When I teach loss aversion in my ECONS102 class, I raise one of the consequences of loss aversion as the endowment effect. The explanation is fairly simple. When people are loss averse, they value losses much greater than otherwise equivalent gains. Giving something up therefore makes people very unhappy, and so people prefer to hold onto the things that they have. That means that, when a person owns something, they have to be given much more to compensate them for giving it up than what they would have been willing to pay to get it in the first place.
However, it turns out that loss aversion may not be the best (or only) explanation for the endowment effect. In a new NBER Working Paper (ungated version here, with a non-technical summary here), Emily Beam (University of Vermont), Yusufcan Masatlioglu (University of Maryland), Tara Watson (Williams College), and Dean Yang (University of Michigan) look at how people respond to a $50 incentive to attend a health service provider, when it is framed as a loss versus when it is framed as a gain. More specifically:
In this study, we implement a randomized field experiment that compares loss versus gain framing to promote preventive health care utilization. We offer individuals in and near Dearborn, Michigan, an incentive to visit a health clinic run by our partner organization, the Arab Community Center for Economic and Social Services (ACCESS). In the “Visa gift card” (loss framing) treatment, participants are given a Visa gift card of either $50 or $10 that can be activated by visiting the clinic; they will effectively lose the value of the card if they choose not to visit a clinic. In the “reminder card” (gain framing) treatment, participants are given a physically similar generic reminder card with the promise that it will be exchanged for a gift card if they visit the health clinic, but they are not given the gift card up front. In both cases, any individual who went to the health clinic would receive an active Visa gift card, and any funds remaining after the visit could be spent elsewhere. Because of random assignment to the treatments, differences in responsiveness to the incentives are attributable to the differences in the frames.
Research participants who were given a Visa gift card essentially face a loss if they choose not to activate it. That's because, once they finish the initial survey, they have the card in hand and choosing not to activate it is like losing $50. The other participants only receive a reminder card, which can be converted into a gift card. So, if they don't go to the clinic, they aren't losing in the same way. So, if there is an endowment effect, we'd expect those who received the gift card to be more likely to visit the clinic.
However, that isn't really what Beam et al. are looking at. They are investigating why there is an endowment effect. So, in the initial survey, they ask questions that are designed to provide an estimate of how loss averse people are. If the endowment effect is related to loss aversion, then the effect should be larger for people who are more loss averse. However, the endowment effect might also arise because of trust. As Beam et al. explain:
A second possible explanation for the effectiveness of loss framing is that giving an incentive up front induces an individual to have more confidence that the incentive will be provided as promised. The perceived probability of receiving a reward is likely higher for someone who has a tangible reward in hand relative to someone hearing about a promised reward. This trust‐related response is likely more relevant in field contexts outside the lab, and it is expected to be most relevant when individuals do not initially trust the person or institution offering the incentive.
If the endowment effect arises because of trust issues, then it should be larger for people who report less trust in the health care organisation, ACCESS. So, armed with measures of trust and loss aversion for around 1500 people (whose gift card was worth $50, and ignoring a smaller group whose gift card offer was only $10), and knowing which of the research participants visited the clinic (to receive or activate their Visa gift card), Beam et al. then find that:
The overall average difference in take‐up between those who receive the $50 Visa gift card (loss frame) and $50 reminder card (gain frame) is about 2.2 percent... The differences between Visa gift card and reminder card redemption rates are 4 to 5 percentage points for more loss‐loving participants and 1 to 2 percentage points for more loss‐averse participants. These results are not statistically significant... There is no clear pattern linking loss aversion to take‐up rates, nor to the gap in take‐up rates between gift card and reminder treatments.
So, there is a small endowment effect, but it isn't related to loss aversion. What about trust? Beam et al. find that:
Participants without trust of the organization at baseline are much more responsive to the gift card treatment (loss frame); the impact of the gift card is 7.2 percentage points for this group... The statistically significant interaction term... suggests that there is no comparable effect for those who do trust ACCESS at baseline.
In other words, there is an endowment effect for research participants who do not trust ACCESS, but no endowment effect for research participants who do trust ACCESS. When I first read those results, I was a little concerned that they arose only because Beam et al. combined people who reported low trust with people who had no opinion because they hadn't heard of ACCESS before. However, when those categories are separated, the results remain similar.
So, it really does seem that it is trust, and not loss aversion, that likely explains the endowment effect in this context. That doesn't necessarily mean that loss aversion is never a source of the endowment effect though, so I think I am safe (for the moment) in continuing to teach it as closely related to loss aversion.
The Beam et al. paper is also interesting in noting some of the real-world difficulties in research, especially this bit:
During our first survey wave, we encountered several safety issues: some interviewers were harassed by residents; on another day, interviewers witnessed gunfire a few blocks away. After these experiences, we excluded tracts that reported relatively high recent crime levels, and we contacted the Dearborn police department to exclude any additional tracts that they considered to be unsafe...
Yikes! And slightly more mundane, this bit on how they had to adapt the measurement of loss aversion:
Although these questions are typically worded as a gamble, we adjusted the wording to be an “opportunity” after pilot testing revealed many subjects would reject all gambles because of religious objections to gambling.
Real-world field research is often not as straightforward as we hope it would be.
[HT: Ranil Dissanayake]
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