In general, people have a sensible aversion to trading items that are incomparable—for a sequence of such trades can easily lead you to items you strictly disprefer.
I don’t see why this is sensible, because such trades can also easily lead you to items that you strictly prefer.
Consider three further explanations (just made up by me, I’m not very familiar with the literature):
You might say that this is a good heuristic because trades are often adversarially chosen, but that’s less true when you’re making the decision yourself—e.g. in this case, where you can choose to exchange or not, there’s no external agent that’s instigating the trade.
You could see the endowment effect is an example of risk aversion. You have a gamecube in your hand, you can look at it, inspect it, and so on. Whereas the playstation is hypothetical, you don’t know if it’s going to be good, you don’t even know if they’re in stock, etc. But it seems like the classic examples of the endowment effect produce very little risk aversion because you literally have the two options right in front of you.
Suppose you think of yourself as a multi-agent system, where different agents have different preferences over different features. You can then think of the choice between the two options as a negotiation between two factions, one of which prefers each. Negotiations generally rely on the choice of a “disagreement point”. Before finding the GameCube, the most natural disagreement point is something like “choose between them randomly”. But after finding the GameCube, the most natural disagreement point is “do nothing” aka “keep the GameCube”. This explanation in some sense just pushes the question back one step: why does the disagreement point change like this? But I think it might still be a useful frame. For example, it predicts that the endowment effect goes away (or perhaps even reverses) if you frame it as “we’re going to swap them unless you object”, so that now the “do nothing” disagreement point goes the other way.
Someone who you’re likely to trade with (either because they offer you a trade or because they are around when you want to trade) are on average more experienced than you at trading. So trades available to you are disproportionately unfavorable and you cannot figure out which ones “are likely to lead to favorable trades in the future”, by assumption that they are incomparable.
This is what you mean by “trades are often adversarialy chosen” in (1.), right? I don’t understand why or in what situation you’re dismissing that argument in (1.).
There can be a lot of other reasons to avoid incomparable trades. In accepting a trade where you don’t clearly gain anything, you’re taking a risk to be cheated and reveal information to others about your preferences, which can risk social embarrassment and might enable others to cheat you in the future. You’re investing the mental effort to evaluate these things despite already having decided that you don’t stand to gain anything.
An interesting counterexample are social contexts where trading is an established and central activity. For example, people who exchange certain collectibles. In such a context, people feel that the act of trading itself has positive value and thus will make incomparable trades.
I think this situation is somewhat analogous to betting. Most people (cultures?) are averse to betting in general. Risk aversion and the known danger of gambling addiction explains aversion to betting for money/valuables. However, many people also strongly dislike betting without stakes. In some social contexts (horse racing, LW) betting is encouraged, even between “incomparable options”, where the odds correctly reflect your credence.
In such cases, most people seem to consider it impolite to answer an off-hand probability estimate by offering a bet. It is understood perhaps as questioning their credibility/competence/sincerity, or as an attempt to cheat them when betting for money. People will decline the bet but maintain their off-hand estimate. This might very well make sense, especially if they don’t explicitly value “training to make good probability estimates”, and perhaps for some of the same reasons as apply to trades?
I don’t understand why or in what situation you’re dismissing that argument in (1.).
Consider the specific example from the post: it’s a store that has a longstanding policy of being willing to sell people items. There’s almost no adversarial pressure from them: you know what’s available, and it’s purely your choice whether to swap or not. In other words, this is “a social context where trading is an established and central activity”. So maybe we’re just disagreeing on how common that is in general.
However, many people also strongly dislike betting without stakes.
Thanks, yeah I agree that this is a good place to press. A few thoughts:
I agree with what Herb said below, especially about default aversion to trading especially in contexts where you have uncertainty
I think you’re totally right that those other explanations could play a role. I doubt the endowment effect has a single explanation, especially since manipulations of the experimental setup can induce big changes in effect sizes. So presumably the effect is the combination of a lot of factors—I didn’t mean incomparability to be the only one, just one contributing factor.
I think one way to make the point that we should expect less trading under incomparability is just to go back to the unspoken assumption economists were making about indifference. As far as I can tell (like I said in footnote 1), the argument that standard-econ models entail 50% trading ignores the possibility that people are indifferent, or assumes that if they are then still 50% of those who are indifferent will trade. The latter seems like a really bad assumption—presumably if you’re indifferent, you’ll stick with a salient default (why bother; you risk feeling foolish and more regret, etc). So I assume the reply is going to instead be that very few people will be PRECISELY indifferent—not nearly enough to lower the trading volume from 50% to 10%. And that might be right, if the only options are strict preference or indifference. But once we recognize incomparability, it seems pretty obvious to me that most people will look at the two options and sorta shrug their shoulders; “I could go either way, I don’t really care”. That is, most will treat the two as incomparable, and if in cases like this incomparability skews toward the default of not trading (which seems quite plausible in to me in thie case, irrespective of wheeling in some general decision theory for imprecise values), then we should expect way less than 50% trading.
presumably if you’re indifferent, you’ll stick with a salient default (why bother; you risk feeling foolish and more regret, etc).
