Asymmetries in Exchange Behavior Incorrectly Interpreted as Evidence of Prospect Theory

Systematic asymmetries in exchange behavior have been widely interpreted as support for endowment effect theory, that loss aversion associated with ownership creates an asymmetry in valuations and exchange behavior. According to this theory, which is an application of prospect theory, because of a kink in the utility function established by the acquisition of a good, parting with an endowed good produces a loss that is greater than the gain from acquiring the good. The results also have been cited as general support for prospect theory, of which loss aversion is a fundamental component. The experiments reported here suggest that such interpretations of observed exchange asymmetries are incorrect. While exchange asymmetries are readily observable, the data reported here demonstrate that measurements of preferences using standard procedures are confounded with effects of the experimental procedures themselves. In other words, the data suggest that experimental procedures lead to observed exchange asymmetries. In treatments for which endowment effect theory would predict exchange asymmetries, we observe no asymmetries when we eliminate alternative explanations related to procedures. Therefore, our results reject loss aversion, endowment effect theory and prospect theory as possible explanations for observed exchange asymmetries and call into question normative legal analyses grounded in these theories of decision making.