“Endowment Effect,” Subject Misconceptions, and Experimental Procedures for Eliciting Valuations

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The Willingness to Pay–Willingness to Accept Gap, the “Endowment Effect,” Subject Misconceptions, and Experimental Procedures for Eliciting Valuations

By CHARLES R. PLOTT AND KATHRYN ZEILER*

We conduct experiments to explore the possibility that subject misconceptions, as opposed to a particular theory of preferences referred to as the “endowment effect,” account for reported gaps between willingness to pay (“WTP”) and willingness to accept (“WTA”). The literature reveals two important facts. First, there is no consensus regarding the nature or robustness of WTP-WTA gaps. Second, while experimenters are careful to control for subject misconceptions, there is no consensus about the fundamental properties of misconceptions or how to avoid them. Instead, by implementing different types of experimental controls, experimenters have revealed notions of how misconceptions arise. Experimenters have applied these controls separately or in different combinations. Such controls include ensur- ing subject anonymity, using incentive-compatible elicitation mechanisms, and providing subjects with practice and training on the elicitation mechanism before employing it to measure valuations. The pattern of results reported in the literature suggests that the widely differing reports of WTP-WTA gaps could be due to an incomplete science regarding subject misconceptions. We implement a “revealed theory” methodology to compensate for the lack of a theory of misconceptions. Theories implicit in experimental procedures found in the literature are at the heart of our experimental design. Thus, our approach to addressing subject misconceptions reﬂects an attempt to control simultaneously for all dimensions of concern over possible subject misconceptions found in the literature. To this end, our procedures modify the Becker-DeGroot-Marschak mechanism used in previous studies to elicit values. In addition, our procedures supplement commonly used procedures by providing extensive training on the elicitation mechanism before subjects provide WTP and WTA responses. Experiments were conducted using both lotteries and mugs, goods frequently used in endowment effect experiments. Using the modiﬁed procedures, we observe no gap between WTA and WTP. Therefore, our results call into question the interpretation of observed gaps as evidence of loss aversion or prospect theory. Further evidence is required before convincing interpretations of observed gaps can be advanced.

A subtle controversy exists in the literature. possible gap between willingness to pay At issue is the existence and interpretation of a (“WTP”) and willingness to accept (“WTA”).1

* Plott: Department of the Humanities and Social Sci- ences, California Institute of Technology, M/C 228-77, Pas- nology’s Experimental Economics Workshop. All errors are adena, CA 91125 (e-mail: [email protected]); Zeiler: ours. Law Center, Georgetown University, 600 New Jersey 1 The WTP-WTA gap refers to a tendency for an indi- Ave., NW, Washington, DC 20001 (e-mail: kmz3@law. vidual to state a minimum amount for which that individual georgetown.edu). The ﬁnancial support of the Laboratory of is willing to “sell” an item that is greater than the maximum Experimental Economics and Political Science is gratefully amount the same individual is willing to pay to “buy” the acknowledged. We thank Colin Camerer, Daniel Klerman, item. Under conditions of sufﬁciently smooth preferences Robert Sherman, Eric Talley, Richard Thaler, and Leeat and the absence of wealth effects, the two magnitudes Yariv for helpful discussions and comments. In addition, we should (theoretically) be the same. Some attribute observed are grateful for comments provided during presentations of gaps to loss aversion: the notion that the loss of the item due earlier versions of this work at the University of Southern to a sale is more pronounced than a gain of the same item California Law School and the California Institute of Tech- due to a purchase. For this reason, WTP-WTA gaps have 530 VOL. 95 NO. 3 PLOTT AND ZEILER: WTP–WTA GAPS AND EXPERIMENTAL PROCEDURES 531

