We conduct experiments to explore the possibility that subject misconceptions, as opposed to a particular theory of preferences referred to as the “endowment effect,” account for reported gaps between willingness to pay (“WTP”) and willingness to accept (“WTA”). The literature reveals two important facts. First, there is no consensus regarding the nature or robustness of WTP-WTA gaps. Second, while experimenters are careful to control for subject misconceptions, there is no consensus about the fundamental properties of misconceptions or how to avoid them. Instead, by implementing different types of experimental controls, experimenters have revealed notions of how misconceptions arise. Experimenters have applied these controls separately or in different combinations. Such controls include ensuring subject anonymity, using incentive-compatible elicitation mechanisms, and providing subjects with practice and training on the elicitation mechanism before employing it to measure valuations. The pattern of results reported in the literature suggests that the widely differing reports of WTP-WTA gaps could be due to an incomplete science regarding subject misconceptions. We implement a “revealed theory” methodology to compensate for the lack of a theory of misconceptions. Theories implicit in experimental procedures found in the literature are at the heart of our experimental design. Thus, our approach to addressing subject misconceptions reflects an attempt to control simultaneously for all dimensions of concern over possible subject misconceptions found in the literature. To this end, our procedures modify the Becker-DeGroot-Marschak mechanism used in previous studies to elicit values. In addition, our procedures supplement commonly used procedures by providing extensive training on the elicitation mechanism before subjects provide WTP and WTA responses. Experiments were conducted using both lotteries and mugs, goods frequently used in endowment effect experiments. Using the modified procedures, we observe no gap between WTA and WTP. Therefore, our results call into question the interpretation of observed gaps as evidence of loss aversion or prospect theory. Further evidence is required before convincing interpretations of observed gaps can be advanced.

Jack L. Knetsch (1989) reported an important discovery. Using a simple experiment, he demonstrated the existence of asymmetries in exchange behavior. More precisely, when he followed a specific set of procedures to endow subjects with mugs and provided each subject an opportunity to exchange the endowed mug for a candy bar, he found that very few subjects gave up the endowed mug. By contrast, when he endowed a different group of subjects with candy bars using the same set of procedures, very few gave up the candy bar in exchange for a mug. While Knetsch, and many of those who followed him, interpreted the asymmetry as evidence of a special shape of preferences related to loss aversion (Knetsch 1989(Knetsch , 1277), our results demonstrate that observed asymmetries should be attributed instead to well-established alternative economic theories that influence choices through the experimental procedures employed.Knetsch's initial intuitions have been expanded in a large and growing literature claiming that observed exchange asymmetries support "endowment effect theory"-an application of prospect theory positing that loss aversion associated with an endowment leads to asymmetries in valuations and exchange behavior. We use the term "endowment effect theory" rather than "endowment effect" to avoid the confusion over terminology that has emerged in the literature. From the beginning (i.e., Richard H. Thaler 1980), the label "endowment effect" has been used commonly to refer to observed symmetries. Using this label to refer to the observed phenomenon is problematic because it suggests a particular Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?By Charles R. Plott and Kathryn Zeiler* theory as an explanation for asymmetries. To say that an observed phenomenon demonstrates an "endowment effect" does not simply denote that an asymmetry was observed; rather, use of the label implies that a very special form of preferences causes the asymmetry. We use "endowment effect theory" to distinguish the theoretical explanation from the observed phenomenon, which we refer to in this narrow context as an "exchange asymmetry." Specifically, endowment effect theory posits that individuals perceive parting with an endowed good as a loss that is greater than a potential gain from acquiring another good of otherwise equal value (Thaler 1980, 44). In turn, this interpretation generates support for a specific theory of choice behavior called prospect theory, of which loss aversion is a major component.

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