Loss aversion vs. endowment effect

A better explanation of the endowment effect

It’s a famous study. Give a mug to a random subset of a group of people. Then ask those who got the mug (the sellers) to tell you the lowest price they’d sell the mug for, and ask those who didn’t get the mug (the buyers) to tell you the highest price they’d pay for the mug. You’ll find that sellers’ minimum selling prices exceed buyers’ maximum buying prices by a factor of 2 or 3. This famous finding, known as the endowment effect, is presumed to have a famous cause: loss aversion. Just as loss aversion maintains that people dislike losses more than they like gains, the endowment effect seems to show that people put a higher price on losing a good than on gaining it. The endowment effect seems to perfectly follow from loss aversion. But a 2012 paper by Ray Weaver and Shane Frederick convincingly shows that loss aversion is not the cause of the endowment effect. Instead, “the endowment effect is often better understood as the reluctance to trade on unfavorable terms,” in other words “as an aversion to bad deals.” ….[READ]

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