IDEAS home Printed from https://ideas.repec.org/h/eme/rlwezz/s0193-5895(07)23018-0.html
   My bibliography  Save this book chapter

Biased Valuations, Damage Assessments, and Policy Choices: The Choice of Measure Matters

In: Research in Law and Economics

Author

Listed:
  • Jack L. Knetsch

Abstract

As commonly pointed out in most instructional and operational manuals, and the benefit–cost and valuation texts on which they are largely based, there is general agreement among economic analysts that the economic values of gains and losses are correctly assessed by two different measures. The value of a gain is appropriately measured by the maximum sum people are willing to pay for it (the so-called WTP measure) – the amount that would leave them indifferent between paying to obtain the improvement and refusing the exchange. The value of a loss is accurately measured by the minimum compensation people demand to accept it (the so-called willingness-to-accept, or WTA, measure) – the sum that would leave them indifferent between being paid to bear the impairment and remaining whole without it.

Suggested Citation

  • Jack L. Knetsch, 2007. "Biased Valuations, Damage Assessments, and Policy Choices: The Choice of Measure Matters," Research in Law and Economics, in: Research in Law and Economics, pages 345-358, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:rlwezz:s0193-5895(07)23018-0
    DOI: 10.1016/S0193-5895(07)23018-0
    as

