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Experimental economics - Essay Example

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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. …
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Experimental economics
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Experimental economics

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. ... Read More
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