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Richard Thaler wins Nobel


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Guest MikeTheCannon

I'm a big fan of Thaler's work. In fact, I would say that his work (along with Tversky, Ariely, and Kahneman) forms the basis for my belief in the value investing philosophy.

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I'm a big fan of Thaler's work. In fact, I would say that his work (along with Tversky, Ariely, and Kahneman) forms the basis for my belief in the value investing philosophy.

 

I agree. Behavioural economics is a fascinating field of study.

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Guest MikeTheCannon

Here's a quick rundown of Thaler's "endowment effect" that I wrote during my undergrad:

 

In 1980, Richard Thaler described another phenomenon where people place a greater value on the goods they held in their personal endowments over the exact same goods they did not own. Thaler referred to this as the “endowment effect”. A classic experiment conducted to emphasize Thaler’s theory was centered around the value of coffee mugs and chocolate bars. The experiment begins with researchers randomly handing out coffee mugs and chocolate bars, with identical market values, to a group of university students. The researchers then confirm that the students preferred each item at about the same 50% rate before letting the students trade freely. The result was that only about 10% of the students decided to trade the item they were endowed with for the one they were not. Given that only half of the students preferred the item they were initially given, one would expect a greater number of trades to have occurred. The discrepancy between what should have happened and what did happen has been attributed to the endow effect, meaning that the students perceived the item they were initially given to be worth more than its market value because they owned it.  Subsequent studies conducted on the endowment effect have shown that the value a person places on an item in their endowment increases with duration of ownership and that the endowment effect appears to only exist when a person possesses the item for personal consumption. That is, items purchased with the understanding they would be later sold were not affected by this phenomena.

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