Under fairly weak assumptions, the most a standard rational economic agent is willing to pay for an item they don't own (WTP) and the least they're willing to accept in exchange for that item if they already own it (WTA) should be identical. In experiments with humans, psychologists and economists have repeatedly found WTP-WTA gaps suggesting that humans aren't rational in at least this specific way. This has been interpreted as the endowment effect* and evidence for prospect theory. According to prospect theory, people are loss averse. Roughly this means that that, given their current ownership set, people value not losing stuff more highly than gaining stuff. Thus once someone gains ownership of something they suddenly value it much more highly. This "endowment effect"* on one's valuation of an item has been put forth as an explanation for the observed WTP - WTA gaps.

*Wikipedia confusingly defines the endowment effect as the gap itself, i.e. as the phenomena to be explained instead of the explanation. I suspect this is a difference in terminology among economists and psychologists, where psychologists use the wiki definition and economists use the definition I give here. However, calling the WTP-WTA gap an "endowment effect" is a bit misleading because a priori the gap may not have anything to endowments at all.

A paper (pdf) by Charlie Plott and Kathryn Zeiler investigates WTP-WTA gaps and it turns out that they may just be due to subjects not quite understanding the experimental protocols, particularly in the value elicitation process. Here's an important quote from their conclusion, but do read the paper for details: 

The issue explored here is not whether a WTP-WTA gap can be observed. Clearly, the experiments of KKT and others show not only that gaps can be observed, but also that they are replicable. Instead, our interest lies in the interpretation of observed gaps. The primary conclusion derived from the data reported here is that observed WTP-WTA gaps do not reflect a fundamental feature of human preferences. That is, endowment effect theory does not seem to explain observed gaps. In addition, our results suggest that observed gaps should not be interpreted as support for prospect theory.

A review of the literature reveals that WTP-WTA gaps are not reliably observed across experimental designs. Given the nature of reported experimental designs, we posited that differences in experimental procedures might account for the differences across reported results. This conjecture prompted us to develop procedures to test for the robustness of the phenomenon. We conducted comparative experiments using procedures commonly used in studies that report observed gaps (i.e., KKT). We also employed a "revealed theory" methodology to identify procedures reported in the literature that provide clues about experimenter notions regarding subject misconceptions. We then conducted experiments that implemented the union of procedures used by experimentalists to control for subject misconceptions. The comparative experiments demonstrate that WTP-WTA gaps are indeed sensitive to experimental procedures. By implementing different procedures, the phenomenon can be turned on and off. When procedures used in studies that report the gap are employed, the gap is readily observed. When a full set of controls is implemented, the gap is not observed.

The fact that the gap can be turned on and off demonstrates that interpreting gaps as support for endowment effect theory is problematic. The mere observation of the phenomenon does not support loss aversion-a very special form of preferences in which gains are valued less than losses. That the phenomenon can be turned on and off while holding the good constant supports a strong rejection of the claim that WTP-WTA gaps support a particular theory of preferences posited by prospect theory. Loss aversion might in some sense characterize preferences, but such a theory most likely does not explain observed WTP-WTA gaps. Exactly what accounts for observed WTP-WTA gaps? The thesis of this paper is that observed gaps are symptomatic of subjects' misconceptions about the nature of the experimental task. The differences reported in the literature reflect differences in experimental controls for misconceptions as opposed to differences in the nature of the commodity (e.g., candy, money, mugs, lotteries, etc.) under study.

 

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Buying an item and selling an item are not symetrical situations. Unless you buy and sell the item repeatedly.

For example, I buy a new device, and I spend 10 hours studying how to use it. Later I sell the device. Do I get those 10 hours of my time back? No. So the total outcome of buying the device and selling the device was minus 10 hours worth of my time.

With simpler items, the transaction cost may be smaller, but it always exists. When I buy an item, I must change my life to include the effective use of the item. When I sell an item, I must change my life again to avoid needing the item. Even if you sell me a candy, I must think about whether I want that candy. If you sell me a mug, I have to check whether it does not have defects. If you sell me a lottery ticket, I will calculate the chances and compare with other products in the same category (even if I am irrational enough to buy a lottery ticket, I will still do my flawed calculations, and they will cost me real time).

Also, in my experience, I buy stuff all the time, but I rarely sell anything. If someone asked to buy my toaster, I would decline. I know it works. If I replaced it with the proceeds of the sale, I might get a lemon.

