Kahneman et al’s Anomalies

Daniel Kahneman, Jack L. Knetsch, Richard H. Thaler Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias The Journal of Economic Perspectives, 5(1), pp. 193-206, Winter 1991

[Some] “behavior can be explained by assuming that agents have stable, well-defined preferences and make rational choices consistent with those preferences … . An empirical result qualifies as an anomaly if it is difficult to “rationalize,” or if implausible assumptions are necessary to explain it within the paradigm.”

The first candidate anomaly is:

“A wine-loving economist we know purchased some nice Bordeaux wines … . The wines have greatly appreciated in value, so that a bottle that cost only $10 when purchased would now fetch $200 at auction. This economist now drinks some of this wine occasionally, but would neither be willing to sell the wine at the auction price nor buy an additional bottle at that price.”

This an example of the effects in the title. Is it anomalous? Suppose that the economist can spare $120 but not $200 on self-indulgencies, of which wine is her favourite. Would this not explain why she might buy a crate cheaply but not pay a lot for a bottle or sell it at a profit. Is it an anomaly? The anomalies seem to be relative to expected utility theory. However, some of the other examples may be genuine psychological effects.

See also

Kahneman’s review, Keynes’ General Theory

Dave Marsay

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About Dave Marsay
Mathematician with an interest in 'good' reasoning.

4 Responses to Kahneman et al’s Anomalies

  1. Roger says:

    There is a fairly rational response.
    1) The economist knows how his wine has been stored. If carefully, he then may think it’s worth more than the market price. He may dislike uncertainty more than the market and therefore value other people’s wine for less.
    2) When he drinks the wine he can gain pleasure and status (if drinking with others) by recalling his good judgment in purchasing the wine for such a low price and then keeping it until it was this good.

    • djmarsay says:

      Good point. I would certainly rather keep my own car than buy a second-hand one that was notionally equivalent. But my objection can be adapted to all the variants that I have seen. Unless anyone would care to defend Kahneman?

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