The Endowment Effect in the Wild: A Field Study on Loss Aversion and its Implications for Retail Investing

AbstractClassical economic theory posits that human beings act as perfectly rational agents, objectively weighing the utility of goods and capital. However, behavioral economics suggests that human decision-making is heavily influenced by cognitive biases rooted in evolutionary survival mechanisms. This paper explores the "Endowment Effect"—the hypothesis that individuals ascribe higher value to an object simply because they own it. Through a randomized field experiment conducted on a university campus, participants were endowed with either a premium chocolate bar or a premium pen and subsequently offered an opportunity to trade for the alternate item. Observations indicated a profound resistance to trading across both cohorts, regardless of the initial item received. This behavior is analyzed through the lens of Loss Aversion and Prospect Theory, connecting the biological pain of loss to the "Disposition Effect" observed in modern financial markets, wherein retail investors exhibit a tendency to hold losing assets to avoid realizing a loss while selling winning assets prematurely.