Also, in my experience, I buy stuff all the time, but I rarely sell anything.

I think it's plausible that this is a major component, possibly even the entirety, of the basis of the endowment effect. Selling one's possessions is, in general, an unusual activity which requires a break in routine, possibly stepping outside one's comfort zone, and usually requires more effort than buying something. The differences between WTP and WTA may be due at least to some degree to the different levels of inconvenience between the processes.

If you're bargaining, isn't it a good idea to at least appear to value your possessions higher than the other guy's, so you can get a better deal (because your threat to walk away seems more credible)?

I'm pretty sure that someone has applied this to the endowment effect and published it somewhere, but I don't have a reference handy. However, the value elicitation process controls for this. Under the process they use, it's rational to state your true WTP and WTA (you'll either miss out on a transaction you would have like to take part in or take part in a losing transaction if you misstate these values). This doesn't prevent it from just being a hardwired thing that humans do, but the gaps do disappear under certain circumstances so that claim seems dubious.

[-]tgb11y50

I'm not convinced that the 'endowment effect' would be an inaccurate heuristic. (Is this being claimed? I'm not sure.) If I play a trading card game and get some shiny new card that looks pretty good to me and I guess that it's worth $5 and someone comes a long and see it and offers to buy it from me for my value of $5, I suddenly think that the card might actually be better than I realized and worth more than $5; certainly at least one other person thought it was worth at least $5. Kahneman's prospect model appears to assume perfect knowledge of the probabilities of the outcomes. When I don't truly know the value of objects, isn't it rational to err on the side of not taking up other people's offers?

I'm not convinced that the 'endowment effect' would be an inaccurate heuristic. (Is this being claimed? I'm not sure.)

I don't think it's being claimed that it's a universally bad heuristic (or valuation bias or whatever), but rather that it sometimes leads to bad decisions. For example, I've read speculation* to the effect that it can make renegotiation of contracts trickier (people unwilling to go down), make it harder for e.g. mobile spectrum licenses to end up with the right companies, and (elsewhere) that it may account for people hoarding stuff even when it's extremely unlikely that they will ever have a use for it.

*upon re-skimming, that article also makes reference to an MRI study that purports to find the endowment effect in the brain, and contains a bunch of evpsych speculation about possible evolutionary causes by people with PhDs.

[-][anonymous]11y00

Expecting offers to exploit your uncertainty about a commodity's value doesn't immediately induce a WTP-WTA gap because you could be symmetrically cautious and avoid paying $5 for the shiny card when offered.

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[-]tgb11y40

Someone offering to buy my cad for $5 suggests its value is above $5. Someone accepting my offer to buy their card for $5 suggests that the card is worth less than $5. Even if I value the card at $5, I suspect I am not getting market value for it if I am uncertain of the price and someone accepts my offer (either to buy or to sell). I might compensate by having WTP of $4 and WTA of $6. It's exactly this symmetric cautiousness that seems to induce a WTP-WTA gap.

This is the thesis of a later paper by Plott and Zeiler, and AFAIK (haven't read it), they do new experiments and find evidence for it and against the endowment effect theory. The economist covered it here.

If I am given a thing, like a mug, I now have one more mug than I had before. My need for mugs has therefore decreased. If I am to sell the mug, I must examine how much I will need the mug after it is gone and place a price on that loss of utility. If I am buying a mug I must set a price on how much I need it after I have it and place a price on that increase of utility. If the experiment is not worded carefully then the thought process could go along the lines of...

I have 2 mugs, and often take a tea break with my mate Steve. To sell one of those mugs would make me lose out on this activity... $10. I don't hugely need another mug unless it breaks, but it is handy to have a spare... $2.

In real life people will attribute more value to their stuff than other stuff as in general they would not have got the stuff if they did not value it higher than the cost of getting it. It is not a failiure of rationality to want something more than what you paid for it, and while it is a failiure of rationality to over value something just because you own it, it is not a failiure of rationality to ask a higher price first in case the person you are selling to is willing to pay more.

It would be difficult to adjust for these factors in designing an experiment.

This all depends on the valuation elicitation process, which is pretty clever and, assuming that the subjects are acting rationality, does in fact elicit true values - at least as implemented in the paper I linked. As the paper goes into, others unknowningly tweak this process a bit and change the incentive structure, then (surprise) they get WTP-WTA gaps.

