Jack Knetsch also: Jack L. Knetsch, "The Endowment Effect and Evidence of Nonreversible Indifference Curves," American Economic Review 79 (1989): 127784.

ongoing debate about the endowment effect: Charles R. Plott and Kathryn Zeiler, "The Willingness to PayWillingness to Accept Gap, the 'Endowment Effect,' Subject Misconceptions, and Experimental Procedures for Eliciting Valuations," American Economic Review 95 (2005): 53045. Charles Plott, a leading experimental economist, has been very skeptical of the endowment effect and has attempted to show that it is not a "fundamental aspect of human preference" but rather an outcome of inferior technique. Plott and Zeiler believe that participants who show the endowment effect are under some misconception about what their true values are, and they modified the procedures of the original experiments to eliminate the misconceptions. They devised an elaborate training procedure in which the participants experienced the roles of both buyers and sellers, and were explicitly taught to assess their true values. As expected, the endowment effect disappeared. Plott and Zeiler view their method as an important improvement of technique. Psychologists would consider the method severely deficient, because it communicates to the participants a message of what the experimenters consider appropriate behavior, which happens to coincide with the experimenters' theory. Plott and Zeiler's favored version of Kne {ers): tsch's exchange experiment is similarly biased: It does not allow the owner of the good to have physical possession of it, which is crucial to the effect. See Charles R. Plott and Kathryn Zeiler, "Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?" American Economic Review 97 (2007): 144966. There may be an impasse here, where each side rejects the methods required by the other.

People who are poor: In their studies of decision making under poverty, Eldar Shafir, Sendhil Mullainathan, and their colleagues have observed other instances in which poverty induces economic behavior that is in some respects more realistic and more rational than that of people who are better off. The poor are more likely to respond to real outcomes than to their description. Marianne Bertrand, Sendhil Mullainathan, and Eldar Shafir, "Behavioral Economics and Marketing in Aid of Decision Making Among the Poor," Journal of Public Policy & Marketing 25 (2006): 823.

in the United States and in the UK: The conclusion that money spent on purchases is not experienced as a loss is more likely to be true for people who are relatively well-off. The key may be whether you are aware when you buy one good that you will not be unable to afford another good. Novemsky and Kahneman, "The Boundaries of Loss Aversion." Ian Bateman et al., "Testing Competing Models of Loss Aversion: An Adversarial Collaboration," Journal of Public Economics 89 (2005): 156180.28: Bad Eventsheartbeat accelerated: Paul J. Whalen et al., "Human Amygdala Responsivity to Masked Fearful Eye Whites," Science 306 (2004): 2061. Individuals with focal lesions of the amygdala showed little or no loss aversion in their risky choices: Benedetto De Martino, Colin F. Camerer, and Ralph Adolphs, "Amygdala Damage Eliminates Monetary Loss Aversion," PNAS 107 (2010): 378892.

bypassing the visual cortex: Joseph LeDoux, The Emotional Brain: The Mysterious Underpinnings of Emotional Life (New York: Touchstone, 1996).

processed faster: Elaine Fox et al., "Facial Expressions of Emotion: Are Angry Faces Detected More Efficiently?" Cognition & Emotion 14 (2000): 6192.

"pops out": Christine Hansen and Ranald Hansen, "Finding the Face in the Crowd: An Anger Superiority Effect," Journal of Personality and Social Psychology 54 (1988): 91724.

"acceptable/unacceptable": Jos J. A. Van Berkum et al., "Right or Wrong? The Brain's Fast Response to Morally Objectionable Statements," Psychological Science 20 (2009): 109299.

negativity dominance: Paul Rozin and Edward B. Royzman, "Negativity Bias, Negativity Dominance, and Contagion," Personality and Social Psychology Review 5 (2001): 296320.

resistant to disconfirmation: Roy F. Baumeister, Ellen Bratslavsky, Catrin Finkenauer, and Kathleen D. Vohs, "Bad Is Stronger Than Good," Review of General Psychology 5 (200 {/spFac1): 323.

biologically significant improvement: Michel Cabanac, "Pleasure: The Common Currency," Journal of Theoretical Biology 155 (1992): 173200.

not equally powerful: Chip Heath, Richard P. Larrick, and George Wu, "Goals as Reference Points," Cognitive Psychology 38 (1999): 79109.

rain-drenched customers: Colin Camerer, Linda Babcock, George Loewenstein, and Richard Thaler, "Labor Supply of New York City Cabdrivers: One Day at a Time," Quarterly Journal of Economics 112 (1997): 40741. The conclusions of this research have been questioned: Henry S. Farber, "Is Tomorrow Another Day? The Labor Supply of New York Cab Drivers," NBER Working Paper 9706, 2003. A series of studies of bicycle messengers in Zurich provides strong evidence for the effect of goals, in accord with the original study of cabdrivers: Ernst Fehr and Lorenz Goette, "Do Workers Work More if Wages Are High? Evidence from a Randomized Field Experiment," American Economic Review 97 (2007): 298317.

communicate a reference point: Daniel Kahneman, "Reference Points, Anchors, Norms, and Mixed Feelings," Organizational Behavior and Human Decision Processes 51 (1992): 296312.

