Editing Endowment effect (section)

===Neoclassical explanations===
Hanemann (1991),<ref name="Hanemann" /> develops a [[neoclassical economic theory|neoclassical]] explanation for the endowment effect, accounting for the effect without invoking [[prospect theory]].

Figure 2 presents this explanation in graphical form. In the figure, two [[indifference curves]] for a particular good X and wealth are given. Consider an individual who is given goods X such that they move from point A (where they have X<sub>0</sub> of good X) to point B (where they have the same wealth and X<sub>1</sub> of good X). Their WTP represented by the vertical distance from B to C, because (after giving up that amount of wealth) the individual is indifferent about being at A or C. Now consider an individual who gives up goods such that they move from B to A. Their WTA represented by the (larger) vertical distance from A to D because (after receiving that much wealth) they are indifferent about either being at point B or D. Shogren et al. (1994)<ref name="Shogren" /> has reported findings that lend support to Hanemann's hypothesis. However, Kahneman, Knetsch, and Thaler (1991)<ref name="KKT91" /> find that the endowment effect continues even when wealth effects are fully controlled for.

:[[File:Simple-indifference-curves-2.png]]
:''Figure 2: Hanemann's Endowment Effect Explanation''

When goods are indivisible, a coalitional game can be set up so that a utility function can be defined on all subsets of the goods.
Hu (2020)<ref>{{cite journal |last=Hu |first=Xingwei |year=2020 |title=A theory of dichotomous valuation with applications to variable selection |journal=Econometric Reviews |volume=39 |issue=10 |pages=1075–1099 |doi=10.1080/07474938.2020.1735750 |arxiv=1808.00131 |s2cid=32184598}}</ref> shows the endowment effect when the utility function is [[superadditive]], i.e., the value of the whole is greater than the sum of its parts. Hu (2020) also introduces a few unbiased solutions which mitigate endowment bias.

Experiments in cognitive psychology have demonstrated that the endowment effect can be brought about by asymmetries in cognitive processing in judging owned and not-owned goods. A 2007 fMRI study by Knutson et al. demonstrated that the insula, an area of the brain associated with loss aversion, is stimulated when people ponder relinquishing goods they already possess. This is consistent with the hypothesis that the endowment effect entails not only ownership bias but also emotional attachment and loss anticipation neural processes. Further, the effect is also conditioned by cultural environment and personality difference in risk sensitivity.
<ref>Knutson, B., Rick, S., Wimmer, G. E., Prelec, D., & Loewenstein, G. (2007). Neural predictors of purchases. Neuron, 53(1), 147–156. https://doi.org/10.1016/j.neuron.2006.11.010</ref>