Comparing learning to normative benchmarks reveals that people overreact to signals about goods that they own, but that learning is close to Bayesian for non-owned goods

Ownership, Learning, and Beliefs. Samuel M. Hartzmark Samuel Hirshmany Alex Imasz. November 2019. https://fraconference.com/wp-content/uploads/2019/11/ownership_learning_beliefs.pdf

Abstract: We examine how owning a good affects learning and beliefs about its quality. We show that people have more extreme reactions to information about a good that they own compared to the same information about a non-owned good: ownership causes more optimistic beliefs after receiving a positive signal and more pessimistic beliefs after receiving a negative signal. This effect on beliefs impacts the valuation gap between the minimum owners are willing to accept to part with the good and the maximum non-owners are willing to pay to attain it, i.e. the endowment effect. We show that the endowment effect increases in response to positive information and disappears with negative information. Comparing learning to normative benchmarks reveals that people overreact to signals about goods that they own, but that learning is close to Bayesian for non-owned goods. In exploring the mechanism, we find that ownership increases attention to recent signals about owned goods, exacerbating over-extrapolation. We demonstrate a similar relationship between ownership and over-extrapolation in survey data about stock market expectations. Our findings have implications for any setting with trade and scope for learning, and provide a microfoundation for models of disagreement that generate volume in asset markets.

KEYWORDS: biased beliefs, endowment effect, ownership, attention, behavioral economics, learning, extrapolation
JEL Classifications: D9, D12