Such a gap is frequently reported in the litera- entirety, supports such interpretations. While ture, and many broad claims have been made many experimenters have observed a WTP- regarding the robustness of the gap and its im- WTA gap, others have failed to observe it. This plications. For example, summarizing experi- variation in experimental results seriously un- mental findings about the pervasiveness of the dermines the claim that the gap is a fundamental gap in a recent survey of the WTP-WTA gap feature of human preferences. Recognizing this, literature, John K. Horowitz et al. (2000) state, scholars who accept the psychological explana- “Previous authors have shown that WTA is tion of the gap have sought to explain the vari- usually substantially larger than WTP, and al- ation in terms of the commodity used in most all have remarked that the WTP/WTA experiments (e.g., mugs, lotteries, money, ratio is much higher than their economic intu- candy, etc.). Some suggest that the existence ition would predict.” Furthermore, claims about and magnitude of the endowment effect depend the power of a particular theory to explain the on the commodity employed in the experiment. gap are appearing with increasing frequency. This observation led us to conclude that further Specifically, the interpretation of the gap as an examination of the nature of observed gaps is “endowment effect” rests on a special theory of necessary before any convincing interpretation the psychology of preferences associated with is possible. “prospect theory.” In particular, Jack L. Although our review of the experimental lit- Knetsch et al. (2001) conclude, “The endow- erature revealed no consensus about the appro- ment effect and loss aversion has been one of priate interpretation of observed WTP-WTA the most robust findings of the psychology of gaps, we did note an important consensus about decision making—people commonly value the experimental procedures used to measure losses much more than commensurate gains.” gaps. Implicitly, researchers unanimously agree Such claims regarding the nature and robustness that experimental procedures should be de- of the gap have seeped into other areas of re- signed to minimize or avoid “subject miscon- search, including law and economics, and spe- ceptions.” Like its close cousin “confusion,” cific interpretations of the WTP-WTA gap however, the concept of “misconceptions” has accompany the claims. Jeffrey J. Rachlinski and not been operationalized formally and certainly Forest Jourden (1998) begin their discussion of not quantified. In fact its meaning changes from the implications of the WTP-WTA gap for legal one experimental environment to another and doctrine by claiming, “Researchers in behav- from experimental study to experimental study. ioral decision theory have developed a growing Consequently, a theory of misconceptions has line of evidence that people appear to value a not been developed. Nevertheless, controlling good that they own much more than an identical for subject misconceptions is necessary to de- good that they do not own.... Researchers have termine whether they play an important role in used several different procedures to demon- the lack of consensus about the nature of the strate the endowment effect.” The research re- gap. ported here suggests that this broad discussion Our approach in the face of this difficulty is found in the literature is based on an incorrect to employ a “revealed theory methodology” to interpretation of experimental results. infer an operational meaning of subject miscon- In spite of the enthusiastic interpretations of ceptions revealed by the myriad procedures ex- the WTP-WTA gap as a fundamental feature of perimentalists adopt to control for them. The human preferences (e.g., referring to the gap as procedures implicitly reflect different ideas an “endowment effect”), in fact no consensus about the form(s) that subject misconceptions exists on whether the literature, considered in its might take. Our approach is to assume that, unless all controls are exercised simultaneously, one cannot conclude that subject misconceptions have been eliminated. come to be called “endowment effects.” We refer to this This observation leads to our main research explanation of gaps as “endowment effect theory” to denote that the terminology is not simply a label for a particular question: If we design an experiment that com- phenomenon, but rather implies a theoretical explanation of pletely controls for subject misconceptions as the observed phenomenon. implicitly defined by the literature (i.e., an 532 THE AMERICAN ECONOMIC REVIEW JUNE 2005 experiment that includes every procedure used effect theory. Using their procedures, we repli- in previous experiments to control for miscon- cate the gap with roughly the same magnitude ceptions), will we observe a WTP-WTA gap? they report. This question led us toward a natural exper- Section III describes in detail the experimen- iment design. The first step is to conduct exper- tal procedures we employ to study whether sub- iments using procedures that frequently produce ject misconceptions account for observed gaps. gaps. If we replicate the gap we can conclude The procedures reflect the conjecture that ob- that there is nothing special about the subject served gaps are related to subjects’ misconcep- pools, or about us as experimenters, that might tions about the valuation task. We expound on eliminate the gap. The second step is to conduct exactly how and why we developed and em- experiments in which subject misconceptions ployed specific procedures. These procedures are completely controlled by incorporating the represent the study’s central contribution. Sec- union of procedures found in the literature. If a tion III also reports the striking result we obtain gap is observed under this treatment, the results when we incorporate controls for subject mis- would strongly support interpreting observed conceptions. When an incentive-compatible gaps as support for endowment effect theory. mechanism is used to elicit valuations, and sub- On the other hand, if a gap is not observed, then jects are provided with (a) a detailed explana- the results would support the conjecture that the tion of the mechanism and how to arrive at procedures themselves produce gaps and that valuations; (b) paid practice using the mecha- gaps are unrelated to the nature of preferences, nism; and (c) anonymity, we observe no WTP- loss aversion, and prospect theory. If the gap WTA gap. To investigate one conjecture can be turned off and on using different sets of regarding which procedures have the greatest procedures, then it likely does not reflect an impact, we designed a second experiment that is asymmetry between gains and losses as posited identical to the first, except subjects are not by loss aversion. provided paid practice using the mechanism. The paper is organized as follows. Section I Again, we observe no statistically significant reviews much of the WTP-WTA gap literature WTA-WTP gap. Section IV offers concluding and is designed to document two facts. First, no remarks. consensus exists about the nature and robustness of the gap. Second, experimenters have I. Experimental Procedures and the Literature employed a wide range of different and sometimes overlapping sets of procedures to control We begin our exploration of experimental for subject misconceptions. Such differences in procedures by examining the literature, relying procedures could account for variations in the on the so-called “revealed theory methodol- results if the specific procedures employed con- ogy.” As will become evident, there is no single trol for some facets of misconception but fail to view of how to control for subject misconcep- control for others. More importantly, given that tions. Table 1 provides a categorization of no theory of “misconceptions” exists, if subject WTP-WTA gap experiments by experiment misconceptions influence the existence or mag- procedures. As endowment effect theory2 is our nitude of the gap, then the optimal method of primary focus, we restrict our attention to the investigating the influence of misconceptions is reported studies that investigate the possible to implement the union of controls. Without a existence or nature of an endowment effect, as theory about the relationship between gaps and opposed to mere WTP-WTA gaps. Several of subject misconceptions, our objective is to cast these studies focus on the possible influences of a large net using a revealed theory methodology certain procedures (e.g., experience with the in the hopes of determining whether the proce- elicitation mechanism, practice using the mech- dures themselves cause gaps between WTA and WTP. Section II reports the results from our repli- 2 To be clear, we use “endowment effect theory” to refer to the theory that observed gaps can be explained by some cation of an experiment reported by Daniel feature of human preferences that leads owners to resist Kahneman et al. (1990) (“KKT”). KKT’s re- selling goods because (a) selling is perceived as “losing” the sults are cited widely as support for endowment endowed good, and (b) individuals are generally loss averse. VOL. 95 NO. 3 PLOTT AND ZEILER: WTP–WTA GAPS AND EXPERIMENTAL PROCEDURES 533

TABLE 1—SUMMARY OF THE LITERATURE BY EXPERIMENTAL DESIGN

Valuations Valuations elicited elicited using Gap using market measured Practice incentive environment directly Result Optimal responses rounds compatible with some using reported explained performed mechanism incentives valuations

Knetsch and Sinden (1984; test 1) gap Knetsch and Sinden (1984; test 3) gap Corsey et al. (1987; part 1) gap Corsey et al. (1987; part 2) gap Brookshire and Corsey (1987; exp 1) gap Singh (1991; test 1 before learning) gap Dubourg et al. (1994) gap Brookshire and Corsey (1987; exp 2) gap Knetsch (1989; test 1) gap binary choice Bateman et al. (2001) gap binary choice Shogren et al. (1994; stage 1, round 1) gap Vickrey Boyce et al. (1992) gap hypothetical BDM Knetsch (1989; test 2) gap hypothetical BDM Morrison (1997; part 2) gap random/pooled BDM Shogren et al. (1994; stage 2) gap random/pooled Vickrey Bateman (et al. (1997; exp 2) gap random/pooled BDM Bateman et al. (1997; exp 1) gap random/pooled BDM Knetsch and Sinden (1984; test 2) gap Brookshire and Corsey (1987; exp 3) gap Smith auction Kahneman et al. (1990; exp6&7) gap incorrectly suggested sealed bid Franciosi et al. (1996; exp 1) gap incorrectly suggested sealed bid Kahneman et al. (1990; exp1&2) gap incorrectly suggested random sealed bid Kahneman et al. (1990; exp 4) gap incorrectly suggested random/pooled sealed bid Kahneman et al. (1990; exp 3) gap incorrectly suggested pooled sealed bid Loewenstein and Issacharoff (1994; exp 1) gap suggested BDM Kahneman et al. (1990; exp 5) gap suggested hypothetical BDM Shogren et al. (2001; BDM) gap suggested random/pooled BDM Knetsch and Sinden (1984; test 4) no gap Singh (1991; test 2 before learning) no gap Singh (1991; tests 1 and 2 after learning) no gap DA Shogren et al. (1994; no available substitute) no gap random/pooled Vickrey Corsey et al. (1987; part 3) no gap Vickrey Morrison (1997; part 1) no gap random/pooled BDM Shogren et al. (1994; stage 1, rounds 2–5) no gap random/pooled Vickrey Shogren et al. (1994; available substitute) no gap random/pooled Vickrey Arien et al. (2002) no gap random/pooled binary choice Shogren et al. (2001; Vickrey) no gap random/pooled Vickrey Loewenstein and Issacharoff (1984; exp 2) no gap suggested BDM Harless (1989) no gap pooled Vickrey

