[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

model of consumer choice that was developed in this chapter. Instead, they argue that
a theory of consumer choice should be based on how people actually make decisions.
Behavioral economists therefore draw on the findings of psychologists who conduct
laboratory experiments to study that question. As a sign of the growing importance
of this work, the 2002 Nobel Prize in Economics was shared by a psychologist, Daniel
Kahneman, whose research has heavily influenced the new field.
Behavioral economics takes as its starting point a number of findings that appear
to be inconsistent with the basic model of consumer choice we have developed in
this chapter. A few of them, discussed below, illustrate the types of evidence on which
behavioral economists focus.
Endowment Effects A large body of evidence suggests that the simple act of
possessing something can alter a person’s preferences. Consider the following experiment
involving a group of college undergraduates, half of whom were given college
coffee mugs that sold for $6.00 at the college bookstore. The students were then
allowed to participate in a market in which mugs could be bought and sold. One
might expect that those students with mugs who valued them least would end up
selling them to those without mugs who valued them most. Since the coffee mugs had
been distributed randomly, about half should trade hands. In fact, very few trades
took place. The experimenters found that the median price demanded by mug sellers
was $5.25, and the median amount buyers were willing to spend was around
$2.25. Initially, there were no reasons to expect predictable differences in how
students valued coffee mugs; but the mere fact of being given a mug seemed to make
individuals value mugs more highly.
This phenomenon is called the endowment effect. In the standard model of consumer
choice, individuals purchase those goods that they value more than the dollars
they have to give up to make the purchase. But people are not expected to value
more highly those items that they happen to possess. In another experiment, college
students were given either a lottery ticket or $2.00. They were then allowed to
exchange whichever they had received for the other; that is, a student who had been
given a lottery ticket could turn it in and get $2.00, or a student who had received $2.00
could exchange it for a lottery ticket. Surprisingly, at least from the perspective of
the standard model of consumer choice, very few students wanted to make the trade.
Those who received lottery tickets seemed to prefer them to the cash; those who
received the cash preferred it to the ticket. Since the two groups of students were
otherwise similar, there was no reason to expect that those who happened to receive
lottery tickets would value them more than did the students given cash.
Loss Aversion The standard model of consumer choice assumes that individuals’
well-defined preferences for goods do not depend on whether they actually have
those items. The endowment effect may reflect what psychologists have called loss
aversion. Individuals seem to be particularly sensitive to losses. Once the students
had mugs in their possession, they didn’t want to give them up; thus they set the
sale price above what they would have been willing to pay for a mug in the first place.
Similarly, a person with $1,100 who then loses $100 feels worse than someone with
$900 who then finds $100. Even though both ultimately have the same amount of
money, their feelings about their situations are very different.
120 ∂ CHAPTER 5 THE CONSUMPTION DECISION