Endowment Effect Research Articles

"What you see may not be what you get": Reverse contingency and perceived loss aversion in pigeons.

The reverse-contingency task is a task in which one is given a choice between two rewards, but one receives the larger amount only if one chooses the smaller amount. This task is very difficult for chimpanzees unless the choice is between symbolic representations of the amounts. We found that pigeons can learn this task easily, if the reward amounts are associated with distinctive colors and the choice is delayed by 5 s. The reverse-contingency task involves three components: a loss when choosing one alternative, a gain when choosing the other, and the contrast between what was expected and what occurred. In Experiment 2 we separated the loss from the gain and found that experiencing a loss is sufficient for pigeons to learn to avoid that alternative. Finally, we found evidence for perceived loss aversion. When pigeons were offered a small amount of food and they received that amount, they preferred it over an alternative that offered them a larger amount but gave them only the smaller amount (a perceived loss). The results indicate that loss aversion, based on reference dependence, is likely a general phenomenon, and not only found in humans and other primates. We suggest that it can be attributed to contrast, the difference between what is expected and what is obtained, and it is related to the endowment effect and the mere ownership effect found in humans.

Prince: An improved method for measuring incentivized preferences

This paper introduces the Prince incentive system for measuring preferences. Prince combines the tractability of direct matching, allowing for the precise and direct elicitation of indifference values, with the clarity and validity of choice lists. It makes incentive compatibility completely transparent to subjects, avoiding the opaqueness of the Becker-DeGroot-Marschak mechanism. It can be used for adaptive experiments while avoiding any possibility of strategic behavior by subjects. To illustrate Prince’s wide applicability, we investigate preference reversals, the discrepancy between willingness to pay and willingness to accept, and the major components of decision making under uncertainty: utilities, subjective beliefs, and ambiguity attitudes. Prince allows for measuring utility under risk and ambiguity in a tractable and incentive-compatible manner even if expected utility is violated. Our empirical findings support modern behavioral views, e.g., confirming the endowment effect and showing that utility is closer to linear than classically thought. In a comparative study, Prince gives better results than a classical implementation of the random incentive system.

Shadow prices for intangible resources

PurposeFocusing on managerial problems related to the measurement of intangibles, this paper develops and validates a hedonic-pricing methodology for the evaluation of the intangible resources of companies obtaining their shadow prices.Design/methodology/approachThe paper adapts a hedonic-pricing methodology developed primarily for markets in real estate and secondhand cars to define how much intangibles may contribute to companies' market value. A certain calibration of the original tool has been developed to make this methodology appropriate for interpretation and practical use. The main advantage of this approach is that it allows for an evaluation of the shadow prices of intangible resources. These prices can be interpreted as the market value of the intangible resources which are not reflected on the balance sheet.FindingsThe results of this study demonstrate that hedonic pricing with a self-selection correction generates robust estimates. As one can see, the positive contribution of a high endowment of intangibles for all shadow prices is confirmed through estimations using two different techniques. Meanwhile, the negative effect of a low endowment is even more evident for the baseline model. This model shows consistent negative shadow prices for the majority of underinvested intangibles. Brands have the highest shadow prices in the introduced models; human capital, as measured by the qualification of top management and investments in employees, has likewise demonstrated high prices. However, most structural resources seem to be not reflected to a large degree in companies' market value.Practical implicationsThis paper brings new opportunities to obtain the monetary value of intangible resources based on estimated market prices of a corporation's resource portfolio. These prices may be used for several purposes – for example, benchmarking for performance management, capital budgeting or knowledge-management practices. Moreover, by having methodological value, this study opens ways to evaluate any other intangibles which are not explicitly discussed in the empirical test of this particular study.Originality/valueThis study primarily contributes to the methodological advancement of evaluation of corporate intangible resources. It departs from the conventional hedonic-pricing mechanism to identify cogent estimates to intangibles in monetary terms. Importantly, this mechanism implies individual shadow prices for specific intangible resources which makes the contribution of this study unique for the existing literature, both within resource-based and value-based views.

