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# The hypothesis that people ascribe more value to things

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The hypothesis that people ascribe more value to things  [#permalink]

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18 Apr 2018, 03:33
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The hypothesis that people ascribe more value to things merely because they own them is at the heart of a highly influential theory in behavioral economics, known as the endowment effect.Economists ascribing to the theory have tried to illustrate this effect with the help of several experiments that seem to show that people value the things they own more than they value identical products they do not own and that they prefer to hold on to those endowed items rather than trade or sell them.Endowment theory says that such observable events, whatever their other possible causes, are at least partially explained by the general phenomenon of loss aversion, which holds that people give possible losses more weight than potential gains of the same magnitude.Endowment theory is an application of this phenomenon, adding the hypothesis that ownership determines whether one experiences a change as a gain or as a loss.Endowment theory posits that ownership sets one’s reference point, the movement from which triggers either a perceived gain or loss, and that people perceive the transfer or sale of endowments as losses.

Although endowment theory continues to enjoy considerable influence, recent experimental data have cast doubt on the hypothesis that ownership sets the reference point and that loss aversion generates the reluctance to trade.The empirical support for endowment theory was never perfect.In recent years, experimentalists have published data suggesting that the results of earlier laboratory experiments were not caused by loss aversion but by other factors.By making a few changes to the experimental design—such as better training subjects in the auction mechanisms used in the experiments, changing the way subjects were given the items, and modifying the procedures for eliciting choices—to rule out alternative explanations, experimentalist were able to make “endowment effects” that had been observed in the laboratory disappear.Many other researchers have since replicated these results.The new data suggest that ownership alone is not enough to change people’s expressed preferences.These results have led experimental economists and cognitive psychologists to develop alternatives to endowment theory.

1.The economists ascribing to the theory of endowment effect would consider which one of the following as an example of this effect?

A.A person who receives a gift of a hundred dollar bottle of wine would not normally spend the same amount buying it and choses to drink the wine rather than sell it.

B.A person, who buys a bottle of his favorite wine for ten dollars, refuses to pay the same amount for a bottle of wine that is very similar in every aspect to the other wine and that his friend is willing to sell.

C.A person, who receives a bottle of wine as a gift from a friend, buys the same wine again from the market at a more expensive price than the one paid by his friend.

D.A person sells a bottle of wine, which was gifted to him, at a price that is not lower than the market price of the wine.

E.A person refuses to sell a bottle of wine that was gifted to him because market survey shows that the price of that wine is likely to rise even further in the future.

2.The author is primarily concerned with

A.describing a theory in detail while analyzing the influence it enjoys in the field of economics

B. explaining a theory and its underlying basis to review the individuals experiments done in its support

C. discussing a theory in detail and bringing out its deficiencies that were deliberately ignored by its proponents

D.critically evaluating a theory and its underlying basis

E. describing a theory and suggesting that it should be discarded since it has no empirical soundness

3.Which of the following is most supported by the information given in the passage?

A.The value of the endowed item increases with the passage of time.

B.The way a response is extracted out of a participant in a study could have an effect in the ultimate outcome of that study.

C.The endowment theory lacks any sort of factual support.

D.As per the endowment theory, the sole reason that people are reluctant to transfer or sell their endowed item is because of the workings of the loss aversion phenomenon.

E.The real value of an endowed product is normally considerably less than the value ascribed to it by people.

4.According to the passage, which of the following is NOT true?

A.The endowment theory enjoys more than limited influence.

B. The ownership of an endowed product has an important part to play in whether a particular change is perceived as a gain or loss.

C. There are holes in the empirical data that support results not in favor of the endowment theory.

D.Loss aversion is possibly not the only factor that the theory believes causes the endowment effect.

E. Some experimental economists have been influenced by the recent data that does not favor the endowment theory.

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The hypothesis that people ascribe more value to things  [#permalink]

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09 Aug 2018, 20:16
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1.The economists ascribing to the theory of endowment effect would consider which one of the following as an example of this effect?

A) A person who receives a gift of a hundred dollar bottle of wine would not normally spend the same amount buying it and choses to drink the wine rather than sell it.

Correct

This choice ticks all the characteristics of the endowment effect as detailed out in the passage. Let’s split the given situation in to bite-sized portions:

The person receives a bottle of wine = he owns it now
He would under not normally spend the same amount buying it = ascribes less value to an identical item
Would rather drink it than sell = hold on to those endowed items rather than sell it.

B) A person, who buys a bottle of his favorite wine for ten dollars, refuses to pay the same amount for a bottle of wine that is very similar in every aspect to the other wine and that his friend is willing to sell.

Incorrect: Out of Scope

As per the theory detailed out in the passage, the item to which less value is ascribed has to be identical not similar. So this choice fails to fulfil a key feature of the theory.

