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The endowment effect changes the shape of the indifference curves substantially [41] Similarly, another study that is focused on the Strategic Reallocations for Endowment analyses how it is the case that economics's agents welfare could potentially increase if they change their endowment holding.
In 1980, loss aversion was used in Thaler (1980) regarding endowment effect. [8] Loss aversion was also used to support the status quo bias in 1988, [9] and the equity premium puzzle in 1995. [10] In the 2000s, behavioural finance was an area with frequent application of this theory, [11] [12] including on asset prices and individual stock ...
Reference dependence is a central principle in prospect theory and behavioral economics generally. It holds that people evaluate outcomes and express preferences relative to an existing reference point, or status quo. It is related to loss aversion and the endowment effect. [1] [2]
Status quo bias has been attributed to a combination of loss aversion and the endowment effect, two ideas relevant to prospect theory.An individual weighs the potential losses of switching from the status quo more heavily than the potential gains; this is due to the prospect theory value function being steeper in the loss domain. [1]
Behavioral economics is the study of the psychological (e.g. cognitive, behavioral, affective, social) factors involved in the decisions of individuals or institutions, and how these decisions deviate from those implied by traditional economic theory.
Confirmation bias is the tendency to search for, interpret, focus on and remember information in a way that confirms one's preconceptions. [32] There are multiple other cognitive biases which involve or are types of confirmation bias: Backfire effect, a tendency to react to disconfirming evidence by strengthening one's previous beliefs. [33]
The disposition effect has been described as one of the foremost vigorous actualities around individual investors because investors will hold stocks that have lost value yet sell stocks that have gained value." [2] In 1979, Daniel Kahneman and Amos Tversky traced the cause of the disposition effect to the so-called "prospect theory". [3]
Cumulative prospect theory has been applied to a diverse range of situations which appear inconsistent with standard economic rationality, in particular the equity premium puzzle, the asset allocation puzzle, the status quo bias, various gambling and betting puzzles, intertemporal consumption and the endowment effect.