The Endowment Effect in a Field Study with Risk-Reducing Instruments

Abstract

The endowment effect is a phenomenon whereby ownership increases the perceived value of goods, thereby reducing the willingness to trade. This paper presents the results of a field experiment, designed to assess the robustness of this effect when decisions concern unique, non-tangible instruments of a very high utility. Participating students were unaware of being involved in the experiment, as we monitored their decisions concerning the examination bonuses in a natural academic setting. In contrast to the majority of prior studies that focus on commodities of a known and certain value, this research examines the effect in the context of risky and ambiguous instruments, which are more difficult to evaluate. Our results strongly support the endowment effect hypothesis, proving that the effect is robust, and likely to also be observed in markets concerning high-utility, risky instruments, such as financial ones. Additionally, we find a weak level of support for the gender effect, with female respondents demonstrating a lack of bias when endowed with ambiguous instruments. The study also analyzes the efficiency of these instruments in terms of their utility in risk reduction, and the effort incentives created.