C) A person, who receives a bottle of wine as a gift from a friend, buys the same wine again from the market at a more expensive price than the one paid by his friend.

Incorrect: Opposite

This choice builds a situation in which the person ends up paying more for an identical item. If anything, this action is suggestive of ascribing more rather less value.

D) A person sells a bottle of wine, which was gifted to him, at a price that is not lower than the market price of the wine.

Incorrect: Opposite

The passage says that when the effect is in action, people would much rather own the product rather than sell it. However, in this choice the endowed item is being sold.

E) A person refuses to sell a bottle of wine that was gifted to him because market survey shows that the price of that wine is likely to rise even further in the future.

Incorrect: Out of Scope

The reason given over here is that the person reuses to sell the endowed product since he is waiting for the rate to go high. As stated above, when the effect is in action, people would much rather own the product rather than sell it.
_______________________________________

2. The author is primarily concerned with

A) describing a theory in detail while analyzing the influence it enjoys in the field of economics

Incorrect: Partial Scope

Although the author does describe the endowment theory in detail, the author does not analyze or delve deep in to the kind of influence it enjoys.

B) explaining a theory and its underlying basis to review the individuals experiments done in its support

Incorrect: Partial Scope

The author does explain the endowment theory and its underlying basis (loss aversion); however, all this is not done to review the experiments done in its support. It is done to educate the reader so that the discussion is carried forward and the author can develop on the criticism of the theory. Now the review of all (not individual) experiments done to support it is again to present the criticism meted out to the theory.

C) discussing a theory in detail and bringing out its deficiencies that were deliberately ignored by its proponents

Incorrect: Partial Scope

Indeed the authors discusses a theory and presents certain criticism for it but there is no basis to state that the shortcomings were deliberately ignored by the proponents of the theory.

D) critically evaluating a theory and its underlying basis

Correct

This choice matches our pre-thinking and is indeed the correct answer.

E) describing a theory and suggesting that it should be discarded since it has no empirical soundness

Incorrect: Out of Scope

The author not only describes the theory but also explains it. Also, the author states that the empirical basis of the theory was never perfect not that it has NO empirical soundness.
_______________________________________

3. Which of the following is most supported by the information given in the passage?

A) The value of the endowed item increases with the passage of time.

Incorrect: Out of Scope

There is no information given regarding any increase in the value of the endowed product.

B) The way a response is extracted out of a participant in a study could have an effect in the ultimate outcome of that study.

Correct

This statement follows from the information given to us in the following section of the passage (2nd para):

By making a few changes to the experimental design—such as better training subjects in the auction mechanisms used in the experiments, changing the way subjects were given the items, and modifying the procedures for eliciting choices—to rule out alternative explanations, experimentalist were able to make “endowment effects” that had been observed in the laboratory disappear.

As we can see, “procedures for eliciting choices” were one of the elements that were tweaked, leading to a completely different outcome.

C) The endowment theory lacks any sort of factual support.

Incorrect: Out of Scope

The author states that the theory’s empirical or factual support was never perfect, not that it lacked any kind of factual support.

D) As per the endowment theory, the sole reason that people are reluctant to transfer or sell their endowed item is because of the workings of the loss aversion phenomenon.

Incorrect: Out of Scope

The passage clearly states that, as per the theory, there could be other causes of the observed events but that loss aversion is definitely one of them.

E) The real value of an endowed product is normally considerably less than the value ascribed to it by people.

Incorrect: Out of Scope

We have no information regarding “real” value of the endowed product.
_______________________________________

4. According to the passage, which of the following is NOT true?

A) The endowment theory enjoys more than limited influence.

Incorrect: Given in the passage

This information is explicitly given to us in the first sentence of the second paragraph (ref. below):

Although endowment theory continues to enjoy considerable influence

B) The ownership of an endowed product has an important part to play in whether a particular change is perceived as a gain or loss.

Incorrect: Given in the passage

This information is given to us in the first paragraph (ref. below):

…ownership determines whether one experiences a change as a gain or as a loss…

C) There are holes in the empirical data that support results not in favor of the endowment theory.

Correct

This choice talks about the data that go against the theory and says that it has holes in it or is flawed. However, the author says that the data used to support the theory is flawed. Hence, this choice is the correct choice that does not flow from the contents of the passage.

D) Loss aversion is possibly not the only factor that the theory believes causes the endowment effect.

Incorrect: Given in the passage

This information is given to us in the first paragraph (ref. below):

Endowment theory says that such observable events, whatever their other possible causes, are at least partially explained by the general phenomenon of loss aversion…

E) Some experimental economists have been influenced by the recent data that does not favor the endowment theory.