Skimming through the methodology section of the paper, the experimental design is really dubious. I think what it shows is that subjects can be trained to overcome the endowment effect (if it exists), not that it doesn't exist as such. Specifically, subjects were given 14 rounds of paid practice (in two of the three experiments), which is, frankly, a lot. (The results of the experiment they were not given the practice were broadly similar, admittedly.) This was also after the trading mechanism was explained to them at some length with examples, which may have prompted them to think more strategically or otherwise think more like a trader than normal or gotten them to learn how to actually obtain good payoffs. That said, maybe those parts were reasonable, but this part sure doesn't seem to be (paper page 539):

Approximately half the subjects acted as sellers and approximately half acted as buyers. All subjects were handed a mug before the start of the round. Sellers were told that they owned the mug. Buyers were told that they could inspect the mug but they did not own it.

As far as I understand the endowment effect, this little procedure would indeed completely (approximately) eliminate it on its own, because both sets of subjects would be (about) equally attached to the mugs at that point. If they ever discussed why they did that, I did not see it. Maybe all the other experiments also did this (I haven't read the papers) and still found a difference! But I really doubt it.

I think what it shows is that subjects can be trained to overcome the endowment effect (if it exists)

Then what do you make of the fact that other experiments have failed to show a WTP-WTA gap? (See section I of the paper).

This was also after the trading mechanism was explained to them at some length with examples, which may have prompted them to think more strategically or otherwise think more like a trader than normal or gotten them to learn how to actually obtain good payoffs.

The endowment effect is a hypothesis about how much an item is valued when you own it vs. when you don't own it, not a hypothesis about how people act given those values. So when you say:

That said, maybe those parts were reasonable

I certainly think they are. Ensuring that the subjects are behaving optimally given their values just ensures that the subjects actions are accurate indicators of their values.

As far as I understand the endowment effect, this little procedure would indeed completely (approximately) eliminate it on its own, because both sets of subjects would be (about) equally attached to the mugs at that point. If they ever discussed why they did that, I did not see it. Maybe all the other experiments also did this (I haven't read the papers) and still found a difference! But I really doubt it.

Time to update! See section II. The authors first replicate a design by Kahneman, Knetsch and Thaler in 1990 (KKT) which allowed both buyers and sellers to inspect the mug and had a WTP-WTA gap. Plott and Zeiler replicate that gap.

Time to update! See section II. The authors first replicate a design by Kahneman, Knetsch and Thaler in 1990 (KKT) which allowed both buyers and sellers to inspect the mug and had a WTP-WTA gap. Plott and Zeiler replicate that gap.

Checking section II and looking up what I think is the right paper, they did indeed replicate correctly. However, while replicating: "One-half of the subjects were given mugs and were referred to as 'sellers.' The remaining subjects were referred to as 'buyers' and received no mugs. Buyers were allowed to inspect the mug of the seller sitting next to them". Note that this does nothing to remove my objection (and strengthens it slightly, since it shows that the original experiment did a different procedure) - in the scenario that replicated the endowment effect successfully, the buyers never got to hold mugs, while in the one that did not, they got to hold mugs and were then asked if they want to pay to keep them.

Then what do you make of the fact that other experiments have failed to show a WTP-WTA gap? (See section I of the paper).

Who knows! Maybe their sample was skewed. Maybe they used all philosophy majors at some university where they all turned into existentialists and grew detached from material values and consequently didn't care about endowments (or all microecon grad students attempting to be homo economicus). Or maybe there was some unlisted confounding factor in their experimental design. Either way, from the table, there are clearly experiments with very similar designs that produced ~opposite outcomes, so something must have gone wrong somewhere. (And given that even in this table there are more papers that find an effect than ones that do not, this vaguely gestures at the idea that there probably is one.)

(My disagreement with your other points, if it exists at all, is small enough to not be worth disputing.)

in the scenario that replicated the endowment effect successfully, the buyers never got to hold mugs, while in the one that did not, they got to hold mugs and were then asked if they want to pay to keep them.

That was not my interpretation of "Buyers were allowed to inspect the mug of the seller sitting next to them." I'm pretty sure (70%) that this means that buyers were allowed to physically hold the mugs. This, at least, was exactly how we did it in an in-class demonstration of the endowment effect (and indeed the WTP-WTA gap was present).

Hm, all right, well, I'll update a little, but I'm still not very convinced. It certainly feels a lot more like possession if you're given a mug directly than if you're (maybe) given one to inspect. (Thanks for the actual observed example!)