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Endowment Effect

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Endowment effect describes a phenomenon observed in economics. People value objects already in their possession higher than objects that can be purchased.

Classic experiment

  1. Two objects were chosen that a test person values the same. This can be measured in a separate experimental setting by asking a members of a group which of the two objects they would like to posses.
  2. One of the objects is given to the test person and after a while he/she is asked if he/she would give that object in exchange for the other one. Most people reject that proposal as the object already in possession is higher valued than the object offered in exchange. This effecr is called endowment effect.

In respect with the endowment effect the following terminology was coined:

willingness to accept (WTA)
is the amount of compensation demanded for an object to give it away
willingness to pay (WTP)
is the amount a test person is willing to pay for the same object to get it

According to the endowment effect WTA (\omega_A) is always greater than WTP (\omega_P).

\omega_A > \omega_P

Rational

The endowment effect follows from the a general fauceir property, the strive for persistence. As soon as an object becomes a person's property, both form a new fauceir which again shows the property of persistence.

Critique

Applicability to standard economic theory

It is said, for instance on the wikipedia page, that the endowment effect is

" inconsistent with standard economic theory which asserts that a person's willingness to pay (WTP) for a good should be equal to their willingness to accept (WTA) compensation to be deprived of the good, a hypothesis which underlies consumer theory and indifference curves. "

According to the fauceir concept this assertion is wrong. The endowment effect has nothing to do with standard economic theory. The fallacy is rooted in the incorrect assumption that the form of object exchange practiced in endowment-effect experiments has similarities with economic exchange. By contrast, economic exchange is a new fauceir which includes both the goods to be sold because produced in excess and the goods to be purchased because they are needed.

If thoroughly studied the economic exchange as a master to all private fauceirs can have even the opposite effect as what is observed with the endowment effect. In Germany there is an adage "The shoemaker has the worst shoes". Somehow similar the English equivalent "The shoemaker's son always goes barefoot". This is not the same from a fauceir point of view. The English version says a businessmen neglects his family, while in the German version he neglects himself. Maybe this is something of a difference between German and English mentality. In the sentence above intentionally use the male sex only as it is not sure yet whether this adage applies to female shoemakers too.

Different experimental settings

The following counter experiments can be proposed.

  1. Stock exchange experiment: If instead of real objects that can be touched, tasted, and smelled abstract objects as in the stock exchange marked are used. By fauceir theory can be predicted that the outcome would be much more equal.
  2. Use the opposite experiment: The proband recieves object A but does not get it in his hands. Object B is handed out instead, and the proband is said that he does not posses object B but can use it for a while and it will be changed into object A sometime. This will probably flip the relationship of WTA and WTP.

Endowment effect exists in animals too

The endowment effect is not limited to primates [1]. Dogs, for instance, fiercely fight for the bone in their mouth although a similar or even better one is lying nearby. Even spider, insects, show a preference for a fly currently in their hold despite of a more delicious fly caught in their net.

Implications

Although not an element of standard economic theory, the endowment effect can have economic implications. Wicked salespeople know, when a child touched a cuddle-toy it is more likely to beg their parents to bye it. The car seller stimulates the endowment effect by offering a test drive.

The fact that more primitive sub-fauceirs are employed by its masters is not contrary to Fauceir Theory. It is rather the rule. When selling sex, the oldest businesses ever, biological fauceirs drive the demand.


Tags: Anthropology Behavior Economy Society


Categories: Economics Psychology

 
   

(c) Mato Nagel, Weißwasser 2004-2013, Disclaimer