Editing Endowment effect (section)

{{Short description|Cognitive bias}}
In [[psychology]] and [[behavioral economics]], the '''endowment effect''', also known as '''divestiture aversion''', is the finding that people are more likely to retain an object they own than acquire that same object when they do not own it.<ref name="Roeckelein2006">{{cite book |first=J. E. |last=Roeckelein |title=Elsevier's Dictionary of Psychological Theories |url=https://books.google.com/books?id=1Yn6NZgxvssC&pg=PA147 |year=2006 |publisher=Elsevier |isbn=978-0-08-046064-2 |page=147 }}</ref><ref name="Morewedge2015"/><ref name=":1"/><ref name="KahnemanKnetschThaler"/> The endowment theory can be defined as "an application of prospect theory positing that loss aversion associated with ownership explains observed exchange asymmetries."<ref name="Zeiler 1449–1466">{{Cite journal |last=Zeiler |first=Kathryn |date=September 2007 |title=Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?|url=https://scholarship.law.bu.edu/faculty_scholarship/454 |journal=American Economic Review |volume=97 |issue=4 |pages=1449–1466 |doi=10.1257/aer.97.4.1449 |doi-access=free |s2cid=16803164|url-access=subscription }}</ref>

This is typically illustrated in two ways.<ref name="Morewedge2015">{{Cite journal |title=Explanations of the endowment effect: an integrative review |journal=Trends in Cognitive Sciences |date=2015 |pages=339–348 |volume=19 |issue=6 |doi=10.1016/j.tics.2015.04.004 |pmid=25939336 |first1=Carey K. |last1=Morewedge |first2=Colleen E. |last2=Giblin |s2cid=4619648}}</ref> In a valuation paradigm, people's maximum [[willingness to pay]] (WTP) to acquire an object is typically lower than the least amount they are [[Willingness to accept|willing to accept]] (WTA) to give up that same object when they own it—even when there is no cause for attachment, or even if the item was only obtained minutes ago.<ref name="KahnemanKnetschThaler"/> In an exchange paradigm, people given a good are reluctant to trade it for another good of similar value. For example, participants first given a pen of equal expected value to that of a coffee mug were generally unwilling to trade, whilst participants first given the coffee mug were also unwilling to trade it for the pen.<ref name="KKT91"/>

A more controversial third paradigm used to elicit the endowment effect is the [[Mere ownership effect|mere ownership]] paradigm, primarily used in experiments in psychology, marketing, and organizational behavior. In this paradigm, people who are randomly assigned to receive a good ("owners") evaluate it more positively than people who are not randomly assigned to receive the good ("[[Treatment and control groups|controls]]").<ref name=":0">{{Cite journal |last=Beggan |first=J. |date=1992 |title=On the social nature of nonsocial perception: The mere ownership effect |journal=Journal of Personality and Social Psychology |volume=62 |issue=2 |pages=229–237 |doi=10.1037/0022-3514.62.2.229}}</ref><ref name="Morewedge2015"/> The distinction between this paradigm and the first two is that it is not [[incentive compatibility|incentive-compatible]]. In other words, participants are not explicitly incentivized to reveal the extent to which they truly like or value the good.

The endowment effect can be equated to the behavioural model [[willingness to accept|willingness to accept or pay (WTAP)]], a formula sometimes used to find out how much a consumer or person is willing to put up with or lose for different outcomes. However, this model has come under recent criticism as potentially inaccurate.<ref name="Zeiler 1449–1466"/><ref name="Zeiler 530–545">{{Cite journal|last1=Plott |first1=Charles |last2=Zeiler |first2=Kathryn |author-link2=Kathryn Zeiler |date=June 2005 |title=The Willingness to Pay-Willingness to Accept Gap, the 'Endowment Effect,' Subject Misconceptions, and Experimental Procedures for Eliciting Valuations |url=https://scholarship.law.bu.edu/faculty_scholarship/781 |journal=American Economic Review |volume=95 |issue=3 |pages=530–545 |doi=10.1257/0002828054201387 |doi-access=free}}</ref>