Market Experience Overcomes Psychological Flaws
The term “endowment effect” refers to people’s tendency to place an extra value on things they already own. John List, an economist at the University of Maryland, tested the existence of the endowment effect in a new way. Instead of using callow students, he went to a real market with traders of varying degrees of experience: a sports-card exchange, one of many such, where Americans trade pictures of their favourite athletes. There, traders dealing in hundreds of cards mix with browsers who might buy only one.
In one experiment (”Does Market Experience Eliminate Market Anomalies?“), List took aside a group of card fans and gave them an assortment of other, less familiar, sporting memorabilia, such as autographs, badges and so forth. He then let them trade. The less card-trading experience a subject had, the less likely he was to trade, even when a good deal was on offer. More experienced traders were less prone to the endowment effect, and traded as keenly as neoclassical theory predicts.
Although consistent with an endowment effect, this was not proof of one. Novice traders could simply be wary of dealing with those who might get the better of them. To rule this out, Mr List concocted another experiment along the lines of the Cornell study (”Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace“). He gave a similar cross-section of fans chocolate and coffee mugs, whose values are well-known even to the most inexperienced bargainers, and let them trade. Again, Mr List found evidence for an endowment effect — but also that long experience as a card trader spilled over into his experimental mug-and-chocolate market. Only novices, like the students in earlier experiments, tended to be swayed by what they had been given.
This implies that experienced buyers or sellers in well-established markets get over their psychological “flaws,” and can transfer their trading skills from one market to another.
“To Have and to Hold,” The Economist