Does market experience eliminate

market anomalies? (2003)

Article by John A. List

Trofim Agarkov

University of Glasgow
Endowment effect

(a) A mug (b) A chocolate bar

Figure 1: Experiment similar to Kahneman, Knetsch & Thaler

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Endowment effect

• Willingness to accept (WTA) ≫ willingness to pay

(WTP)
• These findings show that some neoclassical
modelling assumptions may be violated
• Does WTA/WTP disparity reduce as market
experience intensifies?

2
Experiment 1: marketplace

Figure 2: Sportscard show

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Experiment 1: goods

(a) A ticket (b) A certificate

Figure 3: Goods with the same value in experiment 1

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Experiment 1: design

• Subjects are randomly allocated a good (50/50)

• Market experience:
1. Complete a survey and receive a good
2. Consider potential trade
3. Transaction and exit interview

5
Experiment 1: survey

Dealers Nondealers
Variable mean mean
(std. dev.) (std. dev.)
Trading experience 14.82 5.66
(11.0) (6.42)
Years of market 10.36 6.95
experience (6.75) (9.37)
Income 4.26 4.04
(1.92) (2.06)
Age 34.68 34.70
(11.98) (14.06)
Gender (percent male) 0.93 0.86
(0.25) (0.34)
Education 3.42 3.84
(1.42) (1.49)

Table 1: Descriptive statistics

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Experiment 1: results

Percent p-value for

Variable
traded Fisher’s exact test
Pooled sample (n=148)
Good A for Good B 32.8
Good B for Good A 34.6 <0.001
Dealers (n=74)
Good A for Good B 45.7 0.194
Good B for Good A 43.6
Nondealers (n=74)
Good A for Good B 20.0 <0.001
Good B for Good A 25.6
Table 2: Trading statistics
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Experiment 1: results for nondealers

p-value for
Variable Percent traded
Fisher’s exact test
Experienced (n = 30) 46.7 0.32
Inexperienced (n = 44) 6.80 < 0.001

Table 3: Trading statistics for nondealers

• Experienced if trade ≥ 6 times per month

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Experiment 1: regression results
Dealers Nondealers
Variable Logit trade Logit trade Logit trade Logit trade
function function function function
∗∗
−0.58 −0.41 −4.41 −5.12***
Constant
(1.20) (1.25) (1.93) (1.96)
0.03 0.01 0.14∗∗ 0.50∗∗∗
Trading experience
(0.02) (0.06) (0.05) (0.16)
0.0005 −0.014∗∗∗
(Trading experience )2 - -
(0.001) (0.005)
Years of market −0.04 −0.04 −0.001 0.02
experience (0.04) (0.04) (0.04) (0.04)
−0.28 −0.29 0.19 0.14
Income
(0.18) (0.18) (0.21) (0.23)
0.01 0.01 0.002 −0.02
Age
(0.03) (0.03) (0.03) (0.04)
0.30 0.30 1.59 1.11
Gender
(1.01) (0.99) (1.29) (1.19)
0.30 0.31 −0.006 −0.02
Education
(0.21) (0.21) (0.21) (0.22)
−0.30 −0.30 0.13 0.37
Good B
(0.51) (0.50) (0.70) (0.74)
N 74 74 74 74

Table 4: Estimation results

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Experiment 2: goods

(a) St. Valentine’s Day pin (b) St. Patrick’s Day pin

Figure 4: Goods with the same value in experiment 2

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Experiment 2: results

Percent p-value for

Variable
traded Fisher’s exact test
Pooled sample (n = 80)
25.0 < 0.001
Good C for Good D
Good D for Good C 32.5
Inexperienced consumers (< 7 trades
25.0 < 0.001
monthly; = 60)
Experienced consumers (≥ 7 trades
40.0 0.26
monthly; n = 20)
Inexperienced consumers (< 5 trades
18.0 < 0.001
monthly; n = 50)
Experienced consumers (≥ 5 trades
46.7 0.30
monthly; n = 30)

Table 5: Trading statistics for nondealers

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Experiment 2: regression results
Pin consumers
Variable Logit trade Logit trade Logit trade
function function function
−2.44∗∗ −2.57∗∗ −4.65
Constant
(0.91) (0.95) (1.37)
0.05∗∗∗ 0.08∗ 0.74∗∗
Trading experience
(0.02) (0.05) (0.24)
−0.004 −0.04∗∗∗
(Trading experience)2 -
(0.006) (0.02)
3 0.007∗∗
(Trading experience) - -
(0.003)
0.03 0.03 0.04
Years of market experience
(0.05) (0.05) (0.05)
−0.11 −0.10 −0.03
Income
(0.18) (0.18) (0.19)
0.005 0.006 0.005
Age
(0.02) (0.03) (0.03)
0.90 0.90 0.41
Gender
(0.55) (0.55) (0.61)
0.20 0.20 0.26
Education
(0.23) (0.23) (0.26)
0.26 0.29 0.84
Good D
(0.55) (0.56) (0.63)
N 80 80 80

Table 6: Estimation results 12

Open question

−→ Why experienced consumers exhibit no endowment

effect?

