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Endowment as a blessing

Frenkel, Sivan and Heller, Yuval and Teper, Roee (2012): Endowment as a blessing.

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Abstract

Experimental evidence and field data suggest that agents hold two seemingly unrelated biases: failure to account for the fact that the behavior of others reflects their private information (“winner's curse”), and a tendency to value a good more once it is owned (“endowment effect”). In this paper we propose that these two phenomena are closely related: the biases fully compensate for each other in various economic interactions, and induce an “as-if rational” behavior. We pay specific attention to barter trade, of the kind that was common in prehistoric societies, and suggest that the endowment effect and the winner's curse could have jointly survived natural selection together.

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