Endowment Effect
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Endowment Effect
In psychology and behavioral economics, the endowment effect (also known as divestiture aversion and related to the mere ownership effect in social psychology) is the finding that people are more likely to retain an object they own than acquire that same object when they do not own it. The endowment theory can be defined as "an application of prospect theory positing that loss aversion associated with ownership explains observed exchange asymmetries." This is typically illustrated in two ways. In a valuation paradigm, people's maximum willingness to pay (WTP) to acquire an object is typically lower than the least amount they are willing to accept (WTA) to give up that same object when they own it—even when there is no cause for attachment, or even if the item was only obtained minutes ago. In an exchange paradigm, people given a good are reluctant to trade it for another good of similar value. For example, participants first given a Swiss chocolate bar were generally willing to ...
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Psychology
Psychology is the scientific study of mind and behavior. Psychology includes the study of conscious and unconscious phenomena, including feelings and thoughts. It is an academic discipline of immense scope, crossing the boundaries between the natural and social sciences. Psychologists seek an understanding of the emergent properties of brains, linking the discipline to neuroscience. As social scientists, psychologists aim to understand the behavior of individuals and groups.Fernald LD (2008)''Psychology: Six perspectives'' (pp.12–15). Thousand Oaks, CA: Sage Publications.Hockenbury & Hockenbury. Psychology. Worth Publishers, 2010. Ψ (''psi''), the first letter of the Greek word ''psyche'' from which the term psychology is derived (see below), is commonly associated with the science. A professional practitioner or researcher involved in the discipline is called a psychologist. Some psychologists can also be classified as behavioral or cognitive scientists. Some psyc ...
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Coase Theorem
In law and economics, the Coase theorem () describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasean bargaining. This 'theorem' is commonly attributed to Nobel Prize laureate Ronald Coase. This 1960 paper, along with his 1937 paper on the nature of the firm (which also emphasizes the role of transaction costs), earned Ronald Coase the 1991 Nobel Memorial Prize in Economic Sciences. In this 1960 paper, Coase argued that real-world transaction costs are rarely low enough to allow for efficient bargaining and hence the theorem is almost always inapplicable to economic reality. In his later writings, Coase expressed frustration that his th ...
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Self-referential Encoding
Self-referential encoding is a method of organizing information in one's memory in which one interprets incoming information in relation to oneself, using one's self-concept as a background.Rogers, T. B., Kuiper, N. A., & Kirker, W. S. (1977). Self-reference and the encoding of personal information. ''Journal of Personality and Social Psychology, 35''(9), 677–688. doi:10.1037/0022-3514.35.9.677 Examples include being able to attribute personality traits to oneself or to identify recollected episodes as being personal memories of the past.Benoit, R. G., Gilbert, S. J., Volle, E., & Burgess, P. W. (2010). When I think about me and simulate you: Medial rostral prefrontal cortex and self-referential processes. ''Neuroimage, 50''(3), 1340–1349. doi:10.1016/j.neuroimage.2009.12.091 The implications of self-referential processing are evident in many psychological phenomena. For example, the "cocktail party effect" notes that people attend to the sound of their names even during other ...
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Attachment Theory
Attachment theory is a psychological, evolutionary and ethological theory concerning relationships between humans. The most important tenet is that young children need to develop a relationship with at least one primary caregiver for normal social and emotional development. The theory was formulated by psychiatrist and psychoanalyst John Bowlby. Within attachment theory, infant behaviour associated with attachment is primarily the seeking of proximity to an attachment figure in stressful situations. Infants become attached to adults who are sensitive and responsive in social interactions with them, and who remain as consistent caregivers for some months during the period from about six months to two years of age. During the latter part of this period, children begin to use attachment figures (familiar people) as a secure base to explore from and return to. Parental responses lead to the development of patterns of attachment; these, in turn, lead to internal working models ...
