Endowments and Risky Choice

43 Pages Posted: 8 Apr 2019

See all articles by Erin Crockett

Erin Crockett

City University of NY, Baruch College, Zicklin School of Business

Sean Crockett

Chapman University

Date Written: October 9, 2018

Abstract

We report evidence of an endowment effect for risk, extending previous results to the popular paired-choice lottery setting. Specifically, we observe a distribution of revealed preferences consistent with risk aversion that diminishes in endowed variance, although the effect is considerably weaker for compound relative to simple lotteries. We also find that in the absence of an obvious endowment, subjects behave as if the comparatively lower-variance lottery is a cognitive reference point, revealing a distribution of preferences indistinguishable from subjects who are explicitly endowed with the low-variance lottery. Finally, we report no significant difference in elicited preferences between two popular mechanisms (the Multiple Price List and a variant on the Becker, DeGroot, and Marschak [1964] mechanism) when no endowment is induced, suggesting previously reported differences in behavior between the two mechanisms may be in part a consequence of relative responsiveness to endowment framing.

Keywords: Behavioral Economics, Endowment Effect, Reference Dependent Preferences, Risk Aversion

JEL Classification: C91, D81

Suggested Citation

Crockett, Erin and Crockett, Sean, Endowments and Risky Choice (October 9, 2018). Journal of Economic Behavior and Organization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3353454

Erin Crockett

City University of NY, Baruch College, Zicklin School of Business ( email )

One Bernard Baruch Way
New York, NY 10010
United States

Sean Crockett (Contact Author)

Chapman University ( email )

Orange, CA 92866
United States

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