Week 6

Week 6

This week we were told to read the article: “Neoclassical theory versus prospect theory: Evidence from the market” by John A, List. This article examined endowment effect on consumer in Market place, by testing neoclassical theory against prospect theory. Previous studies has shown that preferences are not independent of current entitlements and a study conducted by Knetsch (1989) showed that participants were more likely to keep their endowed goods (L, A., John 2004). However the evidence done so fare favor prospect theory but some economist has argued that endowment effect is due to mistake made by inexperienced consumers and through time and experiences they are more likely to match predictions from neoclassical model. Recent experiments done on endowment effect supported this theory, for instance List (2003) study examined trading rates of sport memorabilia in an actual marketplace, and observed low number of trades made by inexperienced which consisted with prospect theory, but individual behavior approaches neoclassical expectations as market experience intensifies (List 2004). This findings suggest that behavior does change among inexperience and experience traders, but however some important questions rise from this studies because List 2003 was not mainly interested in testing the major theories. His study did not properly distinguished between prospect theory and neoclassical theory because experienced agents may have planned on reselling the good. This is a important factor as Kahneman, Knetsch and Thaler (1990) stated that there are some cases in which no endowment effect would be expected when goods are bought for resale purposes rather then for utilization. This study took into account all issues by conducting experiment within a well-functioning marketplace. The advantages of conducting this experiment in natural occurring environment is that people will still engage in market activities such as buying and selling regardless of the experiment. This study used more familiar goods such as chocolate bars and mugs. This study found overall strong support for prospect theory within inexperienced consumers, and for those consumers that had a considerable amount of exchange opportunity in the marketplace, neoclassical theory predicts reasonably well, evidence that behavior approaches the neoclassical prediction for experienced agents (List 2004).