The Grilled Cheese

Last year, I conducted an independent study in the Wash U psych department. The experiment I did started with an idea I had a few years ago in another class: do people value things differently when they own them from when they don't own them? I later learned that yes indeedy, they do, and its called the endowment effect.

For example, the average price that somebody is willing to accept (WTA) in for a coffee mug that they own is roughly twice as high as the price that another person is willing to pay (WTP) for that same mug. And this doesn't have anything to do with a strong emotional bonds to things we've had for a while, since it even works when the owner of the mug has just received it.

The standard explanation for this effect comes from Prospect Theory, for which Daniel Kahneman won the Nobel Prize in Economics (Amos Tversky was his partner, but sadly the deceased are not eligible for the Nobel Prize). A large part of the theory is the concept of loss aversion, which explains that people dislike losing things about twice as much as they like gaining things of the same size or magnitude.

According to the loss aversion explanation, people selling their mug experience loss aversion, so they require a higher price to give it up. People buying a mug, on the other hand, don't experience loss aversion. In one sense, this makes some sense, since some studies show that sellers are the weird ones by comparing sellers, buyers and choosers (buyers and choosers have similar preferences, while sellers prefer their object).

But in another sense, this doesn't make sense at all. Why should people experience loss aversion for mugs they part ways with, but not for dollars they give up? That is the question that drove my experiment.

I'll leave the meat of my experiment for another post. For the curious, don't worry: you can find the studies I mention by either doing your own digging or waiting till my next post. I'll post my final paper, which has all the citations.