"wins the contest": John Alcock, Animal Behavior: An Evolutionary Approach (Sunderland, MA: Sinauer Associates, 2009), 27884, cited by Eyal Zamir, "Law and Psychology: The Crucial Role of Reference Points and Loss Aversion," working paper, Hebrew University, 2011.

merchants, employers, and landlords: Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," The American Economic Review 76 (1986): 72841.

fairness concerns are economically significant: Ernst Fehr, Lorenz Goette, and Christian Zehnder, "A Behavioral Account of the Labor Market: The Role of Fairness Concerns," Annual Review of Economics 1 (2009): 35584. Eric T. Anderson and Duncan I. Simester, "Price Stickiness and Customer Antagonism," Quarterly Journal of Economics 125 (2010): 72965.

altruistic punishment is accompanied: Dominique de Quervain et al., "The Neural Basis of Altruistic Punishment," Science 305 (2004): 125458.

actual losses and foregone gains: David Cohen and Jack L. Knetsch, "Judicial Choice and Disparities Between Measures of Economic Value," Osgoode Hall Law Review 30 (1992): 73770. Russell Korobkin, "The Endowment Effect and Legal Analysis," Northwestern University Law Review 97 (2003): 122793.

asymmetrical effects on individual well-being: Zamir, "Law and Psychology."29: The Fourfold Patternand other disasters: Including exposure to a "Dutch book," which is a set of gambles that your incorrect preferences commit you to accept an { to>

puzzle that Allais constructed: Readers who are familiar with the Allais paradoxes will recognize that this version is new. It is both much simpler and actually a stronger violation than the original paradox. The left-hand option is preferred in the first problem. The second problem is obtained by adding a more valuable prospect to the left than to the right, but the right-hand option is now preferred.

sorely disappointed: As the distinguished economist Kenneth Arrow recently described the event, the participants in the meeting paid little attention to what he called "Allais's little experiment." Personal conversation, March 16, 2011.

estimates for gains: The table shows decision weights for gains. Estimates for losses were very similar.

estimated from choices: Ming Hsu, Ian Krajbich, Chen Zhao, and Colin F. Camerer, "Neural Response to Reward Anticipation under Risk Is Nonlinear in Probabilities," Journal of Neuroscience 29 (2009): 223137.

parents of small children: W. Kip Viscusi, Wesley A. Magat, and Joel Huber, "An Investigation of the Rationality of Consumer Valuations of Multiple Health Risks," RAND Journal of Economics 18 (1987): 46579.

psychology of worry: In a rational model with diminishing marginal utility, people should pay at least two-thirds as much to reduce the frequency of accidents from 15 to 5 units as they are willing to pay to eliminate the risk. Observed preferences violated this prediction.

not made much of it: C. Arthur Williams, "Attitudes Toward Speculative Risks as an Indicator of Attitudes Toward Pure Risks," Journal of Risk and Insurance 33 (1966): 57786. Howard Raiffa, Decision Analysis: Introductory Lectures on Choices under Uncertainty (Reading, MA: Addison-Wesley, 1968).

shadow of civil trials: Chris Guthrie, "Prospect Theory, Risk Preference, and the Law," Northwestern University Law Review 97 (2003): 111563. Jeffrey J. Rachlinski, "Gains, Losses and the Psychology of Litigation," Southern California Law Review 70 (1996): 11385. Samuel R. Gross and Kent D. Syverud, "Getting to No: A Study of Settlement Negotiations and the Selection of Cases for Trial," Michigan Law Review 90 (1991): 31993.

the frivolous claim: Chris Guthrie, "Framing Frivolous Litigation: A Psychological Theory," University of Chicago Law Review 67 (2000): 163216.30: Rare Eventswish to avoid it: George F. Loewenstein, Elke U. Weber, Christopher K. Hsee, and Ned Welch, "Risk as Feelings," Psychological Bulletin 127 (2001): 26786.

vividness in decision making: Ibid. Cass R. Sunstein, "Probability Neglect: Emotions, Worst Cases, and Law," Yale Law Journal 112 (2002): 61107. See notes to chapter 13: Damasio, Descartes' Error. Slovic, Finucane, Peters, and MacGregor, "The {r, n>: C. A Affect Heuristic."

Amos's student: Craig R. Fox, "Strength of Evidence, Judged Probability, and Choice Under Uncertainty," Cognitive Psychology 38 (1999): 16789.

focal event and its: Judgments of the probabilities of an event and its complement do not always add up to 100%. When people are asked about a topic they know very little about ("What is your probability that the temperature in Bangkok will exceed 100 tomorrow at noon?"), the judged probabilities of the event and its complement add up to less than 100%.

receiving a dozen roses: In cumulative prospect theory, decision weights for gains and losses are not assumed to be equal, as they were in the original version of prospect theory that I describe.

superficial processing: The question about the two urns was invented by Dale T. Miller, William Turnbull, and Cathy McFarland, "When a Coincidence Is Suspicious: The Role of Mental Simulation," Journal of Personality and Social Psychology 57 (1989): 58189. Seymour Epstein and his colleagues argued for an interpretation of it in terms of two systems: Lee A. Kirkpatrick and Seymour Epstein, "Cognitive-Experiential Self-Theory and Subjective Probability: Evidence for Two Conceptual Systems," Journal of Personality and Social Psychology 63 (1992): 53444.

judged it as more dangerous: Kimihiko Yamagishi, "When a 12.86% Mortality Is More Dangerous Than 24.14%: Implications for Risk Communication," Applied Cognitive Psychology 11 (1997): 495506.

forensic psychologists: Slovic, Monahan, and MacGregor, "Violence Risk Assessment and Risk Communication."

