Introduction
Individual’s behaviors significantly affect the decision making when they participate in the financial market. This phenomenon gives a shock to rational assumptions related to the traditional economic theory. For figuring out the principles and motivations behind decision-making process, behavioral economics has been widely discussed more than ever.
Endowment effect, as one of economic phenomenon, arises from economic activities affecting preference and value construction (Ariely and Norton, 2008; Willemsen et al.2011). This essay explains what the endowment effect is and how the prospect theory is related to the existence of endowment effect. And according to the field study of List (2004), it discusses experience effect on the …show more content…
Making a choice under the uncertain and risky condition people always want to maximize their utility as they expect it. Kahneman and Tversky's (1980) raises Prospect Theory based on Expected Utility Theory to give a decision-making model, and they considered that making decisions under uncertain condition is equivalent to a selection between risky options and prospected options. The former one indicates more adventures when people choose it. For minimizing the risk, people need to make sure about the certainty currently before making a …show more content…
List (2004) discusses the influence of experience on endowment effect via a large-scale experiment. He set two hypotheses related to neoclassical theory and prospect theory. And he invites 375 individuals in the sportscard market. Depending on the degree of experience, subjects are divided into non-dealers and dealers, corresponding the inexperienced individuals and experienced individuals. Every dealer is given a mug or a candy bar during this field study. And then all dealers are asked whether they are willing to swap or they can keep the original item continuously. After testing those people, the result show that people with less experience tend to exit this study while experienced people would like to swap. Hence, there is no evidence showing that endowment effect exists. De Sousa and Munro (2012) also proves that participates who are more experienced in trading rarely will not show their current behavior in transaction and they prefer to exchange good rather than reserve it. Besides, List (2004) also finds that experienced people lean to eliminate endowment effect in a strange situation since they meet the specific problem
Individual’s behaviors significantly affect the decision making when they participate in the financial market. This phenomenon gives a shock to rational assumptions related to the traditional economic theory. For figuring out the principles and motivations behind decision-making process, behavioral economics has been widely discussed more than ever.
Endowment effect, as one of economic phenomenon, arises from economic activities affecting preference and value construction (Ariely and Norton, 2008; Willemsen et al.2011). This essay explains what the endowment effect is and how the prospect theory is related to the existence of endowment effect. And according to the field study of List (2004), it discusses experience effect on the …show more content…
Making a choice under the uncertain and risky condition people always want to maximize their utility as they expect it. Kahneman and Tversky's (1980) raises Prospect Theory based on Expected Utility Theory to give a decision-making model, and they considered that making decisions under uncertain condition is equivalent to a selection between risky options and prospected options. The former one indicates more adventures when people choose it. For minimizing the risk, people need to make sure about the certainty currently before making a …show more content…
List (2004) discusses the influence of experience on endowment effect via a large-scale experiment. He set two hypotheses related to neoclassical theory and prospect theory. And he invites 375 individuals in the sportscard market. Depending on the degree of experience, subjects are divided into non-dealers and dealers, corresponding the inexperienced individuals and experienced individuals. Every dealer is given a mug or a candy bar during this field study. And then all dealers are asked whether they are willing to swap or they can keep the original item continuously. After testing those people, the result show that people with less experience tend to exit this study while experienced people would like to swap. Hence, there is no evidence showing that endowment effect exists. De Sousa and Munro (2012) also proves that participates who are more experienced in trading rarely will not show their current behavior in transaction and they prefer to exchange good rather than reserve it. Besides, List (2004) also finds that experienced people lean to eliminate endowment effect in a strange situation since they meet the specific problem