Notes: Optimal response explained: If blank, no explanation was provided. “Incorrectly suggested” indicates that the experimenter used a non-incentive-compatible elicitation mechanism but told subjects that revealing true valuations was the optimal strategy. “Suggested” indicates that the experimenter correctly advised subjects that the optimal strategy called for truthful valuation revelation. If shaded, the experimenter provided a detailed explanation of the optimal response. Practice rounds performed: If blank, then no practice rounds were performed. “Hypothetical” indicates that practice rounds were not paid. “Random” indicates that randomly selected rounds were paid. “Pooled” indicates that the measurement of the gap includes valuations measured in the first round (without experience) and valuations measured in later rounds (after experience). Valuations elicited using incentive-compatible mechanism: If blank, then non-incentive-compatible mechanism used to elicit valuations. If shaded, then incentive- compatible mechanism used to elicit valuations. Valuations elicited using market environment with some incentives: If blank, elicitation was not conducted in a market environment. If shaded, then elicitation was conducted in a market environment with some incentives. The type of market environment is indicated for each experiment. Gap measured directly using valuations: If blank, then gap measured using number of trades relative to predicted number of trades. If shaded, then gap measured using mean or median of actual WTP and WTA responses. 534 THE AMERICAN ECONOMIC REVIEW JUNE 2005 anism, etc.). In addition, our analysis includes Coursey (1987), the experimenters explained in mainly experiments that provide some sort of some detail the elicitation mechanism and used incentive for truthful revelation of valuations. numerical examples to illustrate the mechanics Studies using purely hypothetical methodolo- of the elicitation device. The experimenters, gies were not included unless they focused spe- however, did not advise subjects on optimal cifically on the issues examined in this paper.3 responses. Each row displayed in Table 1 represents a particular experiment.4 The first column of the Practice Rounds Provided.—In experiments table indicates the study in which the experi- in which practice rounds were provided, sub- ment is reported. The second column indicates jects gained experience with the elicitation whether a statistically significant gap was re- mechanism while tutoring was available and ported as resulting from the particular experi- were encouraged to ask questions. Blank cells ment. Each remaining column of the table indicate that no practice rounds were provided. specifies a particular experimental design fea- In some cases, practice rounds were provided ture or gap measurement technique. There are but not paid. These cases are indicated by cells five such columns: explanation of optimal remarked as “hypothetical.” If the practice rounds sponses, provision of practice rounds, incentive were paid, then the cells are shaded. In experi- compatibility of the elicitation mechanism, the ments providing paid practice, subjects made mechanism used to elicit valuations, and the decisions and experienced the actual conse- method of gap measurement. We explain these quences of those decisions (i.e., gained or lost in turn. money or goods) under conditions similar to those researchers employed to elicit WTA and Explanation of Optimal Response.—A shaded WTP responses used to measure the gap. cell in this column indicates that the experi- “Random” indicates that the study paid only menter provided subjects with some explana- a small subset of the subjects or a small subset tion of the optimal response corresponding to of the rounds. For example, Kahneman et al. the elicitation mechanism. Explanation entails (1990) randomly selected a certain number of describing to the subjects the substantive fea- the subjects to be paid at the end of the exper- tures or purposes of the mechanism and the iment. In other treatments, they randomly se- potential benefits of employing a particular lected one of many rounds to be binding at the strategy. It is important to note that the level of end of the experiment.5 explanation varies substantially across experi- “Pooled” indicates studies that measured the ments. For example, in Kahneman et al. (1990) gap using data aggregated across rounds. In and in our replication of this experiment, sub- such studies there is no clear distinction be- jects simply were provided with the suggestion tween practice rounds and gap measurement (sometimes incorrectly) that “[i]t is in [their] rounds. For instance, David W. Harless (1989) best interest to answer ... questions truthfully.” measures the gap by aggregating data from 12 This type of explanation is indicated as “sug- rounds before which subjects had no paid practice gested.” In David S. Brookshire and Don L. rounds. Before the first round, subjects had no experience using the mechanism, but gained experience as they proceeded through the 12 rounds. 3 Note that the list of experiments using hypothetical elicitation methods reported in Table 1 is not all-inclusive. Valuations Elicited Using Incentive Compat- We limited the list to include a sufficient number of hypo- ible Mechanism.—When experimenters elicit thetical experiments to demonstrate that gaps are almost valuations using incentive-compatible mecha- always observed when subjects are not provided any incentive to reveal their valuations truthfully. Including more hypothetical experiments in the list would not teach us more than what we learn from the patterns revealed in Table 1. 5 Note Charles A. Holt (1986) demonstrated that if the 4 An on-line Appendix provides some additional infor- experimenter elicits valuations of a number of lotteries over mation about the specific experiments cited: the issue under several rounds and then randomly selects one round for investigation, the good used, attributes of the subject pool, which subjects will be paid, mechanisms designed to pro- endowment to buyers, and the measurement instrument. See duce truthful revelations of valuations will not necessarily http://www.e-aer.org/data/june05_app_plott.pdf. produce such revelations. VOL. 95 NO. 3 PLOTT AND ZEILER: WTP–WTA GAPS AND EXPERIMENTAL PROCEDURES 535 nisms, care is taken to measure “true” valua- is physically endowed with the good, anonym- tions void of the influences of strategic behavior. ity of decisions, and the statistical method used Blank cells in this column indicate that the mech- to measure the gap. Clearly such procedures anism used to elicit valuations was not incentive possibly interact with unobserved variables compatible. Therefore, when evaluating these ex- such as subjects’ understanding, attention, mo- periments one cannot assume that the responses tivation, etc., but the exact nature of such inter- elicited represent the “true” valuations of the sub- actions is unknown. Such deep issues are not jects. Shaded cells indicate that the experiment- explored directly in this study, but our proce- ers used a theoretically incentive-compatible dures control for as many as possible. mechanism to elicit valuations. The actual Table 1 clearly answers any question about the mechanisms used are described next. consensus concerning the existence and nature of the gap. In short, no consensus exists. Further- Valuations Elicited Using Market Environ- more, the table suggests that the likelihood an ment with Some Incentives.—This column re- experiment results in a WTP-WTA gap appears to veals that experimenters have employed a wide be related to the experimental procedures.7 variety of market environments to elicit valuations. Blank cells indicate that the experiment II. KKT Replication Design and Results elicited valuations outside a market environment. Experiments employing market environ- This section discusses the experiment design ments and/or some incentives have used Smith reported in KKT (1990), which we attempt to auctions, binary choice designs, sealed-bid one- replicate. The results from our replication indi- price auctions, double auction call markets, cate that our attempt was successful. When us- Vickrey auctions, and the Becker, DeGroot, ing the design reported by KKT, we observe a Marschak (“BDM”) mechanism (ordered from WTP-WTA gap. least (theoretically) incentive compatible to We conducted two identical sessions with most (theoretically) incentive compatible). undergraduates from the California Institute of Technology. Each session consisted of two un- Gap Measured Directly Using Valuations.—The paid practice rounds using induced-value tokens final column provides information about the and one binding round using mugs bearing a method experimenters use to measure gaps. Caltech logo purchased at the bookstore for Blank cells indicate that the gap was measured $7.00 each. The sessions lasted approximately using the number of trades relative to the pre- 15 minutes and subjects earned less than $10. dicted number of trades.6 Shaded cells indicate Payouts were not made anonymously. that the gap is measured using the mean or The instructions replicated those used by median of actual WTP and WTA responses. KKT to test for misconceptions by subjects Table 1 does not include information on other (referred to as “Experiment 5” in their paper). experimental procedures that differ across ex- One-half of the subjects were given mugs and periments. These include: the good, attributes of were referred to as “sellers.” The remaining the subject pool, bounds or restrictions on bids, subjects were referred to as “buyers” and re- cash endowments to buyers, whether the seller ceived no mugs. Buyers were allowed to inspect the mug of the seller sitting next to them. Each subject was assigned the same role in each of 6 Here we note an important point about methods used to the three rounds (i.e., once a buyer, always a measure the gap. If the goal of measuring the gap is to buyer). All subjects used the list method to conclude whether WTA is significantly higher than WTP, reveal their values for the mug.8 We used the then a distinction should be made between direct and indi- rect measurements. Specifically, comparing the number of actual trades to the predicted number of trades might not accurately reveal how WTA relates to WTP. Robert Fran- 7 We did not attempt to include all studies that might ciosi et al. (1996) provide a clear example demonstrating have some bearing on the issue; therefore, the table should that this measure might not accurately determine whether a not be interpreted as a “meta analysis.” significant gap between WTA and WTP exists in the data. 8 See the on-line Appendix for an example of the list The reader should keep this point in mind when considering subjects used to report their valuations (http://www.e-aer. Table 1. org/data/june05_app_plott.pdf. 536 THE AMERICAN ECONOMIC REVIEW JUNE 2005