"1 of 1,000 capital cases": Jonathan J. Koehler, "When Are People Persuaded by DNA Match Statistics?" Law and Human Behavior 25 (2001): 493513.

studies of choice from experience: Ralph Hertwig, Greg Barron, Elke U. Weber, and Ido Erev, "Decisions from Experience and the Effect of Rare Events in Risky Choice," Psychological Science 15 (2004): 53439. Ralph Hertwig and Ido Erev, "The Description-Experience Gap in Risky Choice," Trends in Cognitive Sciences 13 (2009): 51723.

not yet settled: Liat Hadar and Craig R. Fox, "Information Asymmetry in Decision from Description Versus Decision from Experience," Judgment and Decision Making 4 (2009): 31725.

"chances of rare events": Hertwig and Erev, "The Description-Experience Gap."31: Risk Policiesinferior option BC: The calculation is straightforward. Each of the two combinations consists of a sure thing and a gamble. Add the sure thing to both options of the gamble and you will find AD and BC.

the equivalent of "locking in": Thomas Langer and Martin Weber, "Myopic Prospect Theory vs. Myopic Loss Aversion: How General Is the Phenomenon?" Journal of E {>Joenon?&conomic Behavior & Organization 56 (2005): 2538.32: Keeping Scoredrive into a blizzard: The intuition was confirmed in a field experiment in which a random selection of students who purchased season tickets to the university theater received their tickets at a much reduced price. A follow-up of attendance revealed that students who had paid the full price for their tickets were more likely to attend, especially during the first half of the season. Missing a show one has paid for involves the unpleasant experience of closing an account in the red. Arkes and Blumer, "The Psychology of Sunk Costs."

the disposition effect: Hersh Shefrin and Meir Statman, "The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance 40 (1985): 77790. Terrance Odean, "Are Investors Reluctant to Realize Their Losses?" Journal of Finance 53 (1998): 177598.

less susceptible: Ravi Dhar and Ning Zhu, "Up Close and Personal: Investor Sophistication and the Disposition Effect," Management Science 52 (2006): 72640.

fallacy can be overcome: Darrin R. Lehman, Richard O. Lempert, and Richard E. Nisbett, "The Effects of Graduate Training on Reasoning: Formal Discipline and Thinking about Everyday-Life Events," American Psychologist 43 (1988): 43142.

"a sinking feeling": Marcel Zeelenberg and Rik Pieters, "A Theory of Regret Regulation 1.0," Journal of Consumer Psychology 17 (2007): 318.

regret to normality: Kahneman and Miller, "Norm Theory."

habitually taking unreasonable risks: The hitchhiker question was inspired by a famous example discussed by the legal philosophers Hart and Honore: "A woman married to a man who suffers from an ulcerated condition of the stomach might identify eating parsnips as the cause of his indigestion. The doctor might identify the ulcerated condition as the cause and the meal as a mere occasion." Unusual events call for causal explanations and also evoke counterfactual thoughts, and the two are closely related. The same event can be compared to either a personal norm or the norm of other people, leading to different counterfactuals, different causal attributions, and different emotions (regret or blame): Herbert L. A. Hart and Tony Honore, Causation in the Law (New York: Oxford University Press, 1985), 33.

remarkably uniform: Daniel Kahneman and Amos Tversky, "The Simulation Heuristic," in Judgment Under Uncertainty: Heuristics and Biases, ed. Daniel Kahneman, Paul Slovic, and Amos Tversky (New York: Cambridge University Press, 1982), 16073.

applies to blame: Janet Landman, "Regret and Elation Following Action and Inaction: Affective Responses to Positive Versus Negative Outcomes," Personality and Social Psychology Bulletin 13 (1987): 52436. Faith Gleicher et al., "The Role of Counterfactual Thinking in Judgment of Affect," Personality and Social Psychology Bulletin 16 (1990): 28495.actions that deviate from the default: Dale T. Miller and Brian R. Taylor, "Counterfactual Thought, Regret, and Superstition: How to Avoid Kicking Yourself," in What Might Have Been: The Social Psychology of Counterfactual Thinking, ed. Neal J. Roese and James M. Olson (Hillsdale, NJ: Erlbaum, 1995), 30531.

produce blame and regret: Marcel Zeelenberg, Kees van den Bos, Eric van Dijk, and Rik Pieters, "The Inaction Effect in the Psychology of Regret," Journal of Personality and Social Psychology 82 (2002): 31427.