The Endowment Effect and Legal Policy (Highly Wonky Post)
posted by Dave Hoffman
You Say Endowment, I Say Enhancement
Several bloggers have recently discussed Kathy Zeiler and Charles Plott’s work on the endowment effect. According to Josh Wright, for example:
“[Plott/Zeiler] in my view, provide burden-shifting quality evidence that the endowment effect observed in the literature is better explained by experimental procedures than preferences. Proponents of regulation based on the endowment effect, in my view, need not agree with my interpretation of these findings but they ought to respond to them if they want to be taken seriously. Unfortunately, as I discuss here, out of the 255 articles in JLR discussing the endowment effect (210 also discuss regulation, btw), only 16 cite either Zeiler and Plott article. I find that ratio discouraging for the discipline of behavioral law and economics generally.”
I recently had the pleasure of attending a one day conference about Plott/Zeiler’s work hosted by Georgetown, and didn’t end up persuaded to the strong position held by Wright. Here’s a short and informal essay I wrote in advance of the conference, which highlights a few studies that postdate PZ and which challenge their findings. (In particular, I hope more legal bloggers will read Burson et al.’s paper.) The day was useful and edifying — as several attendees noted, it’s to PZ’s credit that they are so clear about their findings, the sources of their data, and various potential interpretations. I entirely agree with Josh that people who talk about the endowment effect literature in the law journals ought to at least cite PZ, at should take seriously the potential that the effect is significantly less robust than had been previously believed.
That said, I came away from the day convinced that “endowment” means something different to economists than it does to psychologists. The economists in the room understood the endowment of the titular effect to attach as soon as someone was told that they owned a good, while for the psychologists, endowment was a phenomenon that they wouldn’t have expected to reveal itself unless some of the incidents of ownership (especially, tangibility and proximity) were present. I ended up convinced that PZ found that they could either “debias” psychologists’ endowment effect, or undermine the theoretical grounding of economists’ endowment effect, but not both.
There is a deep problem here of experimental theory. We want to predict how naive buyers and sellers will act outside of the lab in response to endowment with real goods (from my perspective, the important questions concern legal goods). Experiments are always imperfect reflections of this real market, with controls that hopefully don’t seriously undermine the likelihood of external validity. PZ admittedly don’t have a theory of why the controls they use are the right set to permit extrapolation to the real-world, and implicitly, their design means that they’ve picked the controls they have because they hold a definition of endowment that I think is psychologically heterodox. This choice isn’t wrong. But it does make it a little bit harder to know to evaluate the work, since there’s a significant danger of people talking past one another.
November 25, 2009 at 6:26 pm
Posted in: Behavioral Law and Economics
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Responses (2)
Orin Kerr - November 27, 2009 at 11:03 am
Highly wonky, and yet very interesting. Thanks for posting this.
Josh Wright - November 28, 2009 at 7:51 am
Hi Dave, nice post.
A note of clarification. The point of my post(s) on the subject were not that people who “talk” about the endowment effect ought to cite PZ. I’m not so worried about their citation counts, which I suspect are appropriately impressive. Rather, the point is that legal scholars relying on the evidence of the endowment effect are doing more than talking, they are proposing legal change (and sometimes the introduction of new regulatory agencies) based on the existing evidence. I don’t think the existing evidence justifies that, especially in the areas I am most familiar with, e.g. antitrust and consumer protection. More importantly, even if we take the existence of the effect for granted, the real problem in this literature is not taking seriously costs of the proposed solutions and comparing them to social costs imposed by alternatives. Now, this is a more general methodological problem and not one specific to behavioral law and economics. However, the lack of citation to the PZ paper (and often times problems with highly selective reviews of evidence) in my view is evidence of lack of rigor that should bother behavioral law and economics scholars more than it should bother skeptics like me. That said, there is obviously very good work being done in both behavioral law and economics and by behavioral economists. And it sounds like a wonderful conference. I’m looking forward to reading the materials and learning more.
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