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Other Unpublished Work
| 2008
Transaction Disutility and the Endowment Effect
by
Ray Weaver and Shane Frederick
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Abstract
Acquiring a good seems to increase its value to the owner, as owners generally demand more to sell than non-owners are willing to pay. This endowment effect is typically explained as loss aversion: the prospect of losing possessions causes psychological pain for which sellers demand a premium as compensation. An alternative explanation is transaction disutility: people are reluctant to trade on subjectively disadvantageous or unfair terms. Consumers evaluate trades against perceived market prices, and because market prices usually exceed the value of ownership to most consumers, sellers experience transaction disutility and demand high reservation prices. We show that reducing reference prices shrinks or eliminates the endowment effect. Moreover, further reducing prices to levels below consumer values induces transaction disutility in buyers. Thus, the size of the endowment effect is U-shaped as a function of reference price. We also find that the effect is smallest among people who most value the good. These results suggest that an aversion to bad deals, not an aversion to losing possessions per se, causes buying and selling prices to diverge.
Keywords: Acquisition;
Price;
Spending;
Goods and Commodities;
Demand and Consumers;
Market Transactions;
Value;