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

Abstract

We study a unique field experiment in India in which 1.5 million stock investors face lotteries for the random allocation of shares. We find that the winners of these randomly assigned initial public offering (IPO) lottery shares are significantly more likely to hold them than lottery losers 1, 6, and even 24 months after the random allocation. This finding strongly evokes laboratory findings of an "endowment effect" for risky gambles, and persists in samples of highly active investors, suggesting along with additional evidence that this behavior is not driven by inertia alone. The effect decreases as experience in the IPO market increases, but remains even for very experienced investors. Leading theories of the endowment effect based on reference-dependent preferences are unable to fully explain these and other findings in the data.

Fully Closed: Individual Responses to Realized Gains and Losses

“…The same is true for . In contrast, Kaustia and Knüpfer (2008) and Anagol, Balasubramaniam, and Ramadorai (2018) have perfectly random assignment of IPO investment opportunities, but these represent less large shocks for a select group of individuals. Koudijs and Voth (2016) consider archival data and a nice natural experiment on collateralized lending but we may not be able to extrapolate from their historical episode to today's investors.…”

“…With respect to the literature on retail investor trading, in laboratory experiments a number of papers analyze risk-taking in response to losses in a variety of settings, including choices over lotteries in laboratory experiments (Thaler and Johnson, 1990), the trading decisions of experienced market-makers (Coval and Shumway, 2005), and IPO investors (Kaustia and Knüpfer, 2008;Anagol, Balasubramaniam, and Ramadorai, 2018). This research has produced mixed results: some studies find that individuals become more risk-seeking following losses (Coval and Shumway, 2005;Langer and Weber, 2008;Andrade and Iyer, 2009), while other studies find that they become more risk-averse (Shiv et al, 2005;Liu et al, 2010).…”

“…Second, we also contribute to studies, such as Andersen, Hanspal, and Nielsen (2019), Malmendier and Nagel (2011), Anagol, Balasubramaniam, and Ramadorai (2018), and Koudijs and Voth (2016) on how personal experiences in stock markets affect individuals' behaviors. 3 In addition, show that individuals save less in their 401(k)s after their portfolio returns are 3 In another paper, using the same data we examine the marginal propensity to consume out of forced liquidations.…”

Who Owns What? A Factor Model for Direct Stockholding

“…Our data on Indian stockholdings, which are also used in Campbell, Ramadorai, and Ranish (2014), Anagol, Balasubramaniam, and Ramadorai (2018), Campbell, Ramadorai, and Ranish (2019), and Anagol, Balasubramaniam, and Ramadorai (2021), come from India's two share depositories with the approval of India's apex capital markets regulator, the Securities and Exchange Board of India (SEBI). We observe data from the beginning of February 2002, but because the cross‐sectional relationships we study are fairly stable over time, we focus primarily on August 2011.…”

The Psychology of Decumulation Decisions During Retirement

“…Once an object, or even a financial benefit, becomes part of an individual’s psychological holdings, delaying the benefits of that entitlement becomes more difficult. Loss aversion and/or an endowment effect—and by extension feelings of ownership toward financial holdings—occur for various consumer financial decisions, including investments (Anagol, Balasubramaniam, & Ramadorai, 2016; Samuelson & Zeckhauser, 1988), bank accounts (Giné, Goldberg, Silverman, & Yang, 2018), mutual funds (Frazzini, 2006), and houses (Genesove & Mayer, 2001). Individuals are also more likely to pay for an extended warranty for new purchases when they feel higher psychological ownership toward the new purchase (Lessard-Bonaventure & Chebat, 2015).…”