Trends in Cognitive Sciences
ReviewExplanations of the endowment effect: an integrative review
Section snippets
The endowment effect
People who own a good value it more than people who do not. This endowment effect 1, 2 is usually demonstrated in two experimental paradigms. In the exchange paradigm (Box 1), participants who are randomly endowed with one of two goods are more reluctant to exchange it for the other good than would be expected by chance [3]. In the valuation paradigm (Box 2), the maximum amount of money that buyers are willing to pay to acquire the good (WTP) is lower than the minimum amount of money that
Loss aversion
The endowment effect is traditionally attributed to two features of prospect theory 1, 2. Reference-dependence makes buyers frame goods as gains relative to the status quo, and sellers frame goods as losses relative to the status quo. Buying a good moves one from a reference point of not owning to owning the good, whereas selling moves one from a reference point of owning to not owning the good [20]. Because people are loss averse – the psychological impact of a loss is greater than an
Evolutionary advantage
Evolutionary accounts propose that a predisposition to overvalue goods evolved because it conferred an advantage in bargaining [36]. People who overvalued what they owned acquired more resources through trading, and could therefore support more offspring than could people who accurately valued (or undervalued) what they owned. This predisposition is unintentionally and inappropriately extended to incentive-compatible valuations, cases in which it is in people's best interest to reveal how they
Strategic misrepresentation
A prominent debate in economics concerns whether WTP–WTA gaps simply reflect a misunderstanding of the elicitation procedures in the valuation paradigm 46, 47, 48, 49, 50. If participants believe they are in a negotiation, they may strategically misrepresent their valuation of the good. Considerable evidence suggests that strategic misrepresentation alone does not explain WTP–WTA gaps. Buyers and sellers do not predict an endowment effect, suggesting it is not premeditated 51, 52. WTP–WTA gaps
Reference prices
Buying and selling prices can be compared to reference prices – comparison standards drawn from the external environment or retrieved from memory [54]. One good can have multiple reference prices. Tickets to concerts and sporting events often have different face and resale values [55]. A ‘fair’ price for a bottle of beer is higher if it is sold at an upscale resort than at a run-down grocery store 56, 57, 58.
Reference price theory [58] proposes that when the true value of a good to a person
Biased information processing
More general cognitive process theories suggest that buying, choosing, and selling evoke cognitive frames or queries. In a manner akin to confirmatory hypothesis testing, these frames bias the search for, attention to, and recollection of information, which influences valuation 55, 60, 62, 63, 64. Frames evoked by buying and choosing increase the accessibility of information that suggests keeping or taking the money is preferable to acquiring the good. Frames evoked by selling increase the
Psychological ownership
Loss and gain frames in the valuation and exchange paradigms are usually confounded with ownership status – buyers are never owners and sellers always own the good. This is problematic because ownership alone, is sufficient to increase the perceived value of a good 65, 66. Ownership even increases the perceived value of beliefs and ideas [67]. Mere ownership effects are driven by psychological rather than factual ownership 28, 32. Merely touching a good, touching an image of a good, or
Attribute sampling bias
We suggest that biased information-processing accounts of WTP–WTA gaps in the valuation paradigm 55, 58, 60, 62, 63, 64 can be extended to explain all three major instantiations of the endowment effect: WTP–WTA gaps, reluctance to trade in the exchange paradigm, and mere ownership effects. We propose an integrative attribute sampling bias theory that explains how all three forms of the endowment effect might arise from biases in the accessibility of value-relevant attributes. By attributes, we
Concluding remarks
The findings we review suggest that the endowment effect can no longer solely be attributed to a traditional loss aversion account. Different elicitation methods and psychological ownership lead people to consider different information when valuing a good, and not to weight the same information differently. We propose an integrative process account that specifies how biased information-processing theories of WTP–WTA gaps can be extended to explain reluctance to trade and mere ownership effects.
Acknowledgments
We thank Daniel Gilbert, Alex Imas, Christopher Olivola, Thorsten Pachur, Drazen Prelec, and Liad Weiss for helpful suggestions.
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