Predicting variation in endowment effect magnitudes |
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| Institution: | 1. Universitat de les Illes Balears, Carretera de Valldemossa, km 7,5, 07122 Palma, Spain;2. Universität Bern, Engehaldenstrasse 4, 3012 Bern, Switzerland;3. Max Planck Institute for Human Development, Lentzeallee 94, 14195 Berlin, Germany;1. Psychology Department, University of South Dakota, 414 East Clark Street, Vermillion, SD 57069, USA;2. School of Social Sciences, Singapore Management University, Singapore 178899, Singapore;3. Center for Adaptive Behavior and Cognition, Max Planck Institute for Human Development, 14195 Berlin, Germany;4. School of Management, Jinan University, Guangzhou 510632, China;1. Abertay University, Dundee, UK;2. University of South Africa, Pretoria, South Africa;3. Mississippi State University, Mississippi State, USA |
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| Abstract: | Hundreds of studies demonstrate human cognitive biases that are both inconsistent with “rational” decision-making and puzzlingly patterned. One such bias, the “endowment effect” (also known as “reluctance to trade”), occurs when people instantly value an item they have just acquired at a much higher price than the maximum they would have paid to acquire it. This bias impedes a vast range of real-world transactions, making it important to understand. Prior studies have documented items that do or do not generate endowment effects, and have noted that the effects vary in magnitude. But none has predicted any of the substantial between-item variation in those magnitudes across a large and novel set of items. Working from evolutionary theory, we derived six factors that predicted 52% of the between-item variation in magnitudes for a novel set of 24 items. These results deepen understanding of both the causes of and patterns in endowment effects. More broadly, they suggest that many other cognitive biases may be similarly approached, and potentially linked by a common theoretical framework. |
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