Inside the Minds of Buyers and Sellers: Mental Construals and Prospect Theory

EXTENDED ABSTRACT - Research into decision-making has revealed an asymmetric response pattern towards losses as contrasted with gains (loss aversion) measured relative to any individual’s initial status quo position (Kahneman and Tversky, 1979). One of the outcomes of such a response function is that sellers tend to overvalue objects relative to buyers. That is, the lowest price at which consumers agree to part from a good (selling price) is often considerably higher than the highest price at which they agree to acquire the same item. For instance, Heberlain and Bishop (1985) found that people were willing to pay $31 for a hunting permit but were not willing to sell it for less than $143. Thaler (1980) called this patternBthe fact that people demand more to give up an object that they would be willing to pay to acquire itBthe endowment effect. The endowment effect has proved to be exceedingly robust (see, for e.g., Kahneman, Knetsch and Thaler, 1990). More recently, researchers have examined the underlying processes responsible for the endowment effect. Carmon and Ariely (2000) provide evidence that the endowment effect appears to reflect a differential attention to information, specifically a focus on the foregone.

Citation:

Himanshu Mishra and Dhananjay Nayakankuppam (2004) ,"Inside the Minds of Buyers and Sellers: Mental Construals and Prospect Theory", in NA - Advances in Consumer Research Volume 31, eds. Barbara E. Kahn and Mary Frances Luce, Valdosta, GA : Association for Consumer Research, Pages: 43-43.