ENDOWMENT EFFECT

Endowment effect- The most important characteristic the endowment effect is loss aversion which describes the reference point (here-current state of affair) and decreases in object value which influences decision more than increases of object value does. Endowment effect explains how evaluation of an objects can have significant economic consequences.

For my last lecture we read the paper by E. Johnson, A. Keinan and G. Haubl called "Aspects of endowment; A Query Theory of Value Construction". The authors argue that the value which we assign to a given object depends on the ownership; if we are in the posses ion of an object, or in the possession of money, or not endowed with anything. If we are endowed with an object, with assign a higher value to that object than the person who would like to buy it from us. They also suggest that the order in which we retrieve from memory series of queries differs for buyers and sellers and if we changed the order in which the natural queries are produced, we can eliminate the endowment effect completely. They have conducted three experiments which support their arguments.

The concept of experiments was rather simple and similar in each of them. Firstly student were asked to perform a simple task. Participant who did not understand it were eliminated. Those who stayed were randomly divided into two groups; sellers (endowed with a mug) and buyers (not endowed with a mug). Next they were asked to write down all the reasons, one by one, why they would like to either have the mug or the money. After that they were asked to assign a monetary value to the mug. The results showed that the sellers were giving much higher price to the mug then the buyers were willing to pay. Therefore choosers produced more value-decreasing aspects (positive thought about the money and negative thought about the mug) and sellers produced more value-increasing aspects (positive thoughts about the mug and negative thoughts about the money)

In the second experiment the natural order in which participants were producing queries was reversed. People who were endowed with a mug were asked to first produce value-increasing aspects and than value-decreasing aspects, and sellers the other way round. As the authors predicted as soon as the natural order was reversed, the endowment effect disappeared. The third experiment in which no one was endowed with an object also support the authors hypothesis.

Findings have challenged most of the economic theories. Authors have proven that the query theory exists and that sellers use very different aspects of knowledge in their evaluation of a given object that the buyers. Memory retrieval is therefore important in our evaluation of an object.