TABLE 2—INDIVIDUAL SUBJECT DATA AND SUMMARY STATISTICS FROM KKT REPLICATION

Treatment Individual responses (in U.S. dollars) Mean Median Std. dev. WTP 0, 0, 0, 0, 0.50, 0.50, 0.50, 0.50, 0.50, 1, 1, 1, 1, 1, 1.50 1.74 1.50 1.46 (n ϭ 29) 2, 2, 2, 2, 2, 2.50, 2.50, 2.50, 3, 3, 3.50, 4.50, 5, 5 WTA 0, 1.50, 2, 2, 2.50, 2.50, 3, 3.50, 3.50, 3.50, 3.50, 3.50, 4, 4.50 4.72 4.50 2.17 (n ϭ 29) 4.50, 5.50, 5.50, 5.50, 6, 6, 6, 6.50, 7, 7, 7, 7.50, 7.50, 7.50, 8.50

BDM mechanism to determine which subjects III. Plott-Zeiler Procedures and Results would transact and the price at which transac- tions would occur.9 Buyers used their own This section discusses our experiments, money and were told that credit and change which implement the controls for subject mis- were available before the start of the conceptions found in the literature. If observed experiment. WTA-WTP gaps are explained by endowment The data collected during the mug round of effect theory, then we should observe a gap the KKT replication is displayed in Table 2. when we alter the procedures to control for The mean WTP response was $1.74 (me- subject misconceptions. As reported in detail dian ϭ $1.50) and the mean WTA response was below, however, we observed no gap. $4.72 (median ϭ $4.50). Statistical test results support the hypotheses that the two independent A. Plott-Zeiler Procedures samples (WTA and WTP) were drawn from nonidentical distributions and the median WTA We collected three sets of data. Two sessions is significantly greater than the median WTP.10 of the experiment were conducted with law This result demonstrates a successful replica- students at the University of Southern Califor- tion of the result obtained by KKT using the nia Law School in Los Angeles. One session procedures employed in their study.11 was conducted with undergraduate students at Pasadena City College in Pasadena. Each session consisted of a detailed training session, two 9 The BDM mechanism pits each seller and buyer unpaid practice rounds, 14 paid rounds using against a random bid. All sellers stating bids lower than the lotteries, and one paid round using mugs. The random bid sell the good, but receive an amount of money sessions lasted approximately 90 minutes, and equal to the random bid. All buyers stating bids higher than subjects earned $32 on average (including a $5 the random bid buy the good, but pay an amount of money show-up fee). Upon entering the room, each equal to the random bid. Sellers who bid higher than the random bid, and buyers who bid lower than the random bid, subject chose a laminated card at random indi- do not transact. cating the subject’s identification number. The 10 A Wilcoxon-Mann-Whitney test resulted in a z value subjects were told to keep the identification of Ϫ4.8 with a corresponding p value of 0.00; similarly, a numbers private to facilitate anonymous pay- test of the equality of medians resulted in a Pearson ␹2 statistic of 20 (probability of equal medians equals 0). These outs at the end of the experiment. Also, subjects statistical tests are discussed in Sections 6.4 and 6.3, respec- were asked to avoid communicating with other tively, of Sidney Siegel and N. John Castellan (1988). subjects and verbally reacting to events that 11 We note here that KKT conducted induced value occurred during the experiment. token rounds and used those data as evidence that their We designed the procedures explicitly to subjects had no misconceptions about how responses af- fected outcomes (i.e., subjects almost always rationally re- control for concerns identified in the literature. sponded with their induced values). Our lottery data allow In particular, Table 1 suggests that a gap is ob- us to draw similar conclusions about the level of subject understanding. When viewing our data for the lottery rounds with a certain dollar outcome (e.g., 30-percent chance of $2 and 70-percent chance of $2), we observe correct reporting dures designed to remove misconceptions, as was done as of values similar to the accuracy for induced value rounds part of our procedures, the behavior substantially changes. that were reported by KKT. That is, the proportion of From that fact, we conclude that data from induced value subjects who gave the correct response was the same in our rounds or data from rounds involving lotteries for certain experiments as that reported by KKT. Yet, when the lotter- outcomes should not be used to test for the existence (or ies for certain outcomes are followed by additional proce- absence) of misconceptions. VOL. 95 NO. 3 PLOTT AND ZEILER: WTP–WTA GAPS AND EXPERIMENTAL PROCEDURES 537 served less often when an incentive-compatible must be eliminated. The presumption is that mechanism is used to elicit valuations, and subjects must have a good operational under- training and paid practice rounds are provided. standing of procedures, including the available Table 1 also reveals the absence of a particular alternatives and the mapping of revealed valu- and important set of procedures. Our analysis of ations to consequences. Decision theorists the literature reveals that no one experiment might find the language used to describe proce- designed to study WTP-WTA gaps imple- dures to be very clear because they are trained ments a complete set of controls: an incentive- to give operational meaning to technical lan- compatible elicitation device, training, paid guage, e.g., “true value.” 12 To those not so practice, and anonymity. We fill this void with schooled, however, the language can be unclear. our experiment design. In many cases, conducting paid practice rounds First, using an incentive-compatible elicita- might be necessary to ensure that subjects un- tion device (e.g., BDM) gives subjects an incen- derstand the procedures and how revealed val- tive to announce their actual valuations for the uations map into consequences. good with the goal of increasing the probability As part of the training process, numerical of earning the maximum amount possible. Lack examples provide concrete illustrations, allow- of incentives can be associated with several ing subjects to see the mechanism in terms of its features of arbitrary behavior. Although the spe- purpose. In addition, specific examples are used cific reasons incentives might operate in such a to illustrate why announcing valuations that are manner is not well known, presumably incen- not actual valuations is a dominated strategy tives focus behavior in the sense that attention, when the BDM mechanism is employed. thought, and care in understanding instructions Third, practice rounds allow subjects to learn depend on the nature of incentives. If earnings by gaining familiarly with the mechanism while depend on subjects’ decisions, subjects proba- still educating themselves about its properties. bly are more likely to allocate attention to in- Encouraging questions during the practice structions and decisions during experiments. rounds assists subjects in clearing up any mis- Second, training provides subjects with a ba- conceptions. In addition, the nonanonymous sic understanding of the mechanism used to practice rounds give the experimenter an opportu- elicit valuations. Mechanisms used to elicit val- nity to check whether subjects were displaying uations might be unfamiliar to subjects or, more behavior consistent with a clear understanding important, might be so similar to mechanisms of the valuation task. with which subjects are familiar that subtle and Providing paid practice rounds exposes sub- important differences go unnoticed despite ex- jects to the consequences of their decisions prior perimental controls. Many designs use incentive- to the round during which subjects report valu- compatible mechanisms such as the BDM ations used to measure the WTP-WTA gap. It is mechanism to elicit nonstrategic valuations well known that activities in people’s daily lives from subjects. These mechanisms, however, automatically place them in situations of strate- most likely are unfamiliar to subjects even gic interaction. Strategic reactions developed to though the task might appear to be a common engage in those interactions might seep into buying or selling task. When confronted with an behavior exhibited in experiments in a manner auction of any type, individuals might tend to that clouds gap measurement.13 For example, operate under familiar auction rules (i.e., high- the use of the word “sell” can automatically call est bidder takes the good and pays the amount forth a margin above the minimum that an in- he offered). Therefore, even if subjects are told dividual might accept in exchange for a good. it is in their best interest to bid their “true value,” misconceptions about how the elicitation mechanism works might trigger subjects to 12 Consider another example. Economists might have a default to the strategies associated with familiar clear meaning of what a “preference” is, but subjects might auctions. not clearly recognize this property within themselves or associate it with other words such as likes, dislikes, wants, Our approach is based on a presumption that, wishes, etc. to accurately measure preferences, misconcep- 13 For an evolutionary theory of this phenomenon, see tions about the valuation elicitation mechanism Aviad Heifetz and Ella Segev (2001). 538 THE AMERICAN ECONOMIC REVIEW JUNE 2005

