
796 Journal of Economic Perspectives
"mug lovers" and the half who like mugs least "mug haters." Then, since the
mugs were assigned at random, on average half of the mug lovers will be given
a mug, and half will not. This implies that in the market, half of the mugs
should trade, with mug haters selling to mug lovers.
The 50 percent predicted volume of trade did not materialize. There were
22 mugs and pens distributed so the predicted number of trades was 11. In the
four mug markets the number of trades was 4, 1, 2, and 2 respectively. In
the pen markets the number of trades was either 4 or 5. In neither market was
there any evidence of a trend over the four trials. The reason for the low
volume of trade is revealed by the reservation prices of buyers and sellers. For
mugs,
the median owner was unwilling to sell for less than $5.25, while the
median buyer was unwilling to pay more than $2.25-$2.75. The market price
varied between $4.25 and $4.75. In the market for pens the ratio of selling to
buying prices was also about 2. The experiment was replicated several times,
always with similar results: median selling prices are about twice median buying
prices and volume is less than half of that expected.
Another experiment from this series allows us to investigate whether the
low volume of trading is produced by a reluctance to buy or a reluctance to sell.
In this experiment, 77 students at Simon Fraser University were randomly
assigned to three conditions. One group, the Sellers, were given SFU coffee
mugs and were asked whether they would be willing to sell the mugs at each of
a series of prices ranging from $0.25 to $9.25. A second group of Buyers were
asked whether they would be willing to buy a mug at the same set of prices.
The third group, called Choosers, were not given a mug but were asked to
choose, for each of the prices, between receiving a mug or that amount of
money.
Notice that the Sellers and the Choosers are in objectively identical situa-
tions,
deciding at each price between the mug and that amount of money.
Nevertheless, the Choosers behaved more like Buyers than like Sellers. The
median reservation prices were: Sellers, $7.12; Choosers, $3.12; Buyers, $2.87.
This suggests that the low volume of trade is produced mainly by owner's
reluctance to part with their endowment, rather than by buyers' unwillingness
to part with their cash. This experiment also eliminates the trivial income effect
present in the first experiment, since the Sellers and Choosers are in the same
economic situation.
One of the first lessons in microeconomics is that two indifference curves
can never intersect. This result depends on the implicit assumption that
indifference curves are reversible. That is, if an individual owns x and is
indifferent between keeping it and trading it for y, then when owning y the
individual should be indifferent about trading it for x. If loss aversion is
present, however, this reversibility will no longer hold. Knetsch (1990) has
demonstrated this point experimentally. One group of subjects received 5
medium priced ball point pens, while another group of subjects received $4.50.
They were then made a series of offers which they could accept or reject. The
offers were designed to identify an indifference curve. For example, someone