Endowment Effect, Behavioural, and Standard Economics Theories - Essay Example

Endowment Effect, Behavioural, and Standard Economics Theories Endowment Effect, Behavioural, and Standard Economics Theories Endowment Effect Endowment effect describes a phenomenon in which most people often demand considerably higher prices for products that they own than they could pay for if they were to buy it (Asch, Patton, and Hershey, 1990; p. 50). Also referred to as status quo bias, endowment effect hypothesizes that people put much more value on the goods or products that they have acquired their property right than those they do not have or own. In other words, they often place higher values on objects that they own relative to those objects that they do not own. For instance, in an experiment it was established that people demanded high price for coffee mugs that they had compared to those that they did not yet had (Barberis, Huang, and Santos, 2001; p. 44). The willingness to pay (WTP) when compared with the willingness to accept (WTA) for the same objects is often lower, even though standard economics agitate for the similarities of the two conditions. Different environmental and public services protection documentations have also proved that indeed there is an existing difference between WTPO and WTA (Wilkinson and Klaes, 2012; p. 37). The understanding of the endowment effect can be analysed using the experience where an undergraduate A receives a doll and she is asked how much she would be willing to sell the doll to another undergraduate Q. Studies have indicated that student A will have a hard time to part with the same doll that student Q is not attached (Benabou, and Tirole, 2000). Notably, these two students have less or no experience with the real market world; therefore, will those in the real world of markets behave differently than these two students. In a real marketing research, a researcher approached 46 realtors and 30 car salespersons. This population is presumably high and experienced with negotiating their maximum willingness to accept and maximum willingness to pay while they sell and purchase respectively. In this marketing experiment, the researcher endowed half of his participants with mugs and asked them what it would take them to sell these mugs (Allais, 1953; p. 384). On the other hand, he asked the buyers what would take them to buy these mugs. Regardless of the participants’ immense experience in the real world market, he found out that the willingness to accept the mugs was nearly three times higher than the willingness to pay. This is an indication that even experienced negotiators are also susceptible to the endowment effect (Angeletos, Repetto, Tobacman, and Weinberg, 2001; p. 57). The result of these two experiments is similar indicating that the human brain makes a decision almost in a similar way and on the other hand, it is apparent to note that persons under the same environmental conditions often operate under the same constraints (List, 2004; p. 617). It should also be noted that the same constraints affect even those who have experience in certain fields. The endowment effect can be analysed using neoclassical or standard economics that is strongly built on the assumptions that ever turned to well established facts (Babcock et al. 1994; pg. 928). The most vital and preferred assumption is that all economic agents that include consumers, suppliers, and companies among others are fully rational and their visible hand works create market efficiency (Knetsch and Wong, 2009; p. 410). Rational economists often consider these assumptions a basic, logical, and self-evident; hence, they do not require any empirical scrutiny (Babcock and Loewenstein, 1997; p. 110). Materialism has also been identified as one of the forces behind endowment effect. Some people believe that the material they own is a central occupation that provides them with success and happiness. Using materialism to determine the existence of endowment effect, 317 first year students at Katholieke University Leuven, Belgium were subjected to a study. The survey provided a “clicker” gadget that supported the release of “AXE Click”. This was a new type of men’s deodorant and shower gel as distributed by Unilever brand EXE in 2006. The popularity of this gadget gained prominent among the adolescents and became difficult to purchase at the time of experiment. The survey found out that the sellers’ minimum selling prices (Mselling price= €3.48, SD= 4.30) were higher than the Buyers’ ceiling buying prices (Mbuying price= €0.57, SD= 1.23), t(144)= -8.10, p Read More