TABLE 3—SUMMARY OF EXPERIMENTS AND ORDER OF THE ROUNDS

Experiment 1: Rounds 1–3 Rounds 4–6 Rounds 7–10 Rounds 11–14 Round 15 n ϭ 31 (USC students) Small stake sellers Small stake buyers Large stake sellers Large stake buyers Mugs Experiment 2: Round 1 Rounds 2–4 Rounds 5–7 Rounds 8–11 Rounds 12–15 n ϭ 26 (USC students) Mugs Small stake sellers Small stake buyers Large stake sellers Large stake buyers Experiment 3: Rounds 1–3 Rounds 4–6 Rounds 7–10 Rounds 11–14 Round 15 n ϭ 17 (PCC students) Small stake sellers Small stake buyers Large stake sellers Large stake buyers Mugs

Even if the word “sell” is not used, simply being low. Therefore, if a subject wishes to be known in a situation that calls for selling behavior by other subjects or the experimenter as a tal- might trigger an instinctive reaction (e.g., sell ented bargainer, he might adjust his behavior high and buy low). Despite this, many theories accordingly even if the elicitation device does rely on the assumption that subjects in experi- not reward that type of behavior. In addition, ments understand their tasks and that observed when making anonymous decisions, subjects behavior is not a result of strategic behaviors might be less inclined to ponder the “correct” evoked by instructions. Interpreting data that answer as viewed by others, and instead focus might contain a mixing of motives layered over on choosing the amount that will reward them actual valuations can prove difficult, however. the most. While we attach no particular weight Likewise, if subjects mistakenly believe that to any number of ideas about how subjects outcomes are manipulable, they might behave might want to represent themselves, we remove according to a strategy the mechanism does not the opportunity and incentives for any such reward. For example, if a subject is asked to attempt. provide a “selling price” that reflects his valu- After the two practice rounds, each subject ation for a good he owns, natural instincts might participated in 15 paid rounds: 14 rounds con- persuade him to announce an amount higher ducted with lotteries and one round conducted than his actual valuation. In fact, given bargain- with mugs. We used the data collected during ing instincts of sellers to inflate asks and buyers the mug round to measure the gap. In the ex- to deflate bids, those endowed with a good periments including paid practice rounds, the likely will bid more than their nonstrategic val- mug round was conducted after the lottery uations. This behavior could be especially likely rounds. In the experiment without paid practice if subjects do not fully understand experimental rounds, the mug round was conducted before procedures. the lottery rounds. The first six lottery rounds To control for this possibility, during the paid involved lotteries with expected values of less rounds subjects learn about the intricacies of the than $1. The subjects were told that the lotteries elicitation mechanism and are given an oppor- would increase in magnitude, but the first few tunity to adjust nonoptimal strategies to maxi- rounds allowed for additional (but paid) prac- mize their payouts. Most important, this tice. All subjects acted as sellers in the first learning and adjustment process takes place be- three lottery rounds and buyers in the second fore the gap is measured, minimizing the pos- three lottery rounds. The first set of “large- sibility that the measurement of the gap includes stakes” lottery rounds (four in total) involved strategic responses or responses that are clouded lotteries with expected values ranging from $2 by misconceptions about the mechanism. to $8. All subjects acted as sellers during these Finally, anonymity in decisions and payouts rounds. During the second set of large-stakes is ensured. Some commentators (e.g., Gertrud lottery rounds (four in total), all subjects acted M. Fremling and Richard A. Posner, 2001) hy- as buyers. Subjects were allowed to view only pothesize that if decisions are not made anony- the lottery involved in the round being con- mously, subjects might be concerned with how ducted. Table 3 summarizes the experiment others view them. For example, talented and design. successful bargainers tend to sell high and buy In the mug round, the item considered by the VOL. 95 NO. 3 PLOTT AND ZEILER: WTP–WTA GAPS AND EXPERIMENTAL PROCEDURES 539

