Bidding for Candy

My Easter post on candy bars leaves me pondering where academia would be without chocolate. Many experiments over the years have entailed giving experimental subjects, mostly students, candy either as compensation or as part of the experiment. Interestingly candy may work because people often value it more than the monetary equivalent. (Candy gives those receiving it permission to treat themselves — one of the reasons why in-kind gifts can be valued more highly than cash.) There are of course downsides to giving candy to participants in experiments. For example, it can change a participants’ mood which can throw the experiment off. Even if they save the candy to later they might be influenced by anticipation. (This isn’t necessarily a problem — it’ll depend on the experiment.)

Still chocolate is a mainstay of experiments. One the most influential uses was in Jack Knetsch’s paper on The Endowment Effect. This paper combines psychology and economics so has been extended and assaulted by both groups over the years. Generally speaking psychologically influenced scholars have sought to understand why there is an endowment effect, and have come up with any number of useful, alternative explanations. The economically trained are keen to stress the artificiality of laboratory experiments — and have made some reasonable points about how much we can generalize from the lab. Still Knetsch was saying something interesting.

His basic point is that when we own something it has more value to us than something comparable that we don’t own. This is a problem for trades. Fewer trades occur than would if people didn’t experience an “endowment effect” because we tend to stick with what we’ve got even if a mutual trade might leave us all better off. Where do candy bars come in? Knetsch gave his subjects candy bars but those who possessed the candy bars valued them more than those who didn’t. In his experiment not as many trades were made compared to what was expected.

The first lesson from this research is that some markets, especially those where people invest a lot in ownership — e.g. real estate — might not be as smoothly functioning as traditional economic theory might predict. The second, and more important, lesson is: Don’t try and take anyones candy bar off them, they might be excessively attached to their own candy.

Read: Jack Knetsch (1989) The endowment effect and evidence of nonreversible indifference curves, The American Economic Review. 79 (5) 1277-1284.