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Affective Equilibria in the Endowment Effect

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When people are endowed with an object, they demand more money in order to part with it than they would be willing to pay to acquire it in the first place. This phenomenon is known as the endowment effect. From a behavioral finance point of view, the effect is interesting because the asymmetry between people's willingness to pay to acquire the object versus to part with it seems to be triggered by mere ownership of the object. In this paper, we propose that the endowment effect is due to discrepancies in the affective equilibria between owners and potential buyers of an endowment. We define an affective equilibrium as the price or range of prices for which traders forecast equal post-trade happiness for themselves and for their trading partners. In three studies, we obtain empirical findings that are consistent with this explanation and that also demonstrate erroneous affective forecasting in endowment owners and potential buyers. We discuss these findings in relation to the endowment effect literature. We also suggest that transaction-related emotions should be studied alongside people's risk perceptions to provide a better understanding of financial behaviors.
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Keywords: Affect; Affective forecasting; Emotion; Endowment effect; WTA; WTP

Document Type: Research Article

Affiliations: 1: University College London, 2: City University,

Publication date: 2009-04-01

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