Endowment Effects

On Wednesday morning I had the pleasure of joining Aoibhín, my two-year-old niece, for breakfast. As I sat down beside her she asked for some toast. I duly buttered a slice and placed it on the side-plate between us, only for her mother to point out that Aoibhín would eat, at most, half that slice.

I did the sensible thing and cut the slice in half, giving one half to the child and one half to myself. Though she had heard her mother, Aoibhín protested that I had taken some of her food. She was displaying an endowment effect, based on an attachment period of a couple of seconds.

Harbaugh et al (2001) ask Are Adults Better Behaved than Children? Age, Experience, and the Endowment Effect. They

find that large increases in age do not reduce the endowment effect, supporting the hypothesis that people have reference-dependent preferences which are not changed by repeated experience getting and giving up goods.

Incidentally, Aoibhín’s mother is a public sector worker.