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Randomizing Endowments: An Experimental Study of Rational Expectations and Reference-Dependent Preferences

Goette, Lorenz and Harms, Annette and Sprenger, Charles (2014) Randomizing Endowments: An Experimental Study of Rational Expectations and Reference-Dependent Preferences. . (Unpublished) https://resolver.caltech.edu/CaltechAUTHORS:20200722-150215296

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Abstract

An important advance in the study of reference-dependent preferences is the discipline provided by coherent accounts of reference point formation. Kőszegi and Rabin (2006) provide such discipline by positing a reference point grounded in rational expectations. We examine the predictions of Kőszegi and Rabin (2006) in the context of market experiments with probabilistic forced exchange. The experiment tightly tests the predictions of Kőszegi and Rabin (2006), as when the probability of forced exchange increases, individuals should grow more willing to exchange. This mechanism has the theoretical potential to eliminate and even reverse the 'endowment effect' (Knetsch and Sinden, 1984; Knetsch, 1989; Kahneman et al., 1990). Our results uniformly reject these theoretical predictions. In a series of experiments with a total of 930 subjects, sellers' valuations exceed buyers' valuations under all probabilities of forced exchange. In robustness tests where attention is drawn specifically to the forced exchange mechanism, the results are directionally more promising for buyers, but still reject the main thrust of the theoretical predictions. Our findings suggest a potential path forward incorporating failures to completely forecast sensations of gain and loss into models of expectations-based reference dependence.


Item Type:Report or Paper (Working Paper)
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https://ssrn.com/abstract=2529348SSRNWorking Paper
https://resolver.caltech.edu/CaltechAUTHORS:20200722-071826445Related ItemJournal Article
Additional Information:IZA Discussion Paper No. 8639. We are grateful for the insightful comments of many colleagues and seminar audiences at UCSB, Caltech, Central European University, Stockholm School of Economics, the University of Bonn, the University of Zurich, Universitat Pompeu Fabra, Royal Holloway University of London, University of Oxford and University of Lausanne. We also acknowledge the generous support of the Swiss National Science Foundation, grant CR11I1 137980 (Goette) and the National Science Foundation, grant SES-1024683 (Sprenger).
Funders:
Funding AgencyGrant Number
Swiss National Science Foundation (SNSF)CR11I1_137980
NSFSES-1024683
Subject Keywords:reference-dependent preferences, rational expectations, personal equilibrium, endowment effect, expectations-based reference points
Classification Code:JEL: D81, D84, D12, D03
Record Number:CaltechAUTHORS:20200722-150215296
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20200722-150215296
Official Citation:Goette, Lorenz F. and Harms, Annette and Sprenger, Charles, Randomizing Endowments: An Experimental Study of Rational Expectations and Reference-Dependent Preferences. IZA Discussion Paper No. 8639, Available at SSRN: https://ssrn.com/abstract=2529348
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:104519
Collection:CaltechAUTHORS
Deposited By: Tony Diaz
Deposited On:22 Jul 2020 22:12
Last Modified:22 Jul 2020 22:12

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