are we pricing goods rational?

Filed in archive Global Economy on September 7, 2003

The Economist features some insight into the neoclassical vs. behaviouralists economists battle.
The article elaborates on the "endowment effect", which means that people place an extra value on things they own. It cites some experiments delivering evidence for the effect. If this would be true the approach of efficient prizes and efficient markets would be seriously hampered.
In my opinion the endowment effect can be more easily explained if transaction costs and especially mental transaction costs are incorporated. Clearly I wouldn't simply swap known products against less known. I risk getting an (slightly) worser product, I have to value the swapping product + I have to execute the transaction. So in the experiments showed at least there is a big incentive no to swap, besides the endowment effect.

New research shows now, that the effect shows mostly the behavior of inexperienced market participants and holds not true for more experienced 'traders'.

Quite a good topic for today's German weather....