How Much Relevance Does Reality Imply? (Re)Considering the Endowment Effect
The endowment effect principle, that people’s preferences are relative to an anchor, is consistent with standard economics. But in and of itself, it does not explain differences between “willingness to pay” and “willingness to accept”.
- Unlike claims that consumers make biased choices that do not reflect their underlying welfare, the endowment effect is consistent with neoclassical economics, which lacks theories of preference origin or form.
- Examples where endowment effects may matter—in advertising or Buddhism, for example—suggest they are not easily malleable.
- “Loss aversion” interpretations, as they concern decisions under uncertainty, do not help explain differences between willingness to pay and willingness to accept.
- A fruitful interpretation of the endowment effect may be normative: Willingness to accept could be relevant to policy evaluations where consumers should have something they currently do not.
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