List - Does Market Experience Eliminate Market Anomalies Flashcards
(16 cards)
What is the main research question in List’s work on market experience and anomalies?
Whether market experience reduces or eliminates cognitive bias and economic anomalies (i.e. the endowment effect)
What is the endowment effect and how did List study it?
The endowment effect is the tendency for people to value terms more highly just because they own them. List studied this using field experiments with real market participants with varying levels of market experience.
How did List measure “market experience” in his studies?
He typically classified participants based on self-reported trading frequency (e.g. trades per month), years of experience in the market, or whether they were professional dealers versus non dealers/collectors.
Among inexperienced traders, what was the ratio of WTA to WTP for sports memorabilia?
The WTA/WTP ratio was typically 2:1 or higher for inexperienced traders, indicating a strong endowment effect
In the collector pin market, what was the trading rate for inexperienced vs experienced participants?
Inexperienced participants traded at a rate of abour 18%, while experienced participants traded at a rate of about 47%
What does the observed change in WTA/WTP ratio imply about the effect of market experience?
Market experience substanitally reduces or eliminates the endowment effect, as measured by the convergence of WTA and WTP.
How does List’s follow up study (second market) help address causality?
List conducted a follow up study with the same participants, allowing him to use panel data and fixed effects to control for individual characteristics. This helped distinguish between selection bias and the treatment effect of market experience.
What additional measure of the endowment effect did List use in his experiments?
List used the Willingness to Accept (WTA) vs. Willingness to Pay (WTP) disparity. Non-dealers showed significantly higher WTA than WTP (indicating endowment effect), while dealers showed a smaller, non-significant gap.
How did List’s controlled laboratory experiment contribute to his findings?
List conducted a 4-week laboratory experiment where subjects participated once weekly, allowing him to control for and observe the development of experience. The percentage of subjects willing to trade increased from 11% in week 1 to 27% in week 4, demonstrating that learning through experience significantly reduces the endowment effect.
Once inexperienced consumers are endowed with a good, how many times more likely to keep that good?
13x
What detail in the experiment with sports memorabilia (not the follow up) exacebated the endowment effect?
The subjects receiving the good as payment on initial completion of the survey and had the good in their possession when considering whether to swap for alternative good.
What was the open question had by List regarding the absence of the Endowment Effect for practiced consumers? (Hint: he called out two possible. effects that was clarified in the follow up experiment)
1) Is the absence of Endowment effect for practical consumers because of experience? (Treatment effect)
2) Or because of the prior disposition towards having no such gap leads them to trade more often.
The follow up experiment supported the fact that market experience attenuates the endowment effect.
In the auction experiment measuring WTP/WTA, what was the difference found between dealers and non dealer auctions?
In the dealer scenario, the large sample t test cannot reject that the WTP and the WTA are significant.
For the non dealers, they had 5.6x larger WTA vs WTP, which was found to be statisitically significant.
What was a study List pointed to for an example of the market experience reducing anomalies that linked to the housing market?
Genosome and Mayer.
They found that owner occupants exhibit about twice the degree of loss aversion that investors exhibit.
What are the implications this has upon property rights and Coasian bargaining?
The presence of endowment effects upsets Coasian bargaining becuase the allocation of property rights ultimately matter. But once you have experienced litigants, such EEs begin to disappear and so the basic independence assumption is restored.
What is a key criticism that could be levied towards List’s work?
The main criticism is around whether the results could be reliably reproduced and replicated, raising challenges around robustness and generalisability.