CO2 embodied in trade: trends and fossil fuel drivers

The amount of CO2 embodied in trade has substantially increased over the last decades. We contribute to understanding the reasons for this evolution by studying the trends and some drivers of the carbon intensity of trade over the period 1995–2009 in 41 countries and 35 sectors. Our empirical analysis relies on the World Input-Output Database (WIOD) to compute embodied carbon emissions. Our main findings are the following. First, average emission intensity of traded goods is higher than average emission intensity of final demand. Second, relatively “dirty” countries tend to specialize in emission-intensive sectors. Third, the share of goods produced in emission-intensive countries is rising. Finally, we find that coal abundance (measured as fuel rent and controlling for reverse causality) leads both to a specialization in “dirty” sectors and to an increase in emissions per output when controlling for sector structure, which amounts to a fossil fuel endowment effect. These findings suggest trade liberalization may increase global emissions and therefore highlight the importance of considering trade when designing CO2 reduction strategies.

Investigating preferences between cash and in‐kind transfers among the food subsidy beneficiaries of India

This study examines the beneficiaries' preferences between cash and in‐kind transfer under the ongoing food subsidy program in India and the underlying factors behind that. It is based on a sample survey of 1069 households covering three different states of India namely Odisha, Maharashtra, and Chhattisgarh. The Probit model is employed to find out the preferences of the beneficiaries between cash and in‐kind transfer. The results reveal overwhelming preferences for in‐kind transfer. The latter emanates from possible food inflation and the endowment effect. However, when fungibility gains significance, people may prefer cash. Among contextual factors, lack of preparedness in terms of banking infrastructure as well as improvement in institutional quality and education level make in‐kind preferable. Hence, despite the need for cash transfer gaining ground, the in‐kind transfer may still be considered a better mode of transfer.

Impact of alternative regional trade arrangements on the Ethiopian economy

The Common Market for Eastern and Southern Africa (COMESA) is a Free Trade Area (FTA) regional trade agreement in Africa. Currently, Ethiopia is negotiating to join COMESA FTA. This study assesses the impact of three regional trade arrangements, COMESA FTA, customs unions, and the European Partnership Agreement (EPA) on the economy of Ethiopia. The analysis is based on a static Global Trade Analysis Project (GTAP) model, version 9 database. Unlike previous studies, the customs union scenarios are designed at the detailed Harmonized System (HS) level. COMESA FTA (scenario 1) with standard GTAP model results in a welfare loss for Ethiopia due to negative terms of trade and investment-saving effect, but with unemployment closure (scenario 2); Ethiopia enjoys a welfare gain mainly due to endowment effect. In scenario 3 (COMESA customs union) and scenario 4 (European Partnership Agreement), Ethiopia loses due to negative terms of trade and investment-saving effect. There is a large increase in demand for unskilled labor force in Ethiopia by around US$23 million, US$112 million, and US$43 million for scenario 2, 3, and 4 respectively. Moreover, there is a positive output effect for oilseeds, leather, and basic metals across all scenarios. The world, as a whole, enjoys welfare gains with COMESA FTA (scenario 1 and 2). However, with scenario 3 and 4, there is an overall welfare loss. There is no strong reason for Ethiopia to move to the customs union, and the EPA in the short run. Therefore, a transition period is necessary, but it is recommended for Ethiopia to join COMESA FTA.

An endowment effect for risk levels: Evidence from a Ugandan lab

Risky choices often have a natural starting-point. For example, insurance-type decisions concern reducing risk while investment-type decisions concern increasing it. A recent reference-dependent utility model predicts such references influence behaviour. Stochastic references act as endowments, with riskier references leading to riskier choices. We test this prediction in an identical choice set using a between-subject design in rural Uganda. Subjects are subtly assigned to one of three reference lotteries. On average, those with riskier endowments risk half a standard deviation more coins. We also consider the effect of introducing a new stochastic reference. In a within-subject second round, we test whether a social signal acts as a competing reference. In our experiment, information on peers’ choices is a stronger pull than the initial treatment effect. On average, subjects converge to the social signal by 0.37 for each unit of difference. Previous research focuses on the absence or presence of risk, allowing either the reference or prospect to be non-degenerate. Our results allow both to contain an element of risk, and show that the endowment effect can operate on the level of risk: risky choice is influenced by the riskiness of the reference.