    Download full text from publisher

    File URL: https://www.emerald.com/insight/content/doi/10.1016/S0193-5895(07)23018-0/full/html?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://www.emerald.com/insight/content/doi/10.1016/S0193-5895(07)23018-0/full/pdf?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1016/S0193-5895(07)23018-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Richard H. Thaler & Shlomo Benartzi, 2004. "Save More Tomorrow (TM): Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages 164-187, February.
    2. Bromley, Daniel W., 1995. "Property rights and natural resource damage assessments," Ecological Economics, Elsevier, vol. 14(2), pages 129-135, August.
    3. repec:bla:jfinan:v:53:y:1998:i:5:p:1775-1798 is not listed on IDEAS
    4. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
    5. Richard O. Zerbe, 2001. "Economic Efficiency in Law and Economics," Books, Edward Elgar Publishing, number 1992.
    6. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    7. Samuelson, William & Zeckhauser, Richard, 1988. "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
    8. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-1348, December.
    9. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
    10. Anna Alberini & Alan Krupnick, 2000. "Cost-of-Illness and Willingness-to-Pay Estimates of the Benefits of Improved Air Quality: Evidence from Taiwan," Land Economics, University of Wisconsin Press, vol. 76(1), pages 37-53.
    11. Kachelmeier, Steven J & Shehata, Mohamed, 1992. "Examining Risk Preferences under High Monetary Incentives: Experimental Evidence from the People's Republic of China," American Economic Review, American Economic Association, vol. 82(5), pages 1120-1141, December.
    12. Hanemann, W Michael, 1991. "Willingness to Pay and Willingness to Accept: How Much Can They Differ?," American Economic Review, American Economic Association, vol. 81(3), pages 635-647, June.
    13. Horowitz, John K. & McConnell, Kenneth E., 2002. "A Review of WTA/WTP Studies," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 426-447, November.
    14. Charles R. Plott & Kathryn Zeiler, 2005. "The Willingness to Pay–Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations," American Economic Review, American Economic Association, vol. 95(3), pages 530-545, June.
    15. Jack Knetsch & Fang-Fang Tang & Richard Thaler, 2001. "The Endowment Effect and Repeated Market Trials: Is the Vickrey Auction Demand Revealing?," Experimental Economics, Springer;Economic Science Association, vol. 4(3), pages 257-269, December.
    16. 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.
    17. Daniel S. Putler, 1992. "Incorporating Reference Price Effects into a Theory of Consumer Choice," Marketing Science, INFORMS, vol. 11(3), pages 287-309.
    18. George F. Loewenstein, 1988. "Frames of Mind in Intertemporal Choice," Management Science, INFORMS, vol. 34(2), pages 200-214, February.
    19. Brown, Thomas C. & Gregory, Robin, 1999. "Why the WTA-WTP disparity matters," Ecological Economics, Elsevier, vol. 28(3), pages 323-335, March.
    20. Jack L. Knetsch, 2005. "The Appropriate Choice Of Valuation Measure In Usual Cases Of Losses Valued More Than Gains," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 50(spec0), pages 393-406.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stathopoulos, Amanda & Hess, Stephane, 2012. "Revisiting reference point formation, gains–losses asymmetry and non-linear sensitivities with an emphasis on attribute specific treatment," Transportation Research Part A: Policy and Practice, Elsevier, vol. 46(10), pages 1673-1689.
    2. Robert J. Johnston & Kevin J. Boyle & Wiktor (Vic) Adamowicz & Jeff Bennett & Roy Brouwer & Trudy Ann Cameron & W. Michael Hanemann & Nick Hanley & Mandy Ryan & Riccardo Scarpa & Roger Tourangeau & Ch, 2017. "Contemporary Guidance for Stated Preference Studies," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 4(2), pages 319-405.
    3. Gastineau, Pascal & Taugourdeau, Emmanuelle, 2014. "Compensating for environmental damages," Ecological Economics, Elsevier, vol. 97(C), pages 150-161.
    4. Gáfaro, Margarita & Mantilla, Cesar, 2021. "Environmental valuation using bargaining games: an application to water," OSF Preprints tcfyb, Center for Open Science.
    5. Pascal Gastineau & Emmanuelle Taugourdeau, 2012. "Which compensation for whom?," Documents de travail du Centre d'Economie de la Sorbonne 12080, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    6. Lloyd-Smith, Patrick & Adamowicz, Wiktor, 2018. "Can stated measures of willingness-to-accept be valid? Evidence from laboratory experiments," Journal of Environmental Economics and Management, Elsevier, vol. 91(C), pages 133-149.
    7. John Rolfe & Jill Windle, 2015. "Do Respondents Adjust Their Expected Utility in the Presence of an Outcome Certainty Attribute in a Choice Experiment?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 60(1), pages 125-142, January.
    8. Yildiz, Özgür, 2014. "Lehren aus der Verhaltensökonomik für die Gestaltung umweltpolitischer Maßnahmen [Lessons from behavioral economics for the design of environmental policy measures]," MPRA Paper 59360, University Library of Munich, Germany.
    9. Amanda Stathopoulos & Stephane Hess, 2011. "Referencing, Gains-Losses Asymmetry And Non-Linear Sensitivities In Commuter Decisions: One Size Does Not Fit All!," Working Papers 0511, CREI Università degli Studi Roma Tre, revised 2011.
    10. Tilahun Dires & Derjew Fentie & Yeneneh Hunie & Worku Nega & Mulugeta Tenaw & Sayeh Kassaw Agegnehu & Reinfried Mansberger, 2021. "Assessing the Impacts of Expropriation and Compensation on Livelihood of Farmers: The Case of Peri-Urban Debre Markos, Ethiopia," Land, MDPI, vol. 10(6), pages 1-16, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jack L. Knetsch, 2013. "Values of gains and losses: reference states and choice of measure," Chapters, in: John A. List & Michael K. Price (ed.), Handbook on Experimental Economics and the Environment, chapter 5, pages 157-170, Edward Elgar Publishing.
    2. Knetsch, Jack L. & Wong, Wei-Kang, 2009. "The endowment effect and the reference state: Evidence and manipulations," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 407-413, August.
    3. Andrea Isoni, 2011. "The willingness-to-accept/willingness-to-pay disparity in repeated markets: loss aversion or ‘bad-deal’ aversion?," Theory and Decision, Springer, vol. 71(3), pages 409-430, September.
    4. Eduard Marinov, 2017. "The 2017 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 117-159.
    5. Committee, Nobel Prize, 2017. "Richard H. Thaler: Integrating Economics with Psychology," Nobel Prize in Economics documents 2017-1, Nobel Prize Committee.
    6. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-372, June.
    7. Simon Gächter & Eric J. Johnson & Andreas Herrmann, 2022. "Individual-level loss aversion in riskless and risky choices," Theory and Decision, Springer, vol. 92(3), pages 599-624, April.
    8. Knetsch, Jack L. & Riyanto, Yohanes E. & Zong, Jichuan, 2012. "Gain and Loss Domains and the Choice of Welfare Measure of Positive and Negative Changes," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 3(4), pages 1-18, December.
    9. Gächter, Simon & Johnson, Eric J. & Herrmann, Andreas, 2007. "Individual-Level Loss Aversion in Riskless and Risky Choices," IZA Discussion Papers 2961, Institute of Labor Economics (IZA).
    10. 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.
    11. Bodo Sturm & Joachim Weimann, 2006. "Experiments in Environmental Economics and Some Close Relatives," Journal of Economic Surveys, Wiley Blackwell, vol. 20(3), pages 419-457, July.
    12. Peter D. Lunn, 2013. "Telecommunications Consumers: A Behavioral Economic Analysis," Journal of Consumer Affairs, Wiley Blackwell, vol. 47(1), pages 167-189, April.
    13. Jae-Do Song & Young-Hwan Ahn, 2019. "Cognitive Bias in Emissions Trading," Sustainability, MDPI, vol. 11(5), pages 1-13, March.
    14. Daniel Villanova, 2019. "The extended self, product valuation, and the endowment effect," AMS Review, Springer;Academy of Marketing Science, vol. 9(3), pages 357-371, December.
    15. Dohmen, Thomas, 2014. "Behavioral labor economics: Advances and future directions," Labour Economics, Elsevier, vol. 30(C), pages 71-85.
    16. Christina McGranaghan & Steven G. Otto, 2022. "Choice uncertainty and the endowment effect," Journal of Risk and Uncertainty, Springer, vol. 65(1), pages 83-104, August.
    17. Teck H. Ho & Noah Lim & Colin Camerer, 2005. "Modeling the Psychology of Consumer and Firm Behavior with Behavioral Economics," Levine's Bibliography 784828000000000476, UCLA Department of Economics.
    18. Liu, Runqiu & Jiang, Jian & Yu, Chao & Rodenbiker, Jesse & Jiang, Yongmu, 2021. "The endowment effect accompanying villagers' withdrawal from rural homesteads: Field evidence from Chengdu, China," Land Use Policy, Elsevier, vol. 101(C).
    19. Sayman, Serdar & Onculer, Ayse, 2005. "Effects of study design characteristics on the WTA-WTP disparity: A meta analytical framework," Journal of Economic Psychology, Elsevier, vol. 26(2), pages 289-312, April.
    20. Lindsay, Luke, 2019. "Adaptive loss aversion and market experience," Journal of Economic Behavior & Organization, Elsevier, vol. 168(C), pages 43-61.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:rlwezz:s0193-5895(07)23018-0. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emerald Support (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.