week 6: Neoclassical theory

This week reading focused on the endowment effect, the paper title: Neoclassical THEORY VERSUS PROSPECT THEORY: EVIDENCE FROM THE MARKETPLACE, BY JOHN A LIST.

My understanding of the reading suggests behaviour does change as market experience is accumulating. There have been several experimental studies that suggested people tend to make decisions based on a higher value to things that they earned. In this paper several experiment has being carried out to explore whether the preference between two goods are independent of the consumer entitlement typical reports endowment effects for everyday consumable goods. The first experiment was carried out using mugs and candy bars; subjects were asked to choose between the two. List (2003) used unique pieces of memorabilia which participants were unfamiliar with; finding showed that traders tend to turned to familiars object.
At first I didn’t understand fully what the paper was saying, however after reading, chapter eight on the section endowment effect and the discussions in the class I understood it much better. This study provided insight into the endowment effect for example: The value of goods increases when it becomes a part of a person’s endowment. The person demands more to give up an object than they would be willing to pay to acquire it. According to Kalmeman, Knetsch, and Thaler (1990) Run studies to determine whether the Endowment effect survives when subjects face market disciplines and have a chance to learn. One of the first Studies: was carried out using undergraduate economics class, participated in a series of markets, alternating students given Cornell coffee mugs valued at $6.00.
This study shows that people tend to put a higher price on personalised possession that they treasure more than things they just want to get rid of. Personally I find myself closely attach to gifts given by friends and family which are personal to me, these I find difficult to put a price on. Moreover, I would have no problem putting a price on something’s that I have personally bought myself and want to get rid, in order to earn some money especially if it is something not wanted. Reading this paper has increased my understand of the effect of endowment in different ways. Understanding of prospect theory, people tend to make decisions only if they are being benefitted from the decision at hand. Personally I would agreed with endowment effect, which suggested that people tend to overprice item when they trying to sell something in order to make a profit exceeding the value of the goods.