• Treatment effect: due to experience

• Selection effect: a prior disposition toward having no
WTA/WTP disparity leads them to trade more often

−→ Return to the same sportscard show one year later

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Experiment 3: goods

(a) A photo (b) A baseball

Figure 5: Goods with the same value in experiment 3

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Experiment 3: results

Percent p-value for

Variable
traded Fisher’s exact test
Pooled sample (n=53)
Good E for Good F 40.0 <0.08
Good F for Good E 35.7
Dealers (n=21)
Good E for Good F 45.5 0.99
Good F for Good E 60.0
Nondealers (n=32)
Good E for Good F 35.7 <0.02
Good F for Good E 22.2
Table 7: Trading statistics
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Selection bias?

• It could be that only those subjects who remained

interested in the sportscard market participated in
the follow-up experiment
• Next, we see that little evidence exists to indicate
that selection bias is a major problem

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Experiment 3: regression results
Sportscard consumers
Variable Sample-selection
Logit trade Probit trade
bivariate probit
function function
trade function
−2.40 −1.45 −1.26
Constant
(1.81) (1.06) (0.98)
0.18∗∗∗ 0.112∗∗ 0.106∗∗∗
Trading experience
(0.08) (0.044) (0.040)
−0.09 −0.06 0.02
Years of market experience
(0.09) (0.05) (0.05)
0.18 0.09 0.07
Income
(0.29) (0.17) (0.15)
−0.05 −0.03 −0.02
Age
(0.04) (0.03) (0.02)
−0.34 −0.15 −0.24
Gender
(1.03) (0.63) (0.55)
0.52 0.30 0.26
Education
(0.28) (0.16) (0.14)
0.29 0.19 0.16
Good F
(0.78) (0.47) (0.47)
N 53 53 74

Table 8: Estimation results

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Experiment 3: within-person analysis

Increased Stable Decreasec

number of number of number
trades trades trades
No trade in Experiment I; trade in
13 1 2
Experiment III
No trade in Experiment I; no trade in
8 7 11
Experiment III
Trade in Experiment I; Trade in
4 0 0
Experiment III
Trade in Experiment I; No trade in
2 0 5
Experiment III
N 27 8 18

• Test of homogeneity of distributions → the likelihood of

executing a trade is related to changes in trading activity
during the year (p<0.01).
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Pooled data (n=300)

Figure 6: Summary of trading results

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Experiment 4: an auction

Figure 7: Sheet of trading cards (up to $50)

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Experiment 4: design

• nth-price auction to elicit individual values

• 50% of participants are given the good and asked to
submit WTA, 50% are asked to submit WTP
• Market experience:
1. survey completion
2. inspection of the good/learning the auction rules
3. actual bid (offer)
4. exit interview
• Within 3 days the winners of each auction were
notified by phone or email, and when I received the
checks (or good), I mailed out the sheets (good).

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Experiment 4: results
Dealers Nondealers
WTA WTP WTA WTP
(mean) (mean) (mean) (mean)
(std. dev.) (std. dev.) (std. dev.) (std. dev.)
8.15 6.27 18.53 3.32
Bid or offer
(9.66) (6.90) (19.96) (3.02)
16.67 15.78 4.00 3.73
Trading experience
(19.88) (13.71) (5.72) (3.46)
10.23 10.57 5.97 5.60
Years of market experience
(5.61) (8.13) (5.87) (6.70)
3.46 3.40 3.37 3.40
Income
(2.17) (2.03) (2.14) (2.24)
29.20 31.00 28.40 29.00
Age
(12.20) (14.70) (14.90) (15.30)
0.87 0.90 0.90 0.90
Gender (percent male)
(0.35) (0.31) (0.31) (0.31)
3.36 3.40 3.03 3.23
Education
(1.77) (2.03) (1.73) (1.81)
N 30 30

Table 9: Characteristics of auction participants

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Experiment 5: design

• Does value disparity reduce when more market

experience is gained?
• Two different groups are asked to make consecutive
choices in the following order: ABCD and DCBA
respectively
• The treatments are:
(A) Mugs and chocolate bars
(B) Ballpoint pens and magic markers
(C) Cans of coke and pencils
(D) Highlighters and letter openers

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Experiment 5: results

Group ABCD Group DCBA

Treatment A 11.4% (4/35) 27% (9/33)
Treatment D 25.7% (9/35) 12% (4/33)
Table 10: Percent of people trading

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Conclusion

• Problem: many studies provide strong evidence that

neoclassical assumptions are rarely appropriate,
which calls for an entirely new economic paradigm
to displace conventional neoclassical theory.
• This study shows that despite the endowment effect
being present, individual behaviour converges to the
neoclassical prediction as the trading experience
intensifies.

−→ Market experience eliminates market anomalies.

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Criticism

• Shogren, et al. (1994) argue that such an

experimental technique created a situation of
artificial scarcity. They find no endowment effect in a
corrected experiment.
• Hoffman and Spitzer (1993) argue that the use of
hypothetical questions and experiments involving
small amounts of money tells us little about actual
behaviour.
• Plott and Zeiler (2011) claim that the disparities
between WTA and WTP measures are not reflective of
human preferences, but rather such disparities stem
from faulty experimental designs.
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Criticism

Pay no attention to what the critics say. A statue had

never been erected in honour of a critic.

– Jean Sibelius

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