An Endowment Effect for Risk: Experimental Tests of Stochastic Reference Points∗

The endowment effect has been widely documented. Recent models of reference-dependent preferences indicate that expectations play a prominent role in the presence of the phenomenon. A subset of such expectations-based models predicts an endowment effect for risk when reference points change from certain to stochastic. In two purposefully simple risk preference experiments, eliminating often-discussed confounds, I demonstrate both between and within-subjects an endowment effect for risky gambles. While subjects are virtually risk neutral when choosing between fixed gambles and changing certain amounts, a high degree of risk aversion is displayed when choosing between fixed amounts and changing gambles. These results provide needed separation between expectationsbased reference-dependent models, allow for evaluation of recent theoretical extensions, and may help to close a long-standing debate in decision science on inconsistency between probability and certainty equivalent methodology for utility elicitation. JEL classification: C91, D01, D81, D84