The endowment effect can be equated to the behavioural model willingness to accept or pay (WTAP), a formula sometimes used to find out how much a consumer or person is willing to put up with or lose for different outcomes.
[5][8] One of the most famous examples of the endowment effect in the literature is from a study by Daniel Kahneman, Jack Knetsch & Richard Thaler,[4] in which Cornell University undergraduates were given a mug and then offered the chance to sell it or trade it for an equally valued alternative (pens).
Other examples of the endowment effect include work by Ziv Carmon and Dan Ariely,[9] who found that participants' hypothetical selling price (willingness to accept or WTA) for NCAA final four tournament tickets were 14 times higher than their hypothetical buying price (willingness to pay or WTP).
[17] At the time Thaler's conceptualisation of the endowment effect was in direct contrast to that of accepted economic theory, which assumed humans were completely rational when making decisions.
[18] In the years that followed, extensive investigations into the endowment effect have been conducted producing a wealth of interesting empirical and theoretical findings.
[4] They go on to suggest that the endowment effect, when considered as a facet of loss-aversion, would thus violate the Coase theorem, and was described as inconsistent with standard economic theory which asserts that a person's willingness to pay (WTP) for a good should be equal to their willingness to accept (WTA) compensation to be deprived of the good, a hypothesis which underlies consumer theory and indifference curves.
Their WTA represented by the (larger) vertical distance from A to D because (after receiving that much wealth) they are indifferent about either being at point B or D. Shogren et al. (1994)[26] has reported findings that lend support to Hanemann's hypothesis.
Hu (2020)[27] shows the endowment effect when the utility function is superadditive, i.e., the value of the whole is greater than the sum of its parts.
Connection-based theories propose that the attachment or association with the self-induced by owning a good is responsible for the endowment effect (for a review, see Morewedge & Giblin, 2015[2]).
[21] Others have argued that the short duration of ownership or highly prosaic items typically used in endowment effect type studies is not sufficient to produce such a connection, conducting research demonstrating support for those points (e.g. Liersch & Rottenstreich, Working Paper).
[7] A real-world example of this would be an individual refusing to part with a college T-shirt because it supports one's identity as an alumnus of that university.
A second route by which ownership may increase value is through a self-referential memory effect (SRE) – the better encoding and recollection of stimuli associated with the self-concept.
Huck, Kirchsteiger & Oechssler (2005)[32] have raised the hypothesis that natural selection may favor individuals whose preferences embody an endowment effect given that it may improve one's bargaining position in bilateral trades.
This may be linked with findings (Shogren, et al., 1994[26]) that suggest the endowment effect is less strong when the relatively artificial sense of scarcity induced in experimental settings is lessened.
Shogren, et al. (1994)[26] noted that the experimental technique used by Kahneman, Knetsch and Thaler (1990)[4] to demonstrate the endowment effect created a situation of artificial scarcity.
Others have argued that the use of hypothetical questions and experiments involving small amounts of money tells us little about actual behavior (e.g. Hoffman and Spitzer, 1993, p. 69, n. 23[11]) with some research supporting these points (e.g., Kahneman, Knetsch and Thaler, 1990,[4] Harless, 1989[35]) and others not (e.g. Knez, Smith and Williams, 1985[36]).
Its presence can cause market inefficiencies and value irregularities between buyers and sellers with similar consequences at smaller or upscaled transactions.
He argues that the presence of an endowment effect indicates that a person has no indifference curve (see however Hanemann, 1991[25]) rendering the neoclassical tools of welfare analysis useless, concluding that courts should instead use WTA as a measure of value.
Fischel (1995)[40] however, raises the counterpoint that using WTA as a measure of value would deter the development of a nation's infrastructure and economic growth.
For example, often individuals refuse the sale of their house or upscale their expected value simply due to their emotional attachment and effort poured into it.
This means they might either stick with a property which causes greater inconvenience to alternatives or have an increased level of difficulties associated with its sale.
[43] Consumer's psychological perception thus makes them more reluctant to part with the service when the trial ends, thereby increasing the quantity of subscribers.