TABLE 4—INDIVIDUAL SUBJECT DATA AND SUMMARY STATISTICS

Experiment Treatment Individual responses (in U.S. dollars) Mean Median Std. dev. Experiment 1: WTP 0, 1, 1.62, 3.50, 4, 4, 4.17, 5, 6, 6, 6.50, 8, 8.75, 9.50, 10 5.20 5.00 3.04 (USC/practice) (n ϭ 15) WTA 0, 0.01, 3, 3.75, 3.75, 3.75, 5, 5, 5, 6, 6, 6, 7, 11, 12, 13.75 5.69 5.00 3.83 (n ϭ 16) Experiment 2: WTP 1, 2, 3.50, 5, 5, 5, 8, 8.50, 9, 11.50, 13, 23 7.88 6.50 6.00 (USC/no practice) (n ϭ 12) WTA 0.50, 1, 2, 2.50, 2.50, 4.50, 4.50, 5.70, 6.25, 8, 8, 8.95, 12, 13.50 5.71 5.10 4.00 (n ϭ 14) Experiment 3: WTP 2.50, 5.85, 6, 7.50, 8, 8.50, 8.50, 8.78. 10 7.29 8.00 2.23 (PCC/practice) (n ϭ 9) WTA 3, 3, 3.50, 3.50, 5, 5, 7.50, 10 5.06 4.25 2.50 (n ϭ 8) Pooled data WTP 6.62 6.00 4.20 (n ϭ 36) WTA 5.56 5.00 3.58 (n ϭ 38)

Notes: Experiments 1 and 3 used the BDM mechanism to elicit responses and employed paid practice, training, and anonymity. Experiment 2 used the BDM mechanism to elicit responses and employed training and anonymity (without paid practice rounds). subjects was a plastic travel mug with a market of someone who has no mug but is given the price of approximately $8.50. The subjects were opportunity to buy one. Thus, we perform a not informed of the market price. Approxi- between-subject test to determine whether a sig- mately half the subjects acted as sellers and nificant WTP-WTA gap resulted. approximately half acted as buyers. All subjects In experiments 1 and 3, values for the mugs were handed a mug before the start of the round. were collected after 14 rounds used to provide Sellers were told that they owned the mug. paid practice, during which subjects made de- Buyers were told that they could inspect the cisions involving binding lotteries. In experi- mug but they did not own it. All subjects were ment 2, such practice rounds were absent prior prompted to record an offer (sellers offering the to the mug round. Table 4 contains data on minimum amount they would accept to give up subjects’ responses during the mug rounds. the mug, buyers offering the maximum amount Data are reported for a total of 74 subjects.15 they would pay in exchange for the mug). After offers were recorded, subjects were prompted to 15 consider whether the offer chosen was the ac- Theoretically, the lottery rounds could be used to test for a WTP-WTA gap. The lottery round data, however, are tual nonstrategic value and were allowed to contaminated by a design that was developed only for change the offer before committing to it. After training and not for purposes of measuring a gap. All WTA all committed offers were collected (i.e., slips rounds were conducted prior to the WTP rounds. Thus, placed into the boxes), the predetermined fixed subjects had extensive training on one mechanism (i.e., selling using the BDM mechanism), the meaning of lotter- offer was announced. The subjects recorded ies, the instructions, the procedures, and other subtle fea- their round payoffs and accumulated payoffs for tures of the experiment design before being exposed to the the experiment.14 second mechanism (i.e., buying using the BDM mechanism). Because the BDM mechanism would be more unfa- B. Plott-Zeiler Results miliar in a selling task than a buying task (subjects tend to have more experience buying than selling), the WTA rounds were used first. In addition to what appeared to us to be a Each subject revealed a personal valuation logical approach to training, this procedure also ensured that for a mug, either from the point of view of subjects had money to spend in the WTP rounds, which someone who owned the mug and is given an eliminated complex explanations of collecting from losses, banking, and borrowing that would otherwise make learning opportunity to sell it, or from the point of view more difficult. Mistake corrections, public answers to questions, and other procedures were also employed continu- ously, which confound the valuations provided in the lottery 14 See the online Appendix for detailed subject instruc- rounds and frustrate attempts to use these data to measure tions and procedures (http://www.e-aer.org/data/june05_ gaps. app_plott.pdf). Of course, the data from these rounds are not uninteresting 540 THE AMERICAN ECONOMIC REVIEW JUNE 2005

TABLE 5—STATISTICAL TEST RESULTS

Median test Wilcoxon-Mann-Whitney rank sum test (Null (Null hypothesis: populations hypothesis: identical distributions) have identical medians) zp-value Conclusion (␣ ϭ .05) Pearson ␹2 p-value Conclusion (␣ ϭ .05) Experiment 1 Ϫ0.079 0.9368 Can’t reject null 0.0392 0.843 Can’t reject null (USC) Experiment 2 0.928 0.3536 Can’t reject null 0.1548 0.694 Can’t reject null (USC) Experiment 3 1.738 0.0821 Can’t reject null 1.5159 0.218 Can’t reject null (PCC) Pooled data 1.267 0.2050 Can’t reject null 1.3523 0.245 Can’t reject null

Notes: The Kruskal-Wallis equality-of-populations rank test indicates that WTA responses from different experiments were drawn from the same population and WTP responses from different experiments were drawn from the same population; therefore, pooling the data is appropriate. The Pearson ␹2 statistics were corrected for continuity.

