A Shock Therapy Against the 'Endowment Effect'

Abstract

Simple exchange experiments have identified the fact that participants trade their endowment less frequently than standard demand theory predicts. List (2003) finds, however, that the most experienced dealers acting on a well functioning market are not subject to this “endowment eect”. Thus, it seems that a lot of market experience is needed to overcome the “endowment eect”. In order to understand the eect of market experience, we introduce a distinction between two types of uncertainty, choice uncertainty and trade uncertainty, which could both lead to an “endowment eect”. While List’s own explanation is related to choice uncertainty, we conjecture that trade uncertainty is important for the “endowment eect”. To test this conjecture, we design a simple experiment where the two treatments impact dierently on trade uncertainty, while controlling for choice uncertainty. Supporting our conjecture, we find that “forcing” subjects to give away their endowment in a series of exchanges, eliminates the “endowment eect” in a subsequent test. We discuss why markets might not succeed in providing sucient incentives for learning to overcome the “endowment eect”.