The Role of Anticipated Emotions in the Endowment Effect

What happens when you anticipate negative feelings in decision making?

Abstract (Via Ying Zhang and Ayelet Fishbach UC)

This research explored the role of anticipated negative feelings in the observed disparity between buying and selling prices for the same endowed object.We assumed that anticipated negative reactions to losses deter people from trading an endowed object and therefore psychological variables that attenuate the emotional response to negative events should further reduce the price disparity between buyers and sellers. In 3 studies, we tested whether factors that either decrease concern about negative feelings (e.g., positive mood, framing of the transaction as involving no action) or increase the anticipated negative reaction to failure to act (e.g., priming errors of omission) further eliminate the disparity between buying and selling prices. These studies provide a novel conceptualization of the endowment bias and, more generally, illustrate the role of anticipated negative feelings in decision making.

Introduction (Via Ying Zhang & Fishbach)

The processes of price setting tend to vary systemically between buyers and sellers such that the minimum amount of money that people request in order to part with an object (e.g., a coffee mug) typically exceeds the maximum amount they are willing to pay for this same object (Kahneman, Knetsch, & Thaler, 1990; Knetsch & Sinden, 1984, 1987; Thaler, 1980). This price disparity between buyers and sellers, also known as the endowment effect, may be influenced by the anticipated negative reaction to making wrong trading decisions (either buying or selling). To minimize the possibility of regret from making wrong decisions, buyers and
sellers both adopt extreme thresholds for conducting the transactions. To this extent, situational factors that decrease individuals’ concern regarding negative feelings that may result from making a trade should reduce the size of the endowment bias. In this article we examine this possibility by exploring variables that influence traders’ anticipated negative affective experiences, which are expected to moderate the effect of the transaction role (buyers vs. sellers) on price setting for the same endowed object…

Findings (Via Ying Zhang & Fishbach)

People’s anticipated reaction to losses has a powerful influence on their everyday decisions (e.g., Bar-Hillel & Neter, 1996; Gilovich & Medvec, 1995; Kahneman & Miller, 1986). Our research demonstrates the effect that anticipated negative outcomes have on determining transaction prices. In three studies, we found that variables that decrease the negative experience associated with wrong actions, or that increase the negative experience associated with failing to act, can ultimately decrease the size of the disparity between buying and selling prices.

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29. December 2009 by Miguel Barbosa
Categories: Behavioral Economics, Curated Readings | Leave a comment

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