The Willingness to Pay—Willingness to Accept Gap, the “Endowment Effect,” Subject Misconceptions, and Experimental Procedures for Eliciting Valuations: Comment

Isoni, Andrea; Loomes, Graham; Sugden, Robert

doi:10.1257/aer.101.2.991

Cited by 203 publications

(73 citation statements)

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“…The arguably most prominent account of this type is loss aversion (Kahneman et al, 1990), which posits that buyers and sellers differ in their sensitivity to the magnitude of an object's potential consequences (see below for details). Further, there is evidence in valuations of risky options that buyers and sellers differ in probability weighting (e.g., Brenner, Griffin, & Koehler, 2012), and some authors have highlighted the role of strategic misrepresentation (e.g., Heifetz & Segev, 2004;Isoni, Loomes, & Sugden, 2011;Plott & Zeiler, 2005, 2007. Finally, Yechiam and Hochman (2013a) have recently proposed a loss-attention account, according to which buyers and sellers may differ in the amount of attention they invest in a task.…”

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confidence: 99%

“…Although the seminal investigations on the endowment effect (e.g., Kahneman et al, 1990;Thaler, 1980) involved the valuation of consumer items such as mugs and pens, many subsequent studies have turned to monetary lotteries and found a robust endowment effect there as well (e.g., Birnbaum, Coffey, Mellers, & Weiss, 1992; Birnbaum & Zimmerman, 1998;Brenner et al, 2012;Casey, 1995;Isoni et al, 2011;Kachelmeier & Shehata, 1992;Peters, Slovic, & Gregory, 2003; for a meta-analysis, see Yechiam, Ashby, & Pachur, in press). In contrast to consumer items, an advantage of lotteries is that their attributes can be quantified precisely (which is important for the modeling) and that they also allow to test for buyer-seller differences in risk attitude.…”

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Unpacking buyer-seller differences in valuation from experience: A cognitive modeling approach

Pachur

Scheibehenne

2017

Psychon Bull Rev

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People often indicate a higher price for an object when they own it (i.e., as sellers) than when they do not (i.e., as buyers)-a phenomenon known as the endowment effect. We develop a cognitive modeling approach to formalize, disentangle, and compare alternative psychological accounts (e.g., loss aversion, loss attention, strategic misrepresentation) of such buyer-seller differences in pricing decisions of monetary lotteries. To also be able to test possible buyer-seller differences in memory and learning, we study pricing decisions from experience, obtained with the sampling paradigm, where people learn about a lottery's payoff distribution from sequential sampling. We first formalize different accounts as models within three computational frameworks (reinforcement learning, instance-based learning theory, and cumulative prospect theory), and then fit the models to empirical selling and buying prices. In Study 1 (a reanalysis of published data with hypothetical decisions), models assuming buyer-seller differences in response bias (implementing a strategicmisrepresentation account) performed best; models assuming buyer-seller differences in choice sensitivity or memory (implementing a loss-attention account) generally fared worst. In a new experiment involving incentivized decisions (Study 2), models assuming buyer-seller differences in both outcome sensitivity (as proposed by a loss-aversion account) and response bias performed best. In both Study 1 and 2, the models implemented in cumulative prospect theory performed best. Model recovery studies validated our cognitive modeling approach, showing that the models can be distinguished rather well. In summary, our analysis supports a loss-aversion account of the endowment effect, but also reveals a substantial contribution of simple response bias. Keywords Computational modeling . Endowment effect . Risky decision making . Decision from experience . Loss aversionThe minimum price at which people are willing to accept to sell an object they own is often higher than the maximum price they are willing to pay for the same object when they do not own it. This systematic difference between buying and selling prices-which can also occur within the same person when taking different perspectives-is known as the endowment effect (Kahneman, Knetsch, & Thaler, 1990, 1991Thaler, 1980; see also Birnbaum & Stegner, 1979). The endowment effect has attracted considerable attention because it contradicts a central tenet of economic theory: According to the Coase theorem, the value of an object should be independent of its initial ownership (Kahneman et al., 1990).There have been several proposals as to which cognitive mechanisms give rise to the endowment effect, or how buyers' and sellers' cognitive mechanisms might differ generally.1 For instance, there may be asymmetries between buyers and sellers in terms of the order in which they search for positive 1 Note that this issue is orthogonal to the question of which aspects of being endowed-such as ownership, expectations...

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Unpacking buyer-seller differences in valuation from experience: A cognitive modeling approach

Pachur

Scheibehenne

2017

Psychon Bull Rev

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“…Such reversals may indicate that preferences are context dependent in a way that makes the elicited certainty equivalents induce a ranking which differs from preferences (Tversky et al 1988). This is still an area of active research (Loomes et al, 2010;Plott and Zeiler, 2005;Isoni et al, 2011).…”

Section: Experimental Tests 351 Preference Reversal Under Riskmentioning

confidence: 99%

Rationality and Dynamic Consistency Under Risk and Uncertainty

Hammond

Zank

2014

Handbook of the Economics of Risk and Uncertainty

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For choice with deterministic consequences, the standard rationality hypothesis is ordinality -i.e., maximization of a weak preference ordering. For choice under risk (resp. uncertainty), preferences are assumed to be represented by the objectively (resp. subjectively) expected value of a von NeumannMorgenstern utility function. For choice under risk, this implies a key independence axiom; under uncertainty, it implies some version of Savage's sure thing principle. This chapter investigates the extent to which ordinality, independence, and the sure thing principle can be derived from more fundamental axioms concerning behaviour in decision trees. Following Cubitt (1996), these principles include dynamic consistency, separability, and reduction of sequential choice, which can be derived in turn from one consequentialist hypothesis applied to continuation subtrees as well as entire decision trees. Examples of behavior violating these principles are also reviewed, as are possible explanations of why such violations are often observed in experiments.

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“…In their carefully designed experiment, they try to ensure that participants fully understand the task they face and observe no significant WTP-WTA gap in a classic mug-trading experiment. However, Isoni et al (2011) show that for a specific kind of goods, i.e. lotteries, the asymmetry in evaluations is resilient to strict experimental procedures aimed at minimizing misconceptions.…”

Section: Introductionmentioning

confidence: 99%

Buying and Selling Risk: An Experiment Investigating Evaluation Asymmetries

Güth

Ploner

Soraperra

2016

RBE

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Experimental studies of the WTP-WTA gap avoid social trading by implementing an incentive compatible mechanism for each individual trader. We compare a traditional random price mechanism and a novel elicitation mechanism preserving social trading, without sacrificing mutual incentive compatibility. Furthermore, we focus on risky goods -binary monetary lotteries -for which asymmetries in evaluations are more robust with respect to experimental procedures. For both elicitation mechanisms, the usual asymmetry in evaluation by sellers and buyers is observed. An econometric estimation sheds new light on its causes: potential buyers are over-pessimistic and systematically underweight the probability of a good outcome. Terms of use: Documents in EconStor mayJEL-Code: D810.

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The Willingness to Pay—Willingness to Accept Gap, the “Endowment Effect,” Subject Misconceptions, and Experimental Procedures for Eliciting Valuations: Comment

Cited by 203 publications

References 28 publications

Unpacking buyer-seller differences in valuation from experience: A cognitive modeling approach

Unpacking buyer-seller differences in valuation from experience: A cognitive modeling approach

Rationality and Dynamic Consistency Under Risk and Uncertainty

Buying and Selling Risk: An Experiment Investigating Evaluation Asymmetries

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