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Asymmetries in Exchange Behavior Incorrectly Interpreted as Evidence of Prospect Theory

Plott, Charles R. and Zeiler, Kathryn (2005) Asymmetries in Exchange Behavior Incorrectly Interpreted as Evidence of Prospect Theory. Social Science Working Paper, 1230. California Institute of Technology , Pasadena, CA. (Unpublished) http://resolver.caltech.edu/CaltechAUTHORS:20170808-145011964

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Abstract

Systematic asymmetries in exchange behavior have been widely interpreted as support for endowment effect theory, that loss aversion associated with ownership creates an asymmetry in valuations and exchange behavior. According to this theory, which is an application of prospect theory, parting with an endowed object produces a loss that is greater than the gain from acquiring another object of otherwise equal value. The results also have been cited as general support for prospect theory, of which loss aversion is a fundamental component. The experiments reported here suggest that such interpretations of observed exchange asymmetries are incorrect. While exchange asymmetries are readily observable, the data reported here support the claim that measurements of preferences are confounded by experimental procedures. In other words, the data suggest that experimental procedures lead to observed exchange asymmetries. In treatments for which endowment effect theory would predict exchange asymmetries, we observe no asymmetries when we eliminate alternative explanations related to procedures. Therefore, our results do not support the use of observed exchange asymmetries as evidence of loss aversion, endowment effect theory or prospect theory and call into question normative legal analyses grounded in these theories of decision making.


Item Type:Report or Paper (Working Paper)
Additional Information:The financial support of the National Science Foundation, and the Laboratory of Experimental Economics and Political Science is gratefully acknowledged. We thank Jennifer Arlen, Heidi Li Feldman, Russell Korobkin, Richard Lazarus and Rebecca Tushnet for helpful discussions and comments. In addition, we are grateful for comments provided during presentations of earlier versions of this paper at the Stanford University SITE Conference, the Law and Society Association Annual Meeting, the American Law and Economics Association Annual Meeting and the law schools of Columbia University, Georgetown University, the University of North Carolina - Chapel Hill and the University of Texas - Austin. We are grateful to Kevin Pooler, JD Ellis, Joseph Shifer and Carl Hinneschiedt for excellent research assistance and to several Caltech and Georgetown students who helped us run the experiments.
Group:Social Science Working Papers
Funders:
Funding AgencyGrant Number
NSFUNSPECIFIED
Caltech Laboratory for Experimental Economics and Political ScienceUNSPECIFIED
Subject Keywords:endowment effect, experimental methods, valuation, exchange
Classification Code:JEL: C91, K00
Record Number:CaltechAUTHORS:20170808-145011964
Persistent URL:http://resolver.caltech.edu/CaltechAUTHORS:20170808-145011964
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:79959
Collection:CaltechAUTHORS
Deposited By: Hanna Storlie
Deposited On:09 Aug 2017 18:30
Last Modified:09 Aug 2017 18:30

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