Decomposition of gender differences in cognitive functioning: National Survey of the Japanese elderly

BackgroundIt is well known that females generally live longer than males, but women tend to suffer from more illnesses and limitations than men do, also for dementia. However, limited empirical evidence is available why this ‘male-female health-survival paradox’ is observed. This study aimed to investigate factors which account for gender differences in health, particularly cognitive functioning and decline among older adults.MethodsData were retrieved from the National Survey of the Japanese Elderly, which is a longitudinal survey of a nationwide representative sample of Japanese adults aged 60 or over. Gender differences in cognitive functioning and decline in three-year follow-ups were decomposed using Blinder–Oaxaca decomposition analysis, regarding demographic, socioeconomic, and health-related factors into the ‘explained’ component, by differences in individual attributes listed above, and the ‘unexplained’ component.ResultsEmpirical analyses showed that women’s lower cognitive functioning was partly explained by the endowment effect. Moreover, a shorter duration of formal education and a larger proportion with their longest occupation being domestic worker accounted for steeper cognitive decline and more prevalent mild cognitive impairment in women than in men.ConclusionThis empirical study suggested that gender differences in cognitive functioning and decline account for different individual attributes of social determinants among men and women. Particularly, men seem to be more engaged in activities which accumulate intellectual experiences through education and occupation, as suggested by the cognitive reserve hypothesis.

Assessing efficiency and determinants of tourist attractions based on a two-subprocess perspective: A case of Chengdu, southwestern China

This paper divides the entire operating process of a tourist attraction into the production subprocess and the environmental governance subprocess from a two-subprocess perspective, and evaluates the overall efficiency and the respective subprocess efficiency by establishing a range-adjusted measure (RAM) network data envelopment analysis (DEA) model and further identifies the determinants of efficiency using a panel Tobit regression model. The applicability of the proposed model was examined using 25 tourist attractions in Chengdu during the period 2012–2016 as cases. The first-stage efficiency results show that only a few tourist attractions perform efficiently in two sub-processes and achieve overall efficiency during the observed period. In particular, most tourist attractions outperform environmental governance in the production subprocess. The overall efficiency is highly correlated with production efficiency and environmental governance efficiency. The second-stage regression analysis implies that the scale effect and technology effect have significant positive impacts on efficiency improvement, while the capital effect and resource endowment effect have significant negative impacts. The structure effect has no significant impacts, and environmental regulation has a significant positive impact on environmental governance efficiency and overall efficiency. Overall, the proposed model has better discriminatory power in distinguishing inefficient subprocesses than the traditional ‘black box’ models and provides process-specific guidance for efficiency improvement. This study broadens the perspective of efficiency benchmarking and improves the performance evaluation of tourist attractions, and the empirical results provide some valuable policy implications for destination management in tourist attractions. • Develops an extended range-adjusted measure network data-envelopment analysis model. • Takes a two-subprocess perspective, using the case of tourist attractions in Chengdu. • Production efficiency is generally higher than the environmental governance efficiency. • Production efficiency and environmental governance efficiency are highly relevant to overall efficiency. • Determinants of the three efficiencies are identified by the panel Tobit regression model.

Pigeons are attracted to a perceived gain without an actual gain.

Reference dependence refers to the reduced value of a reward that is less than expected, or the added value of a reward that is greater than expected. There is evidence that when pigeons are offered an alternative that has 1 pellet versus an alternative that has 2 pellets, but one of the two pellets offered will be removed, the pigeons prefer the originally presented 1 pellet (loss aversion). In the present research, we tested for the opposite effect (gain attraction). In Experiments 1 and 2, pigeons could choose between 2 pellets, each one on a distinctive background. If they chose the optimal alternative, they received a second pellet. In Experiment 2, the second pellet obtainedwas the one not initially chosen (a task sometimes referred to as the ephemeral reward task). Pigeons learned to choose optimally in both experiments. In Experiment 3, we tested the pigeons for reference dependence. Pigeons were given an alternative that offered them one pellet or two pellets, if they chose the one-pellet alternative, they received an additional pellet, and if they chose the two-pellet alternative, they received the two pellets. In keeping with the reference dependence hypothesis, the pigeons preferred the 1-pellet alternative that gave them an extra pellet. These effects are related to similar findings with humans, including the endowment effect.

The Endowment Effect and Beliefs About the Market.

The endowment effect occurs when people assign a higher value to an item they own than to the same item when they do not own it, and this effect is often taken to reflect an ownership-induced change in the intrinsic value people assign to the object. However recent evidence shows that valuations made by buyers and sellers are influenced by market prices provided for the individual products, suggesting a role for beliefs about the markets. Here we elicit individuals’ beliefs about whole distributions of market prices, enabling us to quantify whether or not a given transaction constitutes a “good deal” and to demonstrate how an endowment effect may reflect such considerations. In a meta-analysis and three laboratory experiments, we show for the first time that ownership has no effect on beliefs about either: (a) the quality of the item or (b) the appropriate market price for the item. Instead, we show that sellers demand a price for the item that matches their beliefs about the item’s relative quality and the distribution of market prices in the market. Buyers, in contrast, offer less than what they believe the appropriate market price is. Thus, we argue that the endowment effect may largely reflect “adaptively rational” behavior on the part of both buyers and sellers (given their beliefs about relevant markets) rather than any ownership-induced bias or change in intrinsic preferences.