Table 4 also provides summary statistics for WTP response was $5.20 (median ϭ $5.00) and each experiment. In experiment 1, the mean the mean WTA response was $5.69 (median ϭ $5.00). In experiment 2, the mean WTP response was $7.88 (median ϭ $6.50) and the and contain some hints about the sources and nature of the mean WTA response was $5.71 (median ϭ misconceptions that the procedures help remove. We pass $5.10). Finally, in experiment 3, the mean WTP these along as mere speculations and conjectures with the ϭ hope that they will be useful in some way. First, subject response was $7.29 (median $8.00) and the misconceptions seemed to originate from three sources. The mean WTA response was $5.06 (median ϭ first source is the elicitation mechanism and the BDM $4.25). procedure, in particular. Subjects seem to make two very different mistakes. Some subjects do not realize that overbidding (underbidding) in the buying (selling) task exposes WTP-WTA Gap Results.—The main finding them to a loss (if the price falls between the true valuation is striking and ubiquitous across experiments. and the bid). Other subjects do not realize that underbidding No gap is observed. The following statements (overbidding) in the buying (selling) task exposes them to provide the details behind this finding. an opportunity cost of a foregone profitable transaction. After instruction and, in some cases, experiencing these consequences, they seem to recognize and adjust to these Result 1. The data do not support the hypothe- features of the mechanism, sometimes only after repeated sis that WTA is significantly greater than WTP experiences. in both experiments using the BDM mechanism The second source of misconceptions is the concept of to elicit valuations and employing training, an- randomization and the nature of probability. In some cases subjects do not understand statistical independence; they onymity, and paid practice rounds. seem to believe that they can predict the future from past events. In other cases subjects seem to believe that a par- Support. In Table 5 we report the results of ticular outcome will occur with probability zero or one. As statistical tests to determine whether the data a result, subjects think that they have the capacity to guess support the hypothesis that WTA is signifi- the outcome, depending in part on an impulse or an urge. Experience seems necessary for subjects unfamiliar with cantly greater than WTP. For all experiments, random devices to incorporate true notions of randomiza- we perform Wilcoxon-Mann-Whitney tests, tion and the nature of probability. which test for whether the WTP and WTA The third source is the assignment of value to a lottery samples were drawn from identical distribu- where random devices are employed to determine monetary payoffs. Valuing lotteries is not a common activity for most tions, and median tests, which test for whether subjects, and they do not perform this task with the imme- the WTP and WTA samples were drawn from diate and automatic instincts of a decision theorist. Basi- distributions with identical medians. cally, the concept of an expected value is foreign to some The hypothesis that WTA is significantly subjects, and they struggle in various ways to quantify their preferences over lotteries. Experiencing the consequences greater than WTP, when the BDM mechanism of their choices might help subjects familiarize themselves is used to elicit responses and training, anonym- with the random nature of the outcomes. ity, and paid practice rounds are provided, is not VOL. 95 NO. 3 PLOTT AND ZEILER: WTP–WTA GAPS AND EXPERIMENTAL PROCEDURES 541 substantiated by the data in either experiment 1 Given the high variance in the data, we per- or experiment 3. With respect to experiment 1, formed a check on the power of our statistical the Wilcoxon-Mann-Whitney rank sum test sta- tests by testing the null hypothesis of WTA ϭ tistic resulted in a z value of Ϫ0.079 (p ϭ 2 ⅐ WTP. Many claim that WTA seems to be 0.9368); therefore, we cannot reject the null twice WTP (see e.g., W. R. Dubourg et al. hypothesis that the two independent samples (1994) and Jack L. Knetsch et al. (2001)). A t were drawn from identical population distribu- test assuming unequal variances led to a rejec- tions. In addition, a median test resulted in a tion of the null in favor of the alternative, Pearson ␹2 test statistic of 0.0392 (p ϭ 0.843); WTA Ͻ 2 ⅐ WTP (t ϭϪ5.06, p ϭ 0.0000). A therefore, we cannot reject the null hypothesis two-sample Wilcoxon-Mann-Whitney rank- that the two independent samples were drawn sum test also rejects this null (z ϭ 4.64, p ϭ from populations that have identical medians. 0.0000), as does a test of equal medians (Pear- These two statistical tests were also performed son ␹2 ϭ 19.53, p ϭ 0.0000). It also should be using the data collected during experiment 3. noted that, while we observe a WTP that is on Similar results obtained: the Wilcoxon-Mann- average greater than a WTA, the difference is Whitney rank sum test statistic produced a z not statistically significant. value of 1.738 (p ϭ 0.0821) and the median test resulted in a Pearson ␹2 test statistic of 1.5159 House Money Effect Conjecture.—The dra- (p ϭ 0.218). matic difference between measurements taken under a full set of controls for misconceptions Result 2. The data do not support the hypothe- and the measurements taken under the KKT sis that WTA is significantly greater than WTP procedures motivates questions about how par- in the experiment using the BDM mechanism to ticular procedural features might contribute to elicit valuations and employing training and the differences. One question focuses on anonymity (with no paid practice rounds). whether “house money effects” might explain our results. Specifically, it could be that subjects Support. The hypothesis that WTA is signifi- might be more willing to spend money earned cantly greater than WTP, when the BDM mecha- during the experiment than money taken from nism is used to elicit responses and training and their own pockets. A house money effect might anonymity are provided (without paid practice elevate WTP in a manner that eliminates the rounds), is not substantiated by the data produced gap. More precisely, the hypothesis is that a in experiment 2. The Wilcoxon-Mann-Whitney house money effect acts asymmetrically to in- rank sum test statistic produced a z value of 0.928 crease WTP and reduce the difference between (p ϭ 0.3536) and the median test resulted in a WTP and WTA.17 The following result ad- Pearson ␹2 test statistic of 0.1548 (p ϭ 0.694).16 dresses this conjecture. Clearly the extensive instruction and training might have removed misconceptions without a Result 3. The data do not support the house need for paid practice rounds to do so. It should money effect hypothesis. That is, there is no be noted that other researchers conducted ex- support for the hypothesis that money earned periments without paid practice rounds and ob- during the practice rounds accounts for the fact served a gap. Other aspects of the instructions that WTA does not exceed WTP in our differed from ours, however. This fact might experiments. help reconcile our results with those obtained in other studies. The main point, however, is that Support. The support for this result originates paid practice rounds seem unnecessary in the from two sources. First, in experiment 2 mug presence of other procedures thought to control valuations are revealed before money is earned for subject misconceptions. during the practice rounds. In that experiment, house money effects could not have played a

