Thoughts on week 6

This week we looked at the subject of "preference and choice", specifically, how we judge the monetary value of objects in order to make decisions about the object based on this judgment.

The paper reviewed by our group was "Aspects of endowment: a query theory of value construction", Johnson, Haubel & Keinan (2007). The authors present a memory-based account of endowment, which suggests that the value of an object is decided by the order and type of questions (aspects) about an object that we think about when arriving at a valuation.

In summary, their findings showed:

• Buyers produce more value-decreasing aspects (positive thoughts about the money and negative thoughts about the mug)
• Sellers produce more value-increasing aspects (mug: positive, money: negative)
• Buyers and sellers think about aspects in different orders
• The endowment effect can be eliminated by asking buyers and sellers to think about aspects in an order that is opposite to that which they seem to normally use
• The endowment effect can be produced, even without anyone possessing a mug, just by asking buyers and sellers to think about aspects in specific orders

The other papers presented this week dealt with various endowment effect experiments (Kahneman, Knetsch & Thaler (1990)) and a comparison of the Neoclassical Theory, which seems to be used by experts and Prospect Theory, which seems to be used by people who are inexperienced in a particular area (List (2004)).

Interesting thoughts from all of this:

• An example was given of how different people could consider the value of a bottle of wine, with a wine drinker having very different considerations from an investor in wine. This highlights how two people both possessing the same bottle of wine might reach very different valuations. Previously the comparison has been between different valuations arrived at by buyers and sellers.
• The housing market also provides some interesting examples. Consider when there are a lot of "buy to let" investors in the housing market. They might value a property very differently from someone who wants to buy it to live in it. (Can compare back to the wine drinker and the wine investor). This will effect the housing market. A second example can be seen from a falling house price market, as seen recently. Sellers seemed to be unwilling to accept a drop in price, viewing this as a loss even though they may still be in a total gain situation based on the price that they paid for the property. However, the market seemed to start moving again once people realised that a loss on the property that they are selling becomes a gain on the next property that they buy, which would be at a reduced price.

All very interesting and shows the value of knowing as much as you can about someone else's position, if you're ever in a negotiating situation. Of course, in the real world...