Mohlin, Erik & Gärdenfors, P. | 2025
Theory and Decision, 1-10
We show how the endowment effect can be interpreted in terms of ambiguity aversion. Agents take status quo as their reference point, relative to which they evaluate potential trades. The value of exchanged goods is ambiguous, represented by a set of probability distributions over possible values. Agents are ambiguity averse, modeled as maxmin expected utility maximisers. This characteristic leads a seller to focus on the case of selling a high value good and leads a buyer to focus on the case of buying a low value good. Consequently, the seller’s willingness to accept (WTA) is inflated and the buyer’s willingness to pay (WTP) is deflated, producing an endowment effect. Assuming that agents incorporate new information via Bayesian updating of the set of priors, we show that information decreases the WTP-WTA gap. In this way our model can account for the known facts that the endowment effect is mitigated by physical contact with the good, decreasing in experience, larger for non-market goods, and more dependent on possession of the good than on ownership.
