The Endowment Effect as a blessing

Frenkel, Sivan and Heller, Yuval and Teper, Roee (2013): The Endowment Effect as a blessing.

Abstract

We study the idea that seemingly unrelated behavioral biases can coevolve if they jointly compensate for the errors that any one of them would give rise to in isolation. 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. We develop a new family of “hybrid-replicator” selection dynamics and show that under such dynamics, even if biases only partially compensate for each other, individuals with both biases can survive in the population in the long run.

• Item Type: MPRA Paper
• Language: English
• Keywords: Endowment Effect, Winner's Curse, Bounded Rationality, Evolution.
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games

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