Experimental economics - Essay Example

Experimental Economics Summary Paper Table of Contents Introduction 3 Findings of the Article 3 of an Interesting Result 4 Conclusion and Discussion Question 5 Bibliography 6 Introduction The research paper intends to discuss the economic anomalies. The paper focuses primarily on the endowment affect, status quo bias and loss aversion. The fact that people ask for much more in giving up an object they hold than the amount they would pay to acquire that object is known as the endowment affect. Status Quo Bias involves a bias for the present state and not accepting changes.

Loss aversion states that the disadvantage in losing an object is considered greater than the advantage of acquiring an object. The research paper explores the relation between endowment affect and status quo bias with loss aversion. Findings of the Article The researchers conducted various studies to establish the endowment act. An experiment on a certain group of people involved endowment of either lottery tickets or money. It was found in the study that nobody would willingly part with the lottery ticket for money.

It was believed that in a market setting, the discrepancies between the Willingness to Pay (WTP) and Willingness to Acquire (WTA) would reduce. A series of experiments were conducted to understand the endowment affect. The first experiment revealed that the market clearing price coincided with the point of intersection of induced demand and supply curves and transaction costs were low. Since the income effects are insignificant and transaction cost is low thus when market clearing occurs objects are owned by people who value it the most.

The volume of trade was low due to the price reservation of the buyers and sellers and was attributed to the lack of willingness on the part of the owner to part with his belonging. Indifference curves are reversible and they do not intersect. In the presence of loss aversion, the reversibility concept is not applicable. The primary affect of endowment does not lie in increasing the attraction towards the goods one owns. Rather, it enhances the pain in giving up the good. The Status Quo Bias is the preference of individuals to stay in their present condition.

Experiments conducted revealed that individuals selected situations that were status quo. A survey of electric power consumers in California revealed a strong inclination towards status quo by consumers. The study reveals that changes that can worsen situations have a more confounding affect than the improvements brought about by the change. Further the study proposes that people place importance on the losses they perceive than the gains they give up. The perception of fair behavior varies across different groups of people.

The perception of fairness depended on whether the people believed that their gains were being reduced or losses increased. Description of an Interesting Result The results of the status quo bias experiment conducted by the states of Pennsylvania and New Jersey is particularly interesting. The two states offer two types of vehicle insurance namely a cheaper insurance without a suing right and an expensive one with suing rights. The cheaper policy was offered by default in New Jersey and the expensive was offered by default in Pennsylvania.

When individual were given a choice to switch to the other policy only 23% agreed to switch in New Jersey and 53% in Pennsylvania. The conclusion made was that more of Pennsylvanians have the probability of suing. This finding is of interest since the validity of the concept of status quo will be established with time, supported by evidence if the findings of the experiment are proved right. Conclusion and Discussion Question The economic anomalies discussed in the paper are in violation to standard theories.

It is extremely challenging to amend the theories and incorporate the changes. The challenge lies in how to incorporate changes in the theories without creating much of complexities in order so that the predictive yield is not reduced. The required amendments are important and the research paper has aptly established the importance of endowment affect, status quo and loss aversion. Bibliography Kahneman, Daniel. & Et. Al. Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias. The Journal of Economic Perspectives, 2001, Vol: 5, Iss: 1, Pp: 193-206.