The Endowment Effect and Expected Utility

AuthorGwendolyn, C. Morrison
Publication Date01 May 2000
DOIhttp://doi.org/10.1111/1467-9485.00159
{Journals}sjpe/47_2/t213/makeup/t213.3d
Scottish Journal of Political Economy, Vol. 47, No. 2, May 2000
#Scottish Economic Society 2000.Publ ishedby Blackwell Publishers Ltd, 108 Cowley Road, Oxford OX4 1JF, UK and
350 Main Street, Malden, MA 02148, USA
WINNER OF THE 1999 CAIRNCROSS PRIZE
Best Paper by a Young Economist Presented at the Scottish
Economic Society Conference
THE ENDOWMENT EFFECT AND EXPECTED
UTILITY
Gwendolyn C. Morrison
ABSTRACT
The endowment effect, which is well documented in the contingent valuation
literature, alters people's preferences according to a reference point established in
an elicitation question. In particular, the utility that people place on a bundle is
both a positive function of the quantities of the goods comprising the bundle, and a
negative function of any loss (real or hypothetical) that the elicitation question
asks them to incur. Biases such as this have lead some to reject the contingent
valuation method as a means of quantifying costs and benefits in favour of other
methods of preference elicitation such as standard gambles. But, most preference
elicitation methods used by economists require people to express their preferences
for one good in terms of their willingness to forego some of another good.
Consequently, it is reasonable to expect that, and prudent to check whether, an
endowment effect is also evident in other methods of preference elicitation such as
von Neumann-Morgenstern's standard gambles. Internal inconsistencies in the
standard gamble method from the experimental economics literature and from a
study into the value of non-fatal road injuries are shown to be evidence that an
endowment effect is also at work in standard gambles.
II
NTRODUCTION
Evidence has amassed supporting the existence of an endowment effect (or status
quo bias) in contingent valuation studies (Thaler, 1980). The endowment effect is a
reference point effect usually attributed to loss aversion (Kahneman and Tversky,
1979). Willingness to pay questions ask people to give up some money to acquire
(more of) a good and willingness to accept questions ask them to give up (some of)
a good in exchange for some money. As presented in Morrison (1998) the
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University of Nottingham.

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