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The "Endowment Effect":

Larry Ribstein is away from Ideoblog for a few weeks and he has a bunch of guest bloggers. Lots of great stuff over there (so far, no movie reviews).

Josh Wright has a post up on the "The Endowment Effect's Disappearing Act" which discusses in some detail the superb paper by Charlie Plott and Kathy Zeiler on the so-called endowment effect. (I noted the working paper here about a year ago, but Josh's discussion is more extensive). In short, they conclude that findings of a supposed "endowment effect" results from experimental design rather than actually demonstrating what is being tested for. The effect seems to disappear once controls are imposed on the experiments, suggesting that there is something else at work here.

Josh also notes a few concerns about advocating policy recommendations on the basis of the endowment effect.

Production of papers grounded in the "endowment effect" has become quite a cottage industry in recent years. A quick Westlaw search this morning in the JLR database comes up with 541 references to the "endowment effect." Many of these papers even discuss the "endowment effect" as supposedly modeling behavior by firms, as opposed to individuals. (As Alchian would observe, even if the endowment effect existed, firms would likely emerge as a response to it rather than an application of it and there would likely be minimal consequences for allocational efficiency). And accepting the endowment effect can generate a host of interesting policy recommendations and normative conclusions. Like Josh, I am curious to see what effect, if any, the Plott and Zeiler paper has on the production and publication of law review articles based on the endowment effect.

LTEC (mail) (www):
I agree with commenter Paul Gowder from the post you linked to.

I think that the Endowment Effect is real in the real world, but it can be trained out of people in a specific setting.

Because the effect is essentially irrational, it is to be expected that it will be present to different degrees in different situations, but this is not a legitimate criticism of the literature. (A better criticism is that it is obvious this effect exists, and it is obvious that the quantity of the effect will vary widely depending on the exact setting, so why bother with all these experiments?)
12.5.2005 3:00pm
frankcross (mail):
Well, the question is whether it is real in the real world. This was an unconventional setting, so it was trained out of people. However, in many real world settings, you have the features of the training operating (e.g., experience), so in those cases it would not be real in the real world. And I suspect those cases are the most commonplace.

I think the article is mostly important as a caution not to apply the findings of behavioral economics to the real world, where circumstances would naturally provide a sort of training.
12.5.2005 3:47pm
David Gal (mail):
The endowment effect is both real AND rational, AND has nothing to do with loss aversion. If anyone's interested, I have a paper on it at SSRN:

http://ssrn.com/abstract=831104
12.5.2005 5:01pm
Tyrone Slothrop (mail) (www):
Like Josh, I am curious to see what effect, if any, the Plott and Zeiler paper has on the production and publication of law review articles based on the endowment effect.


Why just law review articles? Do only lawyers care about endowment effect?
12.5.2005 5:50pm