Heffetz and List (2014) on Reference Points and Endowments

Heffetz, Ori and John A. List, “Is the Endowment Effect an Expectations Effect?” Journal of the European Economic Association 12(5): 1396-1422, October 2014.

• Three experiments are conducted to test the Koszegi and Rabin (2006) version of prospect theory, in which the reference point consists of recent expectations for future consumption. In part, Koszegi and Rabin were motivated by List’s evidence that endowment effects dissipate with market experience. 

• A pared-down description of the experimental set-up: Subjects flip a coin to determine whether they are assigned a mug or a pen. After this assignment, in the Strong Expectations condition, they are told that there is a 99% chance that the good (mug or pen) that they were assigned by the coin flip is what they have to keep, but there is a 1% chance they will be allowed to trade for the other item. (That is, Strong Expectations means that you virtually own the good that was randomly assigned.) In the Weak Expectations condition, the probability is reversed, so the assignment is very unlikely to be binding. Then (eventually), subjects have to choose which good they want. Only after that do they learn whether their choice matters, or whether the realization of the randomization dictated that they had to stick with their assignment. 

• The Koszegi and Rabin model suggests that under Strong Expectations, the coin-flip assignment should affect preferences – but not under Weak Expectations. What Heffetz and List found, however, is that the assignment matters a lot, with no difference between the Expectation conditions. 

• Experiments by Marzilli Ericson and Fuster, alternatively, found a big effect of strong v. weak expectations in a different experimental set-up. Heffetz and List run two experiments similar to those of Marzilli Ericson and Fuster, but do not replicate their results. Instead, Heffetz and List basically continue to find that the random assignment matters, and that the Expectations condition has no effect – contrary to Koszegi and Rabin and to Marzilli Ericson and Fuster.