Sunday, February 1, 2009

Does value depend on the probability of acquisition?

Endowment effect shows that people tend to overvalue the things they own, that they demand much more to give up an object than they would be willing to pay to acquire it (WTA > WTP). Perhaps there's more one twist. When giving up an object, people may also estimate the ease with which they acquired the object in the first place and calculate its value accordingly. Ease in this case does not mean mental or physical effort, but probability.

So for example imagine these two groups:

Group 1: a $10 mug was acquired with a probability of 100% (e.g. given as a gift)
Group 2: a $10 mug was acquired with a probability of 20% (e.g. won it in a gamble)

When selling their mug, which group will sell it for more? Of course Group 2. So I would expect a monotonically decreasing curve for value (or WTA) as a function of the probability of acquisition.

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