The Ontogeny of the Endowment Effect

Georgia State University Research Foundation, Inc., Atlanta GA

Investigators

Abstract

Cognitive biases cloud effective decision-making. These irrational strategies lead to inefficiencies in everything from large-scale economic systems (such as the health-care industry) to personal choices (such as picking unhealthy snack foods). This research investigates one specific bias, the Endowment Effect (EE), in which individuals tend to ask for more to sell an item in their possession than they would pay to buy it. For instance, people demanded more money to part with a Final Four basketball ticket won in a raffle than they offered to pay for such a ticket some time earlier (e.g., $2400 to sell vs $160 to buy; Carmon & Ariely, 2000). This is true even in cases where the object has accrued no additional value, even sentimental value, since it was acquired. The EE is important because over-valuing possessions leads to less efficient transactions; people demand too much in exchange for what they currently have. For children, this bias may complicate social interactions that involve possessions, such as sharing with siblings and peers. We will investigate the emergence and development of the EE by testing how children and adults make decisions. Our first goal is to document any differences in the EE across these age groups. Our testing procedures will produce results that are comparable to existing data on the EE in non-human primates. This means that we will understand both how the EE develops in humans and how it evolved across the primates. This combined approach will help measure the degree to which biased decision-making is a result of experience and culture. Our second goal is to investigate how different features related to possession influence the EE. In particular, we will test the importance of physical versus "legal" possession (e.g., having an object vs. being told that you will receive an object) and the degree to which the EE is determined by possession of the actual object (as compared to a photo of or symbol representing the object). Finally, our research will have two broader impacts. First, these results will address the development of decision-making biases and thus help to inform the debate about how to best minimize the impacts of faulty decision-making. Additionally, we will engage students at all levels in the scientific process, including sharing these results in academic venues as well as with parents and other members of the community.