Division of the Humanities and Social Sciences California Institute of Technology Pasadena, California 91125 Asymmetries in Exchange Behavior Incorrectly Interpreted as Evidence of Prospect Theory

Systematic asymmetries in exchange behavior have been widely interpreted as support for endowment e ect theory, that loss aversion associated with ownership creates an asymmetry in valuations and exchange behavior. According to this theory, which is an application of prospect theory, parting with an endowed object produces a loss that is greater than the gain from acquiring another object of otherwise equal value. The results also have been cited as general support for prospect theory, of which loss aversion is a fundamental component. The experiments reported here suggest that such interpretations of observed exchange asymmetries are incorrect. While exchange asymmetries are readily observable, the data reported here support the claim that measurements of preferences are confounded by experimental procedures. In other words, the data suggest that experimental procedures lead to observed exchange asymmetries. In treatments for which endowment e ect theory would predict exchange asymmetries, we observe no asymmetries when we eliminate alternative explanations related to procedures. Therefore, our results do not support the use of observed exchange asymmetries as evidence of loss aversion, endowment e ect theory or prospect theory and call into question normative legal analyses grounded in these theories of decision making. JEL classi cation numbers: C91, K00