)

Abstract

The endowment effect is among the best known findings in behavioral economics and has been used as evidence for theories of reference-dependent preferences and loss aversion. However, a recent literature has questioned the robustness of the effect in the laboratory, as well as its relevance in the field. In this review, we provide a summary of the evidence and describe recent theoretical developments that can potentially reconcile the different findings, with a focus on expectation-based reference points. We also survey recent work from psychology that provides either alternatives to or refinements of the usual loss-aversion explanation. We argue that loss aversion is still the leading paradigm for understanding the endowment effect, but given the rich psychology behind the effect, a version of the theory that encompasses multiple reference points may be required.

Suggested Citation

  • Keith M. Marzilli Ericson & Andreas Fuster, 2014. "The Endowment Effect," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 555-579, August.
    • Handle: RePEc:anr:reveco:v:6:y:2014:p:555-579
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-economics-080213-041320
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    References listed on IDEAS

    as
    1. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    2. John A. List, 2011. "Does Market Experience Eliminate Market Anomalies? The Case of Exogenous Market Experience," American Economic Review, American Economic Association, vol. 101(3), pages 313-317, May.
    3. Dirk Engelmann & Guillaume Hollard, 2010. "Reconsidering the Effect of Market Experience on the “Endowment Effect”," Econometrica, Econometric Society, vol. 78(6), pages 2005-2019, November.
    4. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2012. "Salience in Experimental Tests of the Endowment Effect," American Economic Review, American Economic Association, vol. 102(3), pages 47-52, May.
    5. Vincent P. Crawford & Juanjuan Meng, 2011. "New York City Cab Drivers' Labor Supply Revisited: Reference-Dependent Preferences with Rational-Expectations Targets for Hours and Income," American Economic Review, American Economic Association, vol. 101(5), pages 1912-1932, August.
    6. Roland Fryer & Steven Levitt & John List & Sally Sadoff, 2012. "Enhancing the Efficacy of Teacher Incentives through Loss Aversion: A Field Experiment," Framed Field Experiments 00591, The Field Experiments Website.
    7. Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-1268, September.
    8. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1039-1061.
    9. Strahilevitz, Michal A & Loewenstein, George, 1998. "The Effect of Ownership History on the Valuation of Objects," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 25(3), pages 276-289, December.
    10. Andrea Isoni & Graham Loomes & Robert Sugden, 2011. "The Willingness to Pay—Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations: Comment," American Economic Review, American Economic Association, vol. 101(2), pages 991-1011, April.
    11. Keith M. Marzilli Ericson & Andreas Fuster, 2011. "Expectations as Endowments: Evidence on Reference-Dependent Preferences from Exchange and Valuation Experiments," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(4), pages 1879-1907.
    12. John A. List, 2003. "Does Market Experience Eliminate Market Anomalies?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 41-71.
    13. John A. List, 2004. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," Econometrica, Econometric Society, vol. 72(2), pages 615-625, March.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    reference-dependent preferences; loss aversion; WTP-WTA gap; expectations;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D87 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Neuroeconomics

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