Misbehaving: The Making of Behavioral Economics Read Online Free PDF Page A

gut instinct that framing mattered. Paying a surcharge is out-of-pocket, whereas not receiving a discount is a “mere” opportunity cost.
    I called this phenomenon the “endowment effect” because, in economists’ lingo, the stuff you own is part of your endowment, and I had stumbled upon a finding that suggested people valued things that were already part of their endowment more highly than things that could be part of their endowment, that were available but not yet owned.
    The endowment effect has a pronounced influence on behavior for those considering attending special concerts and sporting events. Often the retail price for a given ticket is well below the market price. Someone lucky enough to have grabbed a ticket, either by waiting in line or by being quickest to click on a website, now has a decision to make: go to the event or sell the ticket? In many parts of the world there is now a simple, legal market for tickets on websites such as Stubhub.com, such that ticket-holders no longer have to stand outside a venue and hawk the tickets in order to realize the windfall gain they received when they bought a highly valued item.
    Few people other than economists think about this decision correctly. A nice illustration of this involves economist Dean Karlan, now of Yale University. Dean’s time in Chicago—he was an MBA student then—coincided with Michael Jordan’s reign as the king of professional basketball. Jordan’s Chicago Bulls won six championships while he was on the team. The year in question, the Bulls were playing the Washington Wizards in the first round of the playoffs. Although the Bulls were heavily favored to win, tickets were in high demand in part because fans knew seats would be even more expensive later in the playoffs.
    Dean had a college buddy who worked for the Wizards and gave Dean two tickets. Dean also had a friend, a graduate student in divinity school, who shared the same Wizards connection and had also received a pair of free tickets. Both of them faced the usual financial struggles associated with being a graduate student, although Dean had better long-term financial prospects: MBAs tend to make more money than graduates of divinity school. ¶
    Both Dean and his friend found the decision of whether to sell or attend the game to be an easy one. The divinity school student invited someone to go to the game with him and enjoyed himself. Dean, meanwhile, got busy scoping out which basketball-loving professors also had lucrative consulting practices. He sold his tickets for several hundred dollars each. Both Dean and his friend thought the other’s behavior was nuts. Dean did not understand how his friend could possibly think he could afford to go to the game. His friend could not understand why Dean didn’t realize the tickets were free.
    That is the endowment effect. I knew it was real, but I had no idea what to do with it.
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    *    Typical Schelling thought experiment: suppose there was some medical procedure that will provide some modest health benefit but is extremely painful. However, the procedure is administered with a drug that does not prevent the pain but instead erases all memory of the event. Would you be willing to undertake this procedure?
    †    The question that Zeckhauser was interested in is: how does Aidan’s willingness to pay depend on the number of bullets in the gun? If all the chambers are full, Aidan should pay all he has (and can borrow) to remove even one bullet. But what if there are only two bullets loaded? What will he pay to remove one of them? And would it be more or less than what he would pay to remove the last bullet?
    ‡    Technically, the answers can differ by what economists call an income or wealth effect. You are worse off in version A than version B because if you do nothing in version B you do not get exposed to the disease. But this effect cannot explain differences of the magnitudes that I observed, and other