Well, we don’t run a requests service, but never let it be said that we don’t try to give our readers what they want (or what we want them to want, anyway). The Standard asks us to have a chat about this piece in The Economist which discusses endowment effects, so here goes.
The first question to answer is probably, “Endowment effects?! Wot’s that then?” Well, endowment effects were noticed by Richard Thaler back in the day (which just means sometime before we were born). He saw that people value things more when they own them. So, essentially, you’ll want more money to sell something on Trademe than you’d have paid for it yourself. Our favourite behavioural econ-psychologists, Daniel Kahneman and Amos Tversky, incorporated this observation into their Nobel prize winning prospect theory. They called it loss aversion with reference dependent preferences; you can see it represented by the ‘kink’ in their prospect theory value function at the reference point.
The Economist’s article suggests some nice evolutionary reasons why this effect might exist but, if you’re like me, you’ll be thinking “hang on a tick; doesn’t that mean people constantly pass up opportunities to make a monetary profit?” And, yes, it does. John List thought the same thing so, being a genius experimental economist, he went out into the real world aandanalysed some real markets. He found strong evidence that the endowment effect exists, but also that it diminishes as people gain more trading experience. So, we do probably have a silly, inefficient evolutionary hangover of a heuristic for valuing things but we can learn to overcome it with practise.
Finally, The Standard asks why neo-classical economists ignore all of this stuff all the time. The simple answer is that they’re aware of it, but you can’t save the world in one easy step. Empirical results like this one give us individual heuristics but they don’t give us a decision making framework that can be generally applied. Plenty of people study these heuristics but, until they are combined into a cohesive framework that theoreticians and econometricians can easily work with, they won’t have a broader impact in the profession.