A Social Perception Theory of the Endowment Effect

In nine experiments (total N = 2107, with British, French, and U.S. American participants), this paper proposes and tests a social perception theory of the endowment effect. First, the authors show that buyers are more likely to focus on themselves, and that sellers are more likely to focus on buyers. Then, the authors show that the endowment effect is mediated by misperceptions that sellers have about buyers’ features. Sellers base their willingness-to-accept in part on their biased perceptions of the buyers. Since individuals misconstrue others in many ways that contribute to increases in features linked with willingness-to-pay, this contributes to the endowment effect. Consistent with this explanation, the authors find that selling prices can be moderated by changing the description of the counterpart in several ways, to the point of reversing the endowment effect for positively valued goods. Further, the authors find a stronger endowment effect for products considered highly materialistic. Theoretically, these findings support a new explanation for the endowment effect and connect research on the endowment effect with research about misperceptions of others. Practically, the authors discuss ways of improving negotiations and pricing centered around correcting misperceptions of others.