Tag Archives: plott

Klass & Zeiler: Endowment theory is wrong.

Klass, G., & Zeiler, K. (2013). Against Endowment Theory: Experimental Economics and Legal Scholarship. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2224105

This is a remarkable article. The authors make a clear-cut claim and justify this claim by means of a strong and convincing argument, grounded in experimental research; they put their claim in historical context; they spell out some implications of their claim for future research; and all along they cover an impressive amount of literature from different disciplines. They know their shit back and forth.

The simple claim is that endowment theory, at least as it has been commonly interpreted in behavioral economics and, derivatively, in legal studies, should be rejected.

The core of their argument is straightforward. It is generally accepted that the endowment effect expresses itself in the laboratory by means of exchange asymmetries: for example, people who are randomly assigned the mug don’t want to trade it for the pen, and vice-versa. In valuation studies, it expresses itself in a gap between the Willing-To-Accept and Willing-To-Pay prices: the amount of money someone is willing to pay for a concert ticket is less than what the same person is willing to accept to give up a ticket that she already has. Plott & Zeiler (2005), however, in a series of studies, found that those gaps and asymmetries can be made to disappear by manipulating contextual variables. For instance, typically, when the endowed good is handed to the participant, she is told, “I’m giving you the mug.  It is a gift.  You own it.  It is yours.”  But this utterance might signal that the mug is very valuable. When one substitutes this phrasing with a simpler formulation such as “the mug is yours, you own it,” and one also tweaks other factors (decisions are anonymous, the pen and the mug are at the same physical distance from the subject, etc.), the endowment effect tends to vanish. The endowment effect, to sum up, is an artifact of the researchers’ faulty methods that goes away when one controls all relevant variables.

The article provides historical context for the emergence of endowment theory. Behavioral economists used the endowment effect as a paradigmatic spearhead against neoclassical economics. The clash (and the types of arguments used) reminds me of intercultural psychology critique of homo economicus (Henrich et al., 2007).

In the conclusions, the authors emphasize that simple experiments on human decision making do not translate automatically into normative or political recommendations. Rather, they contribute to corroborate or falsify a theory, and it is theories that can eventually have normative implications.

Klass and Zeiler’s description of the endowment effect changed my understanding of it. They emphasize that, for endowment theory to be true, the increase in value has to result only from pure ownership, that is, from the mere fact that one has an entitlement. Let’s say that there are two mugs, and I own mug 1 but not mug 2, and mug 1 and mug 2 are identical, and both are placed at the same distance from me, and there are no facts in the object history that create any bond between me and any of the mugs. Klass and Zailer seem to claim that, according to endowment theory, I should still value mug 1 more than mug 2, because of the sheer fact that I am mug 1’s owner.

That is: Klass and Zeiler emphasize that pure, “abstract” ownership should be responsible for the endowment effect, and not the history of how the object came to be mine. Thus, they seem to exclude value resulting from attachment to the object (“emotional” or “sentimental” value). By free association, I am reminded of the Kantian view of duty as resulting from bare respect for the moral law. That is: I behave morally not because I feel some subjective satisfaction or pride in being moral, or because some utilitarian calculation that moral behavior will produce the greatest good. I think and act in accordance with my duty because that’s what I ought to do, period. In endowment theory, my thinking and acting is affected by my right, period.

I previously thought (perhaps erroneously) that the endowment effect relied in a richer conception of ownership that included psychological aspects, such as the individual’s attachment to the specific object and the pride one feels for one’s belongings. In my opinion, this view is represented by Gelman & Davidson’s (2016) study on children’s preference for unique owned objects; McEwan, Pesowski, & Friedman (2016) research showing that children view owned objects as non-fungible; Gelman, Manczak, & Noles (2012) paper that claims to have identified an endowment effect in children 2 and 3 years of age: “The present findings suggest that positive evaluation of and preference for one’s own possessions is a basic cognitive disposition, even before children have experience with conventional economic transactions.” There are many other researchers in the field of ownership (Rochat, Ross, etc.) that seem to have this richer understanding of what owning an object means. Perhaps developmental psychologists have misread endowment theory; perhaps they’re talking about a different phenomenon.

This richer view of the subject-object relationship has many antecedents in psychology. One may think of attachment theory, Winnicott’s transitional objects, etc. These different theories are not akin to the cold inclusion of the ownership title in the algorithm that calculates value, but to the warm fact that I value an object because it became mine in a certain context, as result from a certain history. Objects are extensions of the self (here I could quote some twenty developmental psychologists); ownership of property constitutes an important aspect of the construction of self-identity and of boundaries between myself and others.

Hume says something similar in his book on Emotions, in his Enquiry Concerning Human Understanding. One is proud only of the things one owns. In Humean terms, the idea that this mug is splendid and the idea that it belongs to me are associated to each other. The fact that the things that relate to my self (my body, my watch, my horse, my children, my estate, my country) are beautiful or valuable increases my pride; conversely, if my self-esteem is high I will tend to consider that my stuff is the best, just because it’s mine.

References:

Gelman, S. A., & Davidson, N. S. (2016). Young children’s preference for unique owned objects. Cognition. https://doi.org/10.1016/j.cognition.2016.06.016

Gelman, S. a., Manczak, E. M., & Noles, N. S. (2012). The nonobvious basis of ownership: Preschool children trace the history and value of owned objects. Child Development, 83(5), 1732–1747. https://doi.org/10.1111/j.1467-8624.2012.01806.x

Henrich, J., Boyd, R., Bowles, S., Camerer, C., Fehr, E., Mcelreath, R., … Sciences, B. (2007). “Economic Man” in Cross-cultural Perspective : Behavioral Experiments in 15 Small-scale Societies. Social Dynamics, 204(06), 795–815.

Klass, G., & Zeiler, K. (2013). Against Endowment Theory: Experimental Economics and Legal Scholarship. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2224105

McEwan, S., Pesowski, M. L., & Friedman, O. (2016). Identical but not interchangeable: Preschoolers view owned objects as non-fungible. Cognition, 146, 16–21. https://doi.org/10.1016/j.cognition.2015.09.011

Plott, C. R., & Zeiler, K. (2005, June 1). The Willingness to Pay-Willingness to Accept Gap, the “Endowment Effect,” Subject Misconceptions, and Experimental Procedures for Eliciting Valuations. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=615861

 

Advertisements