Endowment Effects in the Field: Evidence from India's IPO Lotteries

Abstract

Winners of randomly assigned initial public offering (IPO) lottery shares are significantly more likely to hold these shares than lottery losers 1, 6, and even 24 months after the random allocation. This effect persists in samples of wealthy and highly active investors, suggesting along with additional evidence that this type of "endowment effect" is not solely driven by portfolio inertia or wealth effects. The effect decreases as experience in the IPO market increases, but persists even for the most experienced investors. These results suggest that agents' preferences and/or beliefs about an asset are not independent of ownership, providing field evidence derived from the behavior of 1.5 million Indian stock investors which is in line with the large laboratory literature documenting endowment effects. We evaluate the extent to which prominent models of endowment effects and/or investor behavior can explain our results. A combination of inattention and non-standard preferences (realization utility) or non-standard beliefs (salience based probability distortions) appears most consistent with our findings.

Household Finance

“…Loss aversion has also been proposed as a leading explanation for the endowment effect. Anagol, Balasubramaniam, and Ramadorai (2018) use the random allocation of IPO stocks to roughly 1.5 million Indian investors as a way to causally identify this effect in asset markets. They find that there is a pronounced endowment effect in these data, namely, that investors who applied for and were randomly allocated IPOs have a strong tendency to continue to hold these stocks while those who randomly didn't receive the stock rarely purchase it in the future.…”

How Field Experiments in Economics Can Complement Psychological Research on Judgment Biases

“…I found that the treatment directly altered the endowment effect. The thrust of these results regarding market and trading experience has been broadly replicated in economics and psychology (see, e.g., Anagol et al, 2018;Kermer et al, 2006;Lindsay, 2019).…”

International Comparative Household Finance

“…However, others propose that the eects of performance on trading may stem from more naive reinforcement learning, or from the fact that investors may have non-classical utility functions such as reference-dependent preferences with loss aversion. For example, Anagol et al (2015Anagol et al ( , 2016 use lotteries in oversubscribed IPOs in India to show that lottery-winning investors, who receive exogenous gains (from which no inferences about investor skill can be made) on account of being randomly allotted IPO shares, are more inclined to hold the shares that they won for long periods of time despite incurring substantial losses on them, likelier to apply for future IPOs, increase the fraction of their portfolios held in the same sector as the IPO stock, increase the overall number of stocks that they hold, and churn their portfolios far more frequently. Anagol et al detect these eects on investment behavior even among investors with substantial portfolio holdings, for whom the exogenous gains are small enough fractions of the portfolio to rule out explanations based on wealth eects or portfolio rebalancing.…”

“…study discrete regulatory changes in India and trace out their eects on risky mortgage lending in that country. Anagol et al (2015Anagol et al ( , 2016 study Indian IPOs in which there are randomized Even in the absence of natural experiments, dierent countries have dierent histories of macroeconomic shocks. Research on household responses to these shocks can progress more rapidly when the data available are a multi-country panel rather than a single-country time series.…”