Incorrect: Given in the passage

This information is given to us in the last sentence of the passage (ref. below):

These results have led experimental economists and cognitive psychologists to develop alternatives to endowment theory.
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Re: The hypothesis that people ascribe more value to things  [#permalink]

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19 Apr 2018, 14:29
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1.The economists ascribing to the theory of endowment effect would consider which one of the following as an example of this effect?

A. person who receives a gift of a hundred dollar bottle of wine would not normally spend the same amount buying it and choses to drink the wine rather than sell it.This matches the description in the passage very well. The person values the product she has very high and isn't willing to sell it. Some students might get tricked by the fact that wine is a gift and that the person wants to drink the wine. However, those two facts aren't relevant to answer this question.

Relevant passage:
Quote:
people value the things they own more than they value identical products they do not own and that they prefer to hold on to those endowed items rather than trade or sell them

2.The author is primarily concerned with

A.describing a theory in detail while analyzing the influence it enjoys in the field of economics The author is not primarly concerned with the influence of this theory.
B. explaining a theory and its underlying basis to review the individuals experiments done in its support He doesn't really review the experiments. Instead he just mentions what other have found.
C. discussing a theory in detail and bringing out its deficiencies that were deliberately ignored by its proponents The problems with the studies weren't delibaretely ignored by the proponents
D.critically evaluating a theory and its underlying basis This fits very well. The author describes the theory and the studies that were used as a basis to prove this theory. He also mentions that there were problems with the study, but he didn't review these problems himself. Overall, this is the best fit.
E. describing a theory and suggesting that it should be discarded since it has no empirical soundness It isn't said that the theory doesn't have any empirical soundness. Loss aversion was strongly weakened as a factor but there also other factors, which aren't named in the passage.

3.Which of the following is most supported by the information given in the passage?

A.The value of the endowed item increases with the passage of time. Is mentioned nowhere.
B.The way a response is extracted out of a participant in a study could have an effect in the ultimate outcome of that study. This looks good. I quoted the relevant passage under the question.
C.The endowment theory lacks any sort of factual support. There is still support, even though the loss aversion theory got weakened drastically.
D.As per the endowment theory, the sole reason that people are reluctant to transfer or sell their endowed item is because of the workings of the loss aversion phenomenon. It is mentioned that there are several other reasons that contribute to this reluctance.
E.The real value of an endowed product is normally considerably less than the value ascribed to it by people. This is also nowhere to be found in the passage.

Quote:
By making a few changes to the experimental design—such as better training subjects in the auction mechanisms used in the experiments, changing the way subjects were given the items, and modifying the procedures for eliciting choices

4.According to the passage, which of the following is NOT true?

A. The endowment theory enjoys more than limited influence. It is mentioned at the beginning that is has high influence.
B. The ownership of an endowed product has an important part to play in whether a particular change is perceived as a gain or loss. This is mentioned as well and hence its not the correct answer.
C. There are holes in the empirical data that support results not in favor of the endowment theory. This is the best answer. My explanation would be that you can't really call it "holes". Yes, some scientists found that a different study setup influences the outcome but this doesn't prove that the previous setup had a hole in the empirical data. I'm sure that someone can come up with a better explanation.
D. Loss aversion is possibly not the only factor that the theory believes causes the endowment effect. This is mentioned in the passage. There are several factors causing the endownment effect.
E. Some experimental economists have been influenced by the recent data that does not favor the endowment theory. Mentioned at the end of the passage.

I hope that helps
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Re: The hypothesis that people ascribe more value to things  [#permalink]

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12 Aug 2018, 23:25
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what is the ideal time that should be spent on this? took me 7 mins and got 3 correct..wondering whether I went too fast?
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Re: The hypothesis that people ascribe more value to things  [#permalink]

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12 Aug 2018, 23:31
3
Gagoosh wrote:
what is the ideal time that should be spent on this? took me 7 mins and got 3 correct..wondering whether I went too fast?

Gagoosh

I believe, ideal time is the time required to get all the questions correct and that depends on individual abilities. There is no common answer.

To determine whether you went too fast, ask yourself, for the question that you got wrong, if you had 20-30 seconds extra, would you've got that correct ? That will tell you the answer
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Re: The hypothesis that people ascribe more value to things  [#permalink]

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25 Jan 2019, 06:22
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workout

In question 4, I chose E as the answer. My reasoning is that in Option E, 'some researchers were influenced.....' has been used whereas in the passage, it is explicitly mentioned that many researchers replicated the result. Is my reasoning incorrect? As in, the grounds to reject E is anything different from what I am thinking?
Re: The hypothesis that people ascribe more value to things   [#permalink] 25 Jan 2019, 06:22
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