The Endowment Effect
The endowment effect is among the best known findings in behavioral economics, and has been used as evidence for theories of reference-dependent preferences and loss aversion. However, a recent literature has questioned the robustness of the effect in the laboratory, as well as its relevance in the field. In this review, we provide a summary of the evidence, and describe recent theoretical developments that can potentially reconcile the different findings, with a focus on expectation-based reference points. We also survey recent work from psychology that provides either alternatives to or refinements of the usual loss aversion explanation. We argue that loss aversion is still the leading paradigm for understanding the endowment effect, but that given the rich psychology behind the effect, a version of the theory that encompasses multiple reference points may be required.
In preparation for the Annual Review of Economics. We thank Nick Barberis, Ori Heffetz, Judd Kessler, Jack Knetsch, George Loewenstein, Charles Plott, and Kathryn Zeiler for helpful comments. Jessica Carichner and David Daly-Coll provided research assistance. The authors declare no conflicts of interest. The views expressed in this paper are solely those of the authors and not necessarily those of the Federal Reserve Bank of New York, the Federal Reserve System, or the views of the National Bureau of Economic Research.
Keith M. Marzilli Ericson & Andreas Fuster, 2014. "The Endowment Effect," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 555-579, 08. citation courtesy of