IoT Marketplace: Willingness-To-Pay vs. Willingness-To-Accept

Willingness-To-Pay (WTP) is the most a person is willing to pay for a good or service. Conversely, Willingness-To-Accept (WTA) is the minimum amount a person is willing to accept for giving up a good or service. People often attribute a higher value for privacy in the WTA condition when compared to the WTP condition. In behavioral economics of privacy and security, this discrepancy between WTP and WTA has been explained by the endowment effect and the status-quo bias. In this study, we aim to emulate the effects of WTP and WTA through interface design. Specifically, we employed the principles of status-quo bias to build two versions of the IoT Marketplace. While one design of the marketplace emulated the WTA condition, the other emulated the WTP condition. In both versions of the marketplace, we communicated the aggregate privacy rating associated with the IoT device using the same indicator. We evaluated the effect the two interfaces had on product selection by conducting a study where participants were asked to purchase an IoT device using either a WTA interface or a WTP interface. Our results show that participants using the interface that emulated the WTA condition were more likely to pay a premium to purchase devices with a higher privacy rating when compared to the participants using the interface that emulated the WTP condition. We also append results showing that when asked to select items without making the purchases the same effect was more pronounced.

Endowment Effects in Proposal Rights Contests

Endowment Effects in Proposal Rights Contests

Value Uncertainty Affects Loss Aversion and the Endowment Effect

Value Uncertainty Affects Loss Aversion and the Endowment Effect

Same Environment, Stratified Impacts? Air Pollution, Extreme Temperatures, and Birth Weight in Southeast China

Ambient air pollution and extreme temperatures have been associated in a number of settings with adverse birth outcomes. However, some newborns may be more vulnerable than others due to inequalities in at least two dimensions of their endowments. First, the pathway from ambient conditions to adverse birth outcomes may vary due to inequalities in child endowments related to socioeconomic status such as maternal education. For example, children in utero with less-educated mothers may be more vulnerable than those of more-educated mothers if their mothers have less access to living, work, transportation, and leisure spaces with indoor air filtration and temperature regulation, or if they have less knowledge of or resources for mitigation strategies. Second, babies' unequal underlying innate health endowments may relate to unequal outcomes in the same environmental context. Protective effects of maternal education may be more pronounced for the most physically vulnerable babies. These effects of unequal endowments may be particularly large in environments with greater air pollution. We examine, for the first time to our knowledge, the effects of these two dimensions of endowment inequalities on birth outcomes in a fairly polluted environment. We use unusual data that permits linking 54,828 singleton live birth records from a district in Guangzhou, China, a relatively polluted environment, to ambient air pollution (PM10 and a composite measure) and extreme temperature data, we test whether, overall, maternal education is an modifier in the relationships between ambient air pollution, extreme temperature, and birth weights. Via conditional quantile regressions, we then test for effect heterogeneity according to the underlying innate physical vulnerability of babies--those further to the left in the conditional distribution of birth weight--after conditioning on other confounders. Results show that the protection associated with a college-educated mother with respect to pollution and extreme heat is substantial: up to 0.31 standard deviations of birth weight. Importantly, this protection is amplified under more extreme ambient conditions and for physically innately more vulnerable infants, after conditioning on other confounders.

Natural Resource Endowments and Foreign Direct Investment Flows in Sub-Saharan African Countries

The objective of this paper is to analyze the effects of natural resource endowment on Foreign Direct Investment (FDI) inflows in Sub-Saharan African countries. The data cover the period of 1996-2019 and are extracted from UNCTAD and World Bank databases (WDI, 2019; WGI, 2019). A dynamic model with individual effects is estimated in four partially homogeneous panels using the one-step generalized method of moments. The results obtained show that 1) forest resources have a beneficial but negligible effect on FDI inflows in Sub-Saharan Africa; 2) oil and mining resources have significant and negligible adverse effects on FDI inflows in Central Africa and West Africa, respectively; and 3) oil and mining resources, in contrast, have significant and negligible positive effects on FDI inflows in Southern Africa and East Africa, respectively. Regarding the development of the forestry industry in Sub-Saharan Africa, the strengthening of political stability and control of corruption in Central and West Africa and the strengthening of corruption control in Southern and East Africa are the main economic policy implications.

