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How Large is the Endowment Effect in the Risky Investment Game?

Author

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  • Holden, Stein T.

    (Centre for Land Tenure Studies, Norwegian University of Life Sciences)

  • Tilahun, Mesfin

    (Centre for Land Tenure Studies, Norwegian University of Life Sciences)

Abstract

The risky investment game of Gneezy and Potters (1997) has been a popular tool used to estimate risk tolerance and myopic loss aversion. Holden and Tilahun (2021) tested and found that the simple one-shot version of this game that is attractive as a simple tool to elicit risk tolerance among respondents with limited education, produce significant endowment effects in two variants of the game where alternatively safe and risky initial monetary endowments are allocated. In this paper, we use an alternative treatment that does not induce endowment effects. This allows us to establish a benchmark to assess the relative size of the endowment effects when initial safe and risky endowments are provided (contribution 1). While Prospect Theory could predict endowment effects in the game, it fails to explain the dominance of interior choices (partial investment). We propose an alternative endowment effect theory that gives predictions that are more consistent with the observed partial investment behavior (contribution 2).

Suggested Citation

  • Holden, Stein T. & Tilahun, Mesfin, 2021. "How Large is the Endowment Effect in the Risky Investment Game?," CLTS Working Papers 4/21, Norwegian University of Life Sciences, Centre for Land Tenure Studies.
    • Handle: RePEc:hhs:nlsclt:2021_004
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    References listed on IDEAS

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    Cited by:

    1. Holden, Stein T. & Tilahun, Mesfin, 2022. "Can the risky investment game predict real world investments?," CLTS Working Papers 5/22, Norwegian University of Life Sciences, Centre for Land Tenure Studies.
    2. Holden, Stein T. & Tilahun, Mesfin, 2021. "Shocks and Stability of Risk Preferences," CLTS Working Papers 5/21, Norwegian University of Life Sciences, Centre for Land Tenure Studies.
    3. Holden, Stein T. & Tilahun, Mesfin, 2021. "How Large is the Endowment Effect in the Risky Investment Game?," CLTS Working Papers 4/21, Norwegian University of Life Sciences, Centre for Land Tenure Studies.
    4. Holden, Stein T. & Tilahun, Mesfin & Sommervoll, Dag Einar, 2022. "Is diminishing impatience in time-dated risky prospects explained by probability weighting?," CLTS Working Papers 3/22, Norwegian University of Life Sciences, Centre for Land Tenure Studies.
    5. Suresh G., 2024. "Impact of Financial Literacy and Behavioural Biases on Investment Decision-making," FIIB Business Review, , vol. 13(1), pages 72-86, January.
    6. Holden, Stein T. & Tilahun, Mesfin, 2022. "Are risk preferences explaining gender differences in investment behavior?," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 101(C).
    7. Ferdinand M. Vieider & Erik Wengström, 2022. "Introduction to the special issue on “Poverty and Economic Decision-Making”," Theory and Decision, Springer, vol. 92(1), pages 1-4, February.

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    More about this item

    Keywords

    Risky investment game; Endowment effects; Loss aversion; Utility curvature; Field experiment; Ethiopia;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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