I think this is assuming the phenomenon you want to explain. If we agree that there are benefits to not trading in general (e.g. less regret/foolishness if it goes wrong), then we should expect that the benefits will outweigh the benefits of trading not just when you’re precisely indifferent, but also when you have small preferences between them (it would be bizarre if people’s choices were highly discontinuous in that way). So then you don’t need to appeal to incomparability at all.
So then the salient question becomes: why would not trading be a “salient default” at all? If you think about it just in terms of actions, there are many cases where it’s just as easy as trading (e.g. IIRC the endowment effect still applies even when you’re not physically in possession of either good yet, and so where trading vs not would just be the difference between saying “yes” and “no”). But at least conceptually trading feels like an action and not trading feels like inaction.
So then the question I’m curious about becomes “does the endowment effect apply when the default option is to trade, i.e. when trading feels like inaction and not trading feels like action?” E.g. when the experimenter says “I’m going to trade unless you object”. That would help distinguish between “people get attached to things they already have” vs “people just go with whatever option is most salient in their mind”, i.e. if it’s really about the endowment or just inaction bias.
Yeah, I think it’s a good question how much of a role some sort of salient default is doing. In general (“status quo bias”) people do have a preference for default choices, and this is of course generally reasonable since “X is the default option” is generally evidence that most people prefer X. (If they didn’t, the people setting the defaults should change it!). So that phenomenon clearly exists, and seems like it’d help explain the effect.
I don’t know much empirical literature off-hand looking at variants like you’re thinking of, but I imagine some similar things exist. People who trade more regularly definitely exhibit the endowment effect less. Likewise, if you manipulate whether you tell the person they’re receiving a “gift” vs less-intentionally winding up with a mug, that affects how many people trade. So that fits with your picture.
In general, I don’t think the explanations here are really competing. There obviously are all sorts of factors that go into the endowment effect—it’s clearly not some fundamental feature of decision making (especially when you notice all the modulators of it that have been found), but rather something that comes out of particular contexts. Even with salience and default effects driving some of it, incomparability will exacerbate it—certainly in the valuation paradigm, for the reasons I mentioned in the post, and even if the exchange paradigm because it will widen the set of people for whom other features (like defaults, aversion to trade, etc.) kick in to prevent them from trading.
I don’t see why this is sensible, because such trades can also easily lead you to items that you strictly prefer.
Consider three further explanations (just made up by me, I’m not very familiar with the literature):
You might say that this is a good heuristic because trades are often adversarially chosen, but that’s less true when you’re making the decision yourself—e.g. in this case, where you can choose to exchange or not, there’s no external agent that’s instigating the trade.
You could see the endowment effect is an example of risk aversion. You have a gamecube in your hand, you can look at it, inspect it, and so on. Whereas the playstation is hypothetical, you don’t know if it’s going to be good, you don’t even know if they’re in stock, etc. But it seems like the classic examples of the endowment effect produce very little risk aversion because you literally have the two options right in front of you.
Suppose you think of yourself as a multi-agent system, where different agents have different preferences over different features. You can then think of the choice between the two options as a negotiation between two factions, one of which prefers each. Negotiations generally rely on the choice of a “disagreement point”. Before finding the GameCube, the most natural disagreement point is something like “choose between them randomly”. But after finding the GameCube, the most natural disagreement point is “do nothing” aka “keep the GameCube”.
This explanation in some sense just pushes the question back one step: why does the disagreement point change like this? But I think it might still be a useful frame. For example, it predicts that the endowment effect goes away (or perhaps even reverses) if you frame it as “we’re going to swap them unless you object”, so that now the “do nothing” disagreement point goes the other way.
Someone who you’re likely to trade with (either because they offer you a trade or because they are around when you want to trade) are on average more experienced than you at trading. So trades available to you are disproportionately unfavorable and you cannot figure out which ones “are likely to lead to favorable trades in the future”, by assumption that they are incomparable.
This is what you mean by “trades are often adversarialy chosen” in (1.), right? I don’t understand why or in what situation you’re dismissing that argument in (1.).
There can be a lot of other reasons to avoid incomparable trades. In accepting a trade where you don’t clearly gain anything, you’re taking a risk to be cheated and reveal information to others about your preferences, which can risk social embarrassment and might enable others to cheat you in the future. You’re investing the mental effort to evaluate these things despite already having decided that you don’t stand to gain anything.
An interesting counterexample are social contexts where trading is an established and central activity. For example, people who exchange certain collectibles. In such a context, people feel that the act of trading itself has positive value and thus will make incomparable trades.
