The following experiment was carried out withundergraduates at Duke University. Theresearchers divided participants into two groups. One group was asked to state the highestprice they would pay for a ticket to the NCAA Final Four basketball tournament,a highly prized item on campus. The other group was told to imagine they hadsuch a ticket and was asked for the lowest price at which they would be willingto sell it. The median selling price was $1,500; the median buying price was$150. Which of the following bias(es) might explain why the buying and sellingprices were so different? Please selectall that apply.1 point Regret Theory Loss Aversion Endowment Effect Disposition Effect
Question
The following experiment was carried out withundergraduates at Duke University. Theresearchers divided participants into two groups. One group was asked to state the highestprice they would pay for a ticket to the NCAA Final Four basketball tournament,a highly prized item on campus. The other group was told to imagine they hadsuch a ticket and was asked for the lowest price at which they would be willingto sell it. The median selling price was 150. Which of the following bias(es) might explain why the buying and sellingprices were so different? Please selectall that apply.1 point Regret Theory Loss Aversion Endowment Effect Disposition Effect
Solution
The biases that might explain the difference in buying and selling prices in this experiment are Loss Aversion and Endowment Effect.
Loss Aversion refers to people's tendency to prefer avoiding losses to acquiring equivalent gains. In this case, those who imagined they had a ticket (sellers) might have set a higher price because they wanted to avoid the loss of giving up something they 'owned'.
Endowment Effect is a cognitive bias where people often demand much more to give up an object than they would be willing to pay to acquire it. Here, the sellers, imagining they owned the ticket, valued it more than the buyers did.
Regret Theory and Disposition Effect do not seem to apply in this context. Regret Theory involves feeling regret for not making the optimal decision, and Disposition Effect refers to the tendency of investors to sell assets that have increased in value while keeping assets that have dropped in value. Neither of these biases seem relevant to the scenario described.
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