Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?

Jack L. Knetsch (1989) reported an important discovery. Using a simple experiment, he demonstrated the existence of asymmetries in exchange behavior. More precisely, when he followed a specific set of procedures to endow subjects with mugs and provided each subject an opportunity to exchange the endowed mug for a candy bar, he found that very few subjects gave up the endowed mug. By contrast, when he endowed a different group of subjects with candy bars using the same set of procedures, very few gave up the candy bar in exchange for a mug. While Knetsch, and many of those who followed him, interpreted the asymmetry as evidence of a special shape of preferences related to loss aversion (Knetsch 1989, 1277), our results demonstrate that observed asymmetries should be attributed instead to well-established alternative economic theories that influence choices through the experimental procedures employed. Knetsch’s initial intuitions have been expanded in a large and growing literature claiming that observed exchange asymmetries support “endowment effect theory”—an application of prospect theory positing that loss aversion associated with an endowment leads to asymmetries in valuations and exchange behavior. We use the term “endowment effect theory” rather than “endowment effect” to avoid the confusion over terminology that has emerged in the literature. From the beginning (i.e., Richard H. Thaler 1980), the label “endowment effect” has been used commonly to refer to observed symmetries. Using this label to refer to the observed phenomenon is problematic because it suggests a particular Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?