Value Uncertainty Affects Loss Aversion and the Endowment Effect

A new explanation of loss aversion and the endowment effect is proposed. The model is based on the uncertain values of goods. The key element is that decision makers consider potential new knowledge about the goods they evaluate, in particular in situations when the seller may have more knowledge about the good than the buyer. The underlying psychological mechanism is exploitation aversion. It is shown that a knowledge dependent version of the loss aversion curve can be derived from buyer and seller strategies that are based on value uncertainty. The value uncertainty model can explain many of the empirical findings for the endowment effect that have proved problematic for previous models. It also yields new predictions that have been experimentally supported