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Superadditive
In mathematics, a function f is superadditive if f(x+y) \geq f(x) + f(y) for all x and y in the domain of f. Similarly, a sequence \left\, n \geq 1, is called superadditive if it satisfies the inequality a_ \geq a_n + a_m for all m and n. The term "superadditive" is also applied to functions from a boolean algebra to the real numbers where P(X \lor Y) \geq P(X) + P(Y), such as lower probabilities. Properties If f is a superadditive function, and if 0 is in its domain, then f(0) \leq 0. To see this, take the inequality at the top: f(x) \leq f(x+y) - f(y). Hence f(0) \leq f(0+y) - f(y) = 0. The negative of a superadditive function is subadditive. Fekete's lemma The major reason for the use of superadditive sequences is the following lemma due to Michael Fekete. :Lemma: (Fekete) For every superadditive sequence \left\, n \geq 1, the limit \lim a_n/n is equal to \sup a_n/n. (The limit may be positive infinity, for instance, for the sequence a_n = \log n!.) For example, f( ...
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Neoclassical Economic Theory
Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good or service is determined through a hypothetical maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production. This approach has often been justified by appealing to rational choice theory, a theory that has come under considerable question in recent years. Neoclassical economics historically dominated macroeconomics and, together with Keynesian economics, formed the neoclassical synthesis which dominated mainstream economics as "neo-Keynesian economics" from the 1950s to the 1970s.Clark, B. (1998). ''Principles of political economy: A comparative approach''. Westport, Connecticut: Praeger. Nadeau, R. L. (2003). ''The Wealth of Natur ...
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Prospect Theory
Prospect theory is a theory of behavioral economics and behavioral finance that was developed by Daniel Kahneman and Amos Tversky in 1979. The theory was cited in the decision to award Kahneman the 2002 Nobel Memorial Prize in Economics. Based on results from controlled studies, it describes how individuals assess their loss and gain perspectives in an asymmetric manner (see loss aversion). For example, for some individuals, the pain from losing $1,000 could only be compensated by the pleasure of earning $2,000. Thus, contrary to the expected utility theory (which models the decision that perfectly rational agents would make), prospect theory aims to describe the actual behavior of people. In the original formulation of the theory, the term ''prospect'' referred to the predictable results of a lottery. However, prospect theory can also be applied to the prediction of other forms of behaviors and decisions. Overview Prospect theory stems from Loss aversion, where the observ ...
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Reference Dependence
Reference dependence is a central principle in prospect theory and behavioral economics generally. It holds that people evaluate outcomes and express preferences relative to an existing reference point, or status quo. It is related to loss aversion and the endowment effect In psychology and behavioral economics, the endowment effect (also known as divestiture aversion and related to the mere ownership effect in social psychology) is the finding that people are more likely to retain an object they own than acquire t .... In prospect theory it is appropriate to use the selected status quo to determine the reference point. However, depending on the particular research being conducted researchers have proven reference dependence from more than just well known brands and the status quo. The types of reference points used varies but studies have used individual goals, aspirations and social comparisons. Alternative reference points are used by researches commonly in the school of phyco ...
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David Gal
David Gal iProfessor of Marketingat the University of Illinois at Chicago. He is best known for his critiques of behavioral economics, and in particular his critique of the behavioral economics concept of loss aversion. His forthcoming book is titled ''The Power of the Status Quo''. Academic career Gal received his Ph.D. from Stanford University in 2007. He joined the faculty of Kellogg School of Management, The Kellogg School of Management at Northwestern University where he remained until 2014, at which time he joined the faculty of The University of Illinois at Chicago. His research has been published in Journal of Consumer Research, Journal of Marketing Research, Journal of Marketing, Judgment and Decision Making, Psychological Science, Management Science (journal), Management Science, and Journal of the American Statistical Association. It has been featured in the ''New York Times'', ''Wall Street Journal'', ''The Toronto Star'', ''Time'', ''Harvard Business Review'', and '' ...
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Psychological Inertia
Psychological inertia is the tendency to maintain the status-quo (or default option) unless compelled by a psychological motive to intervene or reject this. Psychological inertia is similar to the status-quo bias but there is an important distinction in that psychological inertia involves inhibiting any action, whereas the status-quo bias involves avoiding any change which would be perceived as a loss. Research into psychological inertia is limited, particularly into its causes, but it has been seen to affect decision-making by causing individuals to automatically choose or prefer the default option, even if there is a more beneficial option available to them, unless motivated to reject this option. For example, psychological inertia may cause individuals to continue with their investments later than they should, despite information telling them otherwise, causing them to suffer greater losses than they would have if they had disinvested earlier. Psychological inertia has also ...
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