16 The individual data from experiment 2 suggest that the buyer who offered $23.00 for the mug might be driving the result. Evaluating the data without this high offer, however, 17 We are indebted to Colin Camerer, Richard Thaler, produces identical results. and Leeat Yariv for drawing our attention to this hypothesis. 542 THE AMERICAN ECONOMIC REVIEW JUNE 2005 role because subjects did not earn money before A review of the literature reveals that WTP- they participated in the mug round. Yet, in that WTA gaps are not reliably observed across ex- experiment, WTA did not exceed WTP. Thus, perimental designs. Given the nature of reported this experiment incorporated a direct control experimental designs, we posited that differ- and provides no support for the house money ences in experimental procedures might account effect conjecture. for the differences across reported results. This The second source of support is the revealed conjecture prompted us to develop procedures mug valuations themselves. The house money to test for the robustness of the phenomenon. effect conjecture implies that there is some re- We conducted comparative experiments using lationship between money earned in the practice procedures commonly used in studies that re- rounds and the revealed mug valuations. To test port observed gaps (i.e., KKT). We also em- for the existence of such a relationship we re- ployed a “revealed theory” methodology to gressed individual revealed mug valuations identify procedures reported in the literature against the amounts earned during the practice that provide clues about experimenter notions rounds. The regression analysis produced the regarding subject misconceptions. We then con- following equations: ducted experiments that implemented the union of procedures used by experimentalists to con- WTPi ϭ 5.77 ϩ 0.0108Yi trol for subject misconceptions. The comparative experiments demonstrate that WTP-WTA ͑t ϭ 3.816͒͑t ϭ 0.155͒ gaps are indeed sensitive to experimental procedures. By implementing different procedures, the phenomenon can be turned on and off. ϭ ϩ WTAi 5.37 0.005Yi When procedures used in studies that report the gap are employed, the gap is readily observed. ͑t ϭ 3.55͒͑t ϭ 0.08͒ When a full set of controls is implemented, the gap is not observed. where Yi represents subject i’s income prior to The fact that the gap can be turned on and off the mug round. The regression results indicate demonstrates that interpreting gaps as support that none of the variation in mug valuations is for endowment effect theory is problematic. explained by variation in income earned during The mere observation of the phenomenon does the practice rounds. Not only are the coeffi- not support loss aversion—a very special form cients close to zero, but also they are not statis- of preferences in which gains are valued less tically significantly different from zero. These than losses. That the phenomenon can be turned results allow us to reject strongly the hypothesis on and off while holding the good constant that income earned during the practice rounds supports a strong rejection of the claim that had a substantial effect on either WTP or WTA. WTP-WTA gaps support a particular theory of preferences posited by prospect theory. Loss IV. Discussion and Conclusions aversion might in some sense characterize preferences, but such a theory most likely does not The issue explored here is not whether a explain observed WTP-WTA gaps. WTP-WTA gap can be observed. Clearly, the Exactly what accounts for observed WTP- experiments of KKT and others show not only WTA gaps? The thesis of this paper is that that gaps can be observed, but also that they are observed gaps are symptomatic of subjects’ replicable. Instead, our interest lies in the inter- misconceptions about the nature of the experi- pretation of observed gaps. The primary conclu- mental task. The differences reported in the sion derived from the data reported here is that literature reflect differences in experimental observed WTP-WTA gaps do not reflect a fun- controls for misconceptions as opposed to dif- damental feature of human preferences. That is, ferences in the nature of the commodity (e.g., endowment effect theory does not seem to ex- candy, money, mugs, lotteries, etc.) under plain observed gaps. In addition, our results study. suggest that observed gaps should not be inter- That said, we hasten to add that our thesis is preted as support for prospect theory. not especially satisfying because we have nei- VOL. 95 NO. 3 PLOTT AND ZEILER: WTP–WTA GAPS AND EXPERIMENTAL PROCEDURES 543 ther a general theory of what might constitute velopment of preferences. No evidence exists to misconceptions nor a set of operational defini- support the conjecture, and there is evidence tions characterizing them. Constructing a full that works against it. Specifically, in experi- set of procedures to control for them could be ment 2 the mug round was conducted before the very difficult, as they might depend on such subjects participated in the lottery round, and no subtle features as the speed with which experi- gap was observed. Therefore, experience with mental instructions are delivered, the distance the lotteries could not have played a crucial role of subjects from the chalkboard if it is used, the in the disappearance of the gap in that instance. size of writing on the board, how loud the A third interpretation is that the procedures instructions are read, and the nature of pauses or themselves involve a type of demand effect in emphasis. Understanding appears to us to be a which the subjects perceive that the experi- delicate matter and to control fully for it repre- menter wants to strip from responses any spe- sents a daunting task. In fact, we have no direct cial value of ownership. The conjecture is that evidence that our procedures actually eliminate by responding to a demand that the answers be all misconceptions about how revealed valua- “thoughtful,” the subjects remove from the re- tions map into payoffs. What we have shown, sponse a preference related to “ownership” that however, is that when an experiment simulta- would otherwise be reflected in choice. While neously implements all known controls for mis- the mechanism through which this transforma- conceptions, a gap is not observed. tion is supposed to take place is not clear, the Several possible interpretations avail them- conjecture itself cannot be rejected using the selves. Each is a matter of speculation, but we data from our experiments. list them in order to facilitate discussion. One A fourth interpretation is that the procedures interpretation is that WTP-WTA gaps are ob- suggested some particular value as the “correct” served when revealed valuations are con- response and that our measurements recorded founded by ill-conceived motivations to the suggested value as opposed to preferences. announce something other than a “true” valua- As the same procedures were used for all sub- tion. Under this interpretation the lack of ro- jects, the conjecture implies that the valuations bustness of the gap is due to differences in elicited from the subjects should all be similar. levels of understanding by the subjects. When Our data, however, do not support this conjec- the procedures and method for measuring the ture. We observed significant variance in re- gap carefully control for such motivations, gaps sponses for each experiment. We mention here are not observed. Under this interpretation, use one interesting aside. The test for understanding of the label “endowment effect” to describe that KKT employed and that we use as well (in observed gaps reflects an inappropriate applica- conjunction with other procedures) could be tion of prospect theory. subject to criticism under this conjecture. The A second interpretation is that the procedures fact that subjects reveal “correct” valuations themselves remove attitudes that would foster might simply reflect their tendency to report the any difference between WTA and WTP. In par- suggested value (i.e., the certain lottery value in ticular, according to this conjecture, by allow- our design or the induced token value in KKT’s ing the subjects to participate in both the buying design). Thus, correct answers under these con- side and the selling side of the lottery rounds, ditions might not demonstrate that subjects un- objects are translated into commodities for derstood the mechanism. which neither ownership nor loss plays a par- A fifth interpretation is that the WTP-WTA ticular part in the preference formation process. gap reflects features of a decision process, as Then, in the subsequent mug round, the attitude opposed to a preference. Plott (1996) advances toward lotteries somehow is transferred to the a “discovered preference hypothesis,” positing mug. Under this interpretation, the procedures that responses in experiments reflect a type of (and not the actual measurement of preferences) internal search process in which subjects use play a role in the transformation of preferences paid practice rounds along with trial and error to influenced by loss aversion to preferences not “discover” what their preferences are. As the influenced by loss aversion. Of course, prospect subjects gain experience, they begin to discover theory says nothing about such a dynamic de- their preferences, which are then reflected in 544 THE AMERICAN ECONOMIC REVIEW JUNE 2005 their behavior. The hypothesis is that stages of Single-Response Sequential Method.” Be- the process can be identified and during the havioral Science, 1964, 9(3), pp. 226–32. initial stages, when the situation is least familiar Boyce, Rebecca R.; Brown, Thomas C.; McClel- to the subject, the effects of framing are most land, Gary H.; Peterson, George L. and important. Under this interpretation prospect Schulze, William D. “An Experimental Exam- theory itself emerges as a stage of the process. ination of Intrinsic Values as a Source of the Rather than describing a feature of preferences, WTA-WTP Disparity.” American Economic the theory describes the features of an early Review, 1992, 82(5), pp. 1366–73. stage of the preference discovery process. 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