Does Attenuating Endowment Effect Improve Efficiency? An Overview of Applications

Hai He

doi:10.54097/hbem.v21i.13711

Authors

Hai He

DOI:

https://doi.org/10.54097/hbem.v21i.13711

Keywords:

Endowment Effect; Market Efficiency; Cognitive Bias; Risk Prospects.

Abstract

This article explores the impact of the endowment effect on market efficiency, with a specific focus on attenuating this effect to improve overall efficiency. The analysis is grounded in a classical three-dimensional theoretical framework encompassing willingness to pay (WTP), willingness to accept (WTA), and loss aversion. The article discusses strategies to narrow the gap between WTA and WTP and reduce loss aversion as means to mitigate the endowment effect and enhance market efficiency. Drawing on literature reviews and case studies, the paper examines three applications of the endowment effect in the context of P2P payment, organizational co-determination, and the U.S. drinking water supply. The findings suggest that attenuating the endowment effect has the potential to improve efficiency, foster cooperation, and provide practical methods for enhancing market outcomes. To improve the future study, this paper provides insight to mitigate the endowment effect by combining closing the WTA-WTP discrepancy and reducing the loss aversion, introducing proxy variables based on specific contexts for empirical study.

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