I think this situation is somewhat analogous to betting. Most people (cultures?) are averse to betting in general. Risk aversion and the known danger of gambling addiction explains aversion to betting for money/valuables. However, many people also strongly dislike betting without stakes. In some social contexts (horse racing, LW) betting is encouraged, even between “incomparable options”, where the odds correctly reflect your credence.
In such cases, most people seem to consider it impolite to answer an off-hand probability estimate by offering a bet. It is understood perhaps as questioning their credibility/competence/sincerity, or as an attempt to cheat them when betting for money. People will decline the bet but maintain their off-hand estimate. This might very well make sense, especially if they don’t explicitly value “training to make good probability estimates”, and perhaps for some of the same reasons as apply to trades?
Consider the specific example from the post: it’s a store that has a longstanding policy of being willing to sell people items. There’s almost no adversarial pressure from them: you know what’s available, and it’s purely your choice whether to swap or not. In other words, this is “a social context where trading is an established and central activity”. So maybe we’re just disagreeing on how common that is in general.
Good point, I’ll need to think about that.
Thanks, yeah I agree that this is a good place to press. A few thoughts:
I agree with what Herb said below, especially about default aversion to trading especially in contexts where you have uncertainty
I think you’re totally right that those other explanations could play a role. I doubt the endowment effect has a single explanation, especially since manipulations of the experimental setup can induce big changes in effect sizes. So presumably the effect is the combination of a lot of factors—I didn’t mean incomparability to be the only one, just one contributing factor.
I think one way to make the point that we should expect less trading under incomparability is just to go back to the unspoken assumption economists were making about indifference. As far as I can tell (like I said in footnote 1), the argument that standard-econ models entail 50% trading ignores the possibility that people are indifferent, or assumes that if they are then still 50% of those who are indifferent will trade. The latter seems like a really bad assumption—presumably if you’re indifferent, you’ll stick with a salient default (why bother; you risk feeling foolish and more regret, etc). So I assume the reply is going to instead be that very few people will be PRECISELY indifferent—not nearly enough to lower the trading volume from 50% to 10%. And that might be right, if the only options are strict preference or indifference. But once we recognize incomparability, it seems pretty obvious to me that most people will look at the two options and sorta shrug their shoulders; “I could go either way, I don’t really care”. That is, most will treat the two as incomparable, and if in cases like this incomparability skews toward the default of not trading (which seems quite plausible in to me in thie case, irrespective of wheeling in some general decision theory for imprecise values), then we should expect way less than 50% trading.
What do you think?
I think this is assuming the phenomenon you want to explain. If we agree that there are benefits to not trading in general (e.g. less regret/foolishness if it goes wrong), then we should expect that the benefits will outweigh the benefits of trading not just when you’re precisely indifferent, but also when you have small preferences between them (it would be bizarre if people’s choices were highly discontinuous in that way). So then you don’t need to appeal to incomparability at all.
So then the salient question becomes: why would not trading be a “salient default” at all? If you think about it just in terms of actions, there are many cases where it’s just as easy as trading (e.g. IIRC the endowment effect still applies even when you’re not physically in possession of either good yet, and so where trading vs not would just be the difference between saying “yes” and “no”). But at least conceptually trading feels like an action and not trading feels like inaction.
So then the question I’m curious about becomes “does the endowment effect apply when the default option is to trade, i.e. when trading feels like inaction and not trading feels like action?” E.g. when the experimenter says “I’m going to trade unless you object”. That would help distinguish between “people get attached to things they already have” vs “people just go with whatever option is most salient in their mind”, i.e. if it’s really about the endowment or just inaction bias.
Yeah, I think it’s a good question how much of a role some sort of salient default is doing. In general (“status quo bias”) people do have a preference for default choices, and this is of course generally reasonable since “X is the default option” is generally evidence that most people prefer X. (If they didn’t, the people setting the defaults should change it!). So that phenomenon clearly exists, and seems like it’d help explain the effect.
I don’t know much empirical literature off-hand looking at variants like you’re thinking of, but I imagine some similar things exist. People who trade more regularly definitely exhibit the endowment effect less. Likewise, if you manipulate whether you tell the person they’re receiving a “gift” vs less-intentionally winding up with a mug, that affects how many people trade. So that fits with your picture.
In general, I don’t think the explanations here are really competing. There obviously are all sorts of factors that go into the endowment effect—it’s clearly not some fundamental feature of decision making (especially when you notice all the modulators of it that have been found), but rather something that comes out of particular contexts. Even with salience and default effects driving some of it, incomparability will exacerbate it—certainly in the valuation paradigm, for the reasons I mentioned in the post, and even if the exchange paradigm because it will widen the set of people for whom other features (like defaults, aversion to trade, etc.) kick in to prevent them from trading.