Thinking and Deciding

MENTAL ACCOUNTING 297
think about the gains and losses, though, we do not just add them up as an accountant
would. Rather, we consider them separately, weighing the losses more.
The status quo (endowment) effect
Recall from the last chapter that the Value function of prospect theory is thought to
be steeper for losses than for gains (loss aversion), concave for gains, and convex for
losses. These properties have implications for decisions involving separate gains and
losses. One of them is that people are biased toward the status quo, toward things
as they are. This effect is also called the “endowment” effect because people are
unwilling to give up their endowment, what they now “have,” for what they would
otherwise prefer to it. The loss of the former seems to loom larger than the gain of
the latter. Consider the following example, from Thaler (1980, pp. 43–44):
Mr. R. bought a case of good wine in the late 1950s for about $5 a
bottle. A few years later, his wine merchant agreed to buy the wine back
for $100 a bottle. He [Mr. R.] refused, although he has never paid more
than $35 for a bottle of wine.
In this example, Mr. R. will not accept $100 for a bottle of wine, although he
would not pay more than $35 for (presumably) the same bottle. In both cases, however,
the choice is between wine and money. It might help to think of the true value
of the wine as the amount of money that would have the same desirability as the wine
if Mr. R. had to choose between money and wine (having neither at the outset). Most
likely, this value would be between $35 and $100, because the endowment effect
induces an unwillingness to part with money when Mr. R. has the money, and with
wine when he has the wine.
Researchers demonstrated this effect in the laboratory with real goods and real
money (Kahneman, Knetsch, and Thaler, 1990; Knetsch and Sinden, 1984). In one
experiment in the latter study, members of a group of “sellers” were each given a
coffee mug from their university bookstore and were asked to indicate on a form
whether or not they would sell the mug at each of a series of prices ranging from
$0 to $9.25. A group of “buyers” indicated, on a similar form, whether they were
willing to buy a mug at each price. At the end, a “market price” was picked at
which there were enough sellers to meet the buyers’ demands, and transactions were
completed at that price for sellers willing to accept it and buyers willing to pay it,
as in a real market. The median values assigned to the mug were $7.12 for sellers
and $2.87 for buyers. Although we would expect that half of the buyers and half
of the sellers would prefer the mug to the market price (because the mugs were
assigned randomly), three-quarters of the sellers ended up keeping their mugs (and
three-quarters of the buyers were unwilling to pay enough to get them).
In this study, a group of “choosers” were also asked to choose, for each price in
the series, between receiving a mug or receiving the indicated amount in cash. (Most
choosers, of course, would prefer the cash if the amount were high enough. The highest
amount at which a chooser would still prefer the mug is a measure of her value