Chapter 100 The Endowment Effect: Evidence of Losses Valued More than Gains

Abstract

Publisher Summary The early empirical evidence of a wide disparity between people's valuations of gains and losses appeared in results of contingent valuation studies in which respondents were asked both how much they would be willing to pay to prevent a loss of an environmental or other amenity, and what sum they would demand to accept its loss. The results of experiments testing people's valuations of gains and losses have been consistent in showing that individuals value losses far more than otherwise fully commensurate gains. This leads to smaller gains from trade and fewer voluntary market transactions than would be the case with valuation equivalence. The valuation disparity also suggests greater caution in assessing welfare losses, predicting market outcomes, and may well imply different policy designs.