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The Endowment Effect as blessing

Frenkel, Sivan and Heller, Yuval and Teper, Roee (2017): The Endowment Effect as blessing. Forthcoming in: International Economic Review No. forthcoming

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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 suggest that the “endowment effect” and the “winner's curse” could have jointly survived natural selection together. Next we develop a new family of “hybrid-replicator” dynamics. We show that under such dynamics, biases survive in the population for a long period of time even if they only partially compensate for each other and despite the fact that the rational type's payoff is strictly larger than the payoffs of all other types.

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