Behavioural Land Use Policy Studies: Past, Present, and Future

In this article we firstly provide a brief review of the current state of behavioural studies in land use policy, followed by a discussion of behavioural biases that are most relevant to land use policymaking. Next, we summarise the seven papers included in this themed issue of Land Use Policy. The behavioural topics explored by these papers include endowment effect, nudge, trust, social norm, time preference, and loss aversion. Our review of the literature shows that Land Use Policy has been leading the applications of behavioural insights in environmental studies in general and land use policy studies in particular. The papers included in this themed issue push this research frontier by using large survey datasets from the field, and by investigating some under-researched behavioural tools (e.g., nudge). We conclude by suggesting research gaps to be filled by future behavioural land use policy studies.

Impact of forest land tenure security on the circulation of ecological forest land:From the perspective of endowment effect and security perception

Impact of forest land tenure security on the circulation of ecological forest land:From the perspective of endowment effect and security perception

Will Liberalizing the Services Trade between Developing and Developed Countries Solve Employment Problems in a Post-Pandemic Recovery? The Case of ACP-EU Services Trade

The COVID-19 pandemic has exacerbated the asymmetric employment problems in the global services sector. Would a liberalization of the highly protected services trade between the rich and poorer countries help solve such problems? This paper contributes to answering that question by analyzing the impacts on welfare and employment of an hypothetical liberalization of the services trade between the Africa, Caribbean and Pacific Group of States (ACP) and their rich partners in the European Union and the United Kingdom (EU+UK). For both the ACP and EU +UK, their service sectors play important role in their economy, especially in providing jobs. The services sectors employ the majority of unskilled labor and the large majority of skilled labor. For instance, in the EU+UK, 67% of employed unskilled and 82% of employed skilled workers are in the service sectors; the respective figures for ACP countries are 54% and 90%. These figures indicate that any change in trade policies for the services sector will affect not just the services but also other sectors such agriculture and manufacturing in ACP and EU countries. To analyze the impacts of services trade liberalization on welfare an employment, I use a Computable General Equilibrium model that takes into account the labor productivity gaps among trading countries. Results show that although ACP services represents only about 24% of ACP’s total exports to and 28% of ACP’s total import from the EU+UK, halving the bilateral tariffs in services trade will generate for the ACP a welfare gain 3.4 times larger than the gain under elimination of bilateral tariffs on goods. Such liberalization of services trade will generate significant endowment effects equivalent to 410,000 new jobs per year, mostly in the services sector. The employment and welfare gains will also reach other sectors, including agriculture, as services trade costs are reduced. The liberalization of services trade will raise wages, especially for ACP’s skilled labor. All these ACP’s gains will increase further if its labor productivity improves. Despite a slight decline in wages for EU+UK’s skilled labor, the EU+UK will gain about 7.8 billion USD in welfare. Overall, liberalization of the services trade between ACP and EU+UK will help solve their employment problems and should not be delayed.

ENDOWMENT EFFECT DURING COVID-19 IN INDONESIA - BEHAVIORAL STUDY ON UNIVERSITY STUDENT’S PERCEPTION FOR MEDICAL MASK PRICE

Behavioral study about how people make decision becomes very popular nowadays. Many various researches address a problem or an error in people action. One of the errors that would like to be explored in this article is endowment effect. Endowment effect explains that people perceive fairness based on prior knowledge or a “frame” that put into their mind. This would be a problem because it could cause inconsistency in people action. Purpose of this research is to detect the endowment effect on university student when COVID-19 is taking place. The issue that would like to be explored is medical mask price increase during this outbreak. Simple survey on two groups of university students is conducted to detect this endowment effect. If the response from research respondents is the same on both groups then there is no endowment effect. Independent t-test is applied to test research hypothesis and validate the result. The finding is quite surprising; there is inconsistency between descriptive and hypothetical result. Most of respondents agree that the price is actually tradable at Rp 4,000 (it increases from normal price and about 0.27 USD) but they are reluctant to say this action fair. Some discussion and analysis are performed to expand this finding.
 
 Key Words: Behavioral Economics, Bounded Rationality, Endowment Effect, Opportunity Cost, and Self-Control