Endowment effect presentation Behavioral Economics .pdf

Endowment effect presentation Behavioral Economics .pdf

1. Endowment effect and
critical re-examination of
conventional theory of
consumer choice

2. Endowment Effect
The incentive to have
something that one
does not have is
less than the
incentive not to lose
the same thing if one
has it.

4. Demonstrated in two
experimental paradigms
exchange paradigm
participants who are randomly endowed with
one of two goods are more reluctant to
exchange it for the other good than would be
expected by chance
valuation paradigm
the maximum amount of money that
buyers are willing to pay to acquire the good
(WTP) is lower than the minimum amount of
money that sellers of a good are willing to
accept to relinquish it (WTA), creating a WTP–
WTA gap
The endowment effect is not confined to private goods or the laboratory. People demand more
to give up entitlements such as time, intellectual property, public land, and environmental,
health and safety regulations than they are willing to pay to acquire them

5. Evolutionary advantage hypothesis for the
endowment effect
overvaluing owned goods may have been
advantageous in ancestral trading contexts, helping
individuals gain more resources and thus support
larger families
Suggestion
cultural factors, social learning, and even genetic
makeup influence the endowment effect, indicating
a variation across different human populations and
even among non-human primates
Evidence
studies on Hadza tribes and non-human primates
reveal that while the endowment effect exists across
various groups, it manifests differently depending on
cultural and societal exposure to markets
Example 2
people of European descent typically exhibit larger
willingness to pay (WTP) and willingness to accept
(WTA) gaps than those of Asian descent
Example 1

6. The concept of
reference prices
when the perceived value of a good
is compared to external or internal
reference prices, buyers may lower
their WTP, while sellers may
increase their WTA to avoid feeling
like they are getting a "bad deal."

7. Psychological
ownership
Create new associations between the
self and the object, incorporating it
into one's self-concept and imbuing
it with positive attributes related to
one's identity. This sense of
ownership can persist over time,
influencing the reference point used
to evaluate the object and enhancing
memory for the object through self-
referential memory effects.

8. Examples
Market Transactions
Online Auctions
Real Estate
Collectibles
Personal Belongings

9. Ways in which endowment
effect challenges traditional
economic models
•Preference stability
•WTP vs. WTA Discrepancy
•Market Inefficiencie

10. AspectConventional Theory of Consumer BehaviorEndowment Effect
Decision-
Making
Assumes rational decision-making where consumers
maximize utility.
Suggests consumers often irrationally overvalue items
they own, deviating from purely utility-based decisions.
Market
Behavior
Market price reflects equilibrium between supply and
demand, aligning with consumer valuation.
Demonstrates a disparity between willingness to pay
(WTP) and willingness to accept (WTA) due to ownership.
Value
Perception
Value is determined by objective assessments of utility
and price; consumers evaluate based on marginal
utility.
Value is subjectively enhanced by ownership, not strictly
tied to utility or market price.
SubstitutionConsumers are willing to substitute goods freely if the
alternatives provide equivalent utility.
Ownership reduces willingness to substitute or trade
goods, even for similar or superior alternatives.
IndifferenceConsumers can be indifferent between choices that
offer the same utility.
Ownership biases consumers against indifference,
making them prefer owned items over equivalent
choices.
Loss AversionNot a primary focus—consumers are viewed as
primarily utility-maximizers.
Central feature—consumers experience greater pain
from losses (losing owned items) than gains of equal
value.

11. Thank you !