A Culture-by-Context Analysis of Endowment Effects

A Culture-by-Context Analysis of Endowment Effects Matthias S. Gobel (matthias.gobel.11@ucl.ac.uk) Tiffanie Ong (tiffanieong@gmail.com) Adam J. L. Harris (adam.harris@ucl.ac.uk) Department of Experimental Psychology; University College London; 26 Bedford Way, London WC1H 0AP, UK Abstract WTP-WTA Price Gaps: the Endowment Effect The endowment effect describes people’s tendency to ask for more money when selling objects than they are willing to pay when buying these objects. Previous research found that Asian participants showed smaller endowment effects than Western participants. These results were explained by culture-specific self-beliefs being transferred onto the endowed object. Yet, Asian self-concepts are not only more interdependent, but also more situation-contingent than Western self-concepts. Thus, we predicted cultural differences in endowment effects to depend on social contexts. In two studies, we asked participants to imagine being either the owner or the buyer of a coffee mug, and to imagine using this mug in either a public or private context. Assessing participants’ monetary value of the mug, we found that Asians showed endowment effects in private but not in public contexts. In contrast, Westerners showed endowment effects across both social contexts. We discuss possible mechanisms that may underlie these findings. Keywords: Endowment Effect; Social Context; Culture; Decision Making; Self-Concept Introduction More and more people rely on owning stock shares to improve their income and secure their retirement. One key aspect of successful private (and professional) trading is to find the right moment to buy lucrative options and to sell unprofitable shares. As with many other decisions people face, selecting to buy or to sell relies on elaborate cognitive processes. Researchers in the cognitive science of decision making have provided sophisticated models to predict when people ought to buy or to sell. Yet, most of the decisions people make in everyday life are also influenced by social values, norms, and expectations represented in the presence of others (e.g., Yamagishi, Hashimoto, & Schug, 2008). In this article, we investigate how the cultural background of an individual and the social context of the transaction influence decision making. We ask, is the willingness-to-pay (WTP) when buying and the willingness-to-accept (WTA) when selling different among East Asian and Western individuals? Moreover, does the social context associated with an object change its valuation by owners versus non- owners across both cultures? Providing answers to these questions, the present research presents two experiments demonstrating a novel interplay between culture and social context in this area of human decision making. One of the most prevalent topics in the decision making literature over the last 30 years has been the gap in monetary value between WTP and WTA (e.g., Horowitz & McConnell, 2002). The psychological phenomenon to overvalue owned objects is known as the endowment effect (Thaler, 1980). In a typical endowment experiment, participants are randomly divided into non-owners versus owners of a certain object (e.g., a coffee mug). While the former group of participants reports the highest price they are willing to buy the non- endowed object for (WTP), the latter group indicates the lowest price they are willing to sell the endowed object for (WTA). While classic economic theory would expect these two to be of similar magnitude, experimental findings have consistently demonstrated significant price gaps between WTP and WTA (e.g., Kahneman, Knetsch, & Thaler, 1990). The robustness of this endowment effect has been shown with a large variety of objects including mugs, chocolates and pens (e.g., Kahneman et al., 1990), with young children (Harbaugh, Krause, & Vesterlund, 2001) as well as with chimpanzees (Brosnan et al., 2007). Traditionally, it has been advocated that the endowment effect is the result of loss aversion (e.g., Kahneman et al., 1990). That is, the pain associated with the possibility of losing an object outweighs the pleasure associated with the possibility of gaining such an object (Kahneman & Tversky, 1979). However, more recent research has proposed that the affective-cognitive state of merely owning an object might underlie the endowment effect (e.g., Morewedge, Shu, Gilbert, & Wilson, 2009). In other words, being the owner compared to not being the owner of an object might change how people think and feel about the object in the present rather than it might influence the anticipated pain associated with its loss in the future. Evidence presented in support of this position includes findings that endowment effects increase for objects that are closely connected to the self (Tom, 2004), for objects that have been possessed for longer durations (Strahilevitz & Loewenstein, 1998), and for objects that can compensate threats to the self (Dommer & Swaminathan, 2013). Taken together these findings are in line with theorizing that being the owner of an object associates the self (i.e., the cognitive representation of one’s identity) with the object (Beggan, 1992). Through this self- object association, the object gains social characteristics, and implicit beliefs about the self are transferred onto the object (Gawronski, Bodenhausen, & Becker, 2007).