# Are adults better behaved than children? Age, experience, and the endowment effect

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3 W.T. Harbaugh et al. / Economics Letters 70 (2001) from the last three. The children s goods were chosen because they were familiar, widely available in stores, and appealed to both boys and girls. The goods in a pair were roughly of equivalent value. During the experiment it was clear that the appeal to children of the goods increased from the first to the third pair. The undergraduates were not given the first pair of children s goods, since we doubted these goods would appeal to adults. Their last pair was a choice between two 100-g Swiss chocolate bars, or a coffee mug with the university logo on it, similar to the goods that Knetsch and others have used. We randomly divided the subjects in each classroom into two groups. Subjects in one group were given one good, and those in the other group were given the other good. Along with the item, each subject was given a tag. A sample of the other good was then passed among each group. After inspecting the item, the students chose to either keep their original good (by placing a blue sticker on the tag it came with) or to trade it for the other good (by placing a yellow sticker on the tag). The second and third rounds were played exactly as the first, but with different pairs of goods. Every subject and every class received the pairs of goods in the same order, except for the difference for undergraduates noted above. The protocol is available from the authors. 3. Results When given a choice between two goods, an endowment effect exists if the probability that a person chooses, say, good A is higher if they were initially endowed with good A than if they were endowed with good B. We define the endowment boost as the average across the two goods of the increase in the likelihood that a person chooses a good when they are endowed with it, relative to being endowed with the other good. That is, if pjui denotes the probability of choosing good j when endowed with good i, then the endowment boost equals: 1 p1u1 1 p2u2 ]]] 1]]] 2 p 2 p 1u2 2u1 The children s choices for each of the three pairs are presented in Tables 2 4. The rows indicate the good that a subject was endowed with, while the columns indicate which good they chose. We report both n ij, the number of subjects endowed with good i who choose good j, and p jui, the probability a Table 2 Children s choices: Pair 1 A B Endowment A 24 ( paua50.40) 36 ( pbua50.60) 60 B 6 (paub50.092) 59 ( pbub50.91) Endowment boost52.9 p-value of hypothesis of no endowment effect50.000

4 178 W.T. Harbaugh et al. / Economics Letters 70 (2001) Table 3 Children s choices: Pair 2 C D Endowment C 47 ( pcuc50.76) 15 ( pduc50.24) 62 D 30 (pcud50.48) 33 ( pdud50.52) Endowment boost51.9 p-value of hypothesis of no endowment effect person chooses good j, conditional on having been endowed with good i. We say an endowment effect exists if the endowment boost is greater than 1. Formally we use Fisher s exact test of the null 1 hypothesis that endowment has no effect on which good a person chooses. The probability values for the test statistics and the endowment boost are reported for each pair. For every good, the likelihood of choosing the good increases when the child is endowed with it. Fisher s exact test rejects the null hypothesis of no endowment effect for all pairs. Furthermore, the effect is quite large. In Table 2, for example, the first row shows that 24 of the 60 subjects who were endowed with good A kept it, while 36 switched to good B. The second row shows that of the 65 subjects who were endowed with good B, six switched to A and 59 kept B. While good A was not very popular relative to good B, it was considerably more likely to be chosen when a subject was endowed with it than when not, and the same was true of good B. For the A and B pair of goods, children on average are 2.9 times more likely to choose the good they are endowed with than the good they are not. The analogous number is 1.9 and 2.5 for the subsequent pairs. We are unable to say anything about the effect of repetition on the size of the endowment effect for two reasons. First, it is possible that any effect is driven by differences in the pairs of goods, rather than by repetition. Table 4 Children s choices: Pair 3 E F Endowment E 39 ( peue50.70) 17 ( pfue50.30) 56 F 19 (peuf50.28) 50 ( pfuf50.72) Endowment boost52.5 p-value of hypothesis of no endowment effect This test, from Fisher (1925), is done by using the binomial distribution to calculate the exact probability of getting the observed results, or results more contradictory to the null, if the null is true.

5 Table 5 Undergraduates choices: Pair 2 W.T. Harbaugh et al. / Economics Letters 70 (2001) C Endowment C 12 ( pcuc50.63) 7 ( pduc50.37) 19 D 3 (pcud50.16) 16 ( pdud50.84) Endowment boost53.1 p-value of hypothesis of no endowment effect D Second, the Zelen test has a probability value of 0.51, so we cannot reject the hypothesis that the 2 endowment boosts are equivalent across goods. Next we look at the data from our undergraduate subjects. Tables 5 7 show that, as with the children, an endowment effect exists for all three pairs of goods. We then examine whether age is related to the endowment effect. Table 8 shows the endowment boosts for all four pairs of goods by grade level so that we can look at differences in the boosts by age. While the pair 1 boost for the kindergartners is undefined because none of the subjects endowed with good B switch, the endowment effect is obviously large. While the third-graders appear to be the least susceptible to the endowment effect, their behavior is not significantly different than that of the other age groups. Formally, for pairs 1, 2, and 3, the Zelen test cannot reject the null hypothesis that Table 6 Undergraduates choices: Pair 3 E Endowment E 9 ( peue50.47) 10 ( pfue50.53) 19 F 2 (peuf50.11) 17 ( pfuf50.89) Endowment boost53.1 p-value of hypothesis of no endowment effect F 2 The Zelen test (Zelen, 1971) is an exact test, derived from the binomial probabilities, for the homogeneity of the odds-ratios: n11 n21 ]]] n11 1 n12 n21 1 n22 ]]] n Y]]] 12 n22 ]]] ]]] n11 1 n12 n21 1 n22 across treatments (or pairs, in our case), where n ij is the number of observations in row i, column j for a given treatment.

7 W.T. Harbaugh et al. / Economics Letters 70 (2001) We argue that these results are inconsistent with the argument that the endowment effect is a mistake or a transitory anomaly related to market inexperience. If that were true, then the relatively unsophisticated children would have kept their initial endowments at higher rates than did the adults in this study. We believe the most reasonable interpretation of these results is that they support reference-dependent preferences. The endowment effect appears to be a real part of preferences, rather than a mistake that diminishes with experience and learning. Acknowledgements We thank the principal, teachers and students who made this project possible. We also thank Rachel Croson and seminar participants at the 1998 ESA meetings for helpful comments; John Hobbs for his work on an earlier version of this project; and Josha Antos and Kristin Hutchens for expert research assistance. NSF Grants SBR and SBR funded this research. References Brookshire, D.S., Coursey, D.L., Measuring the value of a public good: an empirical comparison of elicitation procedures. American Economic Review 77 (4), Coursey, D.L., Hovis, J.J., Schulze, W.D., The disparity between willingness to accept and willingness to pay measures of value. The Quarterly Journal of Economics 102 (3), Fisher, R.A., Statistical Methods for Research Workers. Oliver and Boyd, Edinburgh. Kahneman, D., Knetsch, J.L., Thaler, R., Experimental tests of the endowment effect and the Coase theorem. Journal of Political Economy 98 (6), Knetsch, J.L., The endowment effect and evidence of nonreversible indifference curves. American Economic Review 79 (5), Knez, P., Smith, V.L., Williams, A.W., Individual rationality, market rationality, and value estimation. American Economic Review 75 (2), Shogren, J.F., Shin, S.Y., Hayes, D., Kliebenstein, J.B., Resolving differences in willingness to pay and willingness to accept. American Economic Review 84, Zelen, M., The analysis of several 232 contingency tables. Biometrika 58 (1),

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