The following text is about economics.
Prospect theory's "endowment effect" describes how people value items they own more highly than identical items they don't own. Experiments show that owners demand significantly more to sell objects than non-owners would pay to buy them—often by a factor of two or more. This challenges the economic assumption that willingness to pay and willingness to accept should be similar. The effect may stem from loss aversion: giving up an owned item is experienced as a loss, which hurts more than the equivalent gain from acquiring it. This finding has implications for market predictions, legal damages, and behavioral policy.
What does the endowment effect challenge about traditional economics?
The assumption that people make no economic decisions
The assumption that buying and selling prices for identical items should be similar
The idea that people ever value objects they own
The existence of markets for any goods
Correct Answer: B
Choice B is the correct answer. "This challenges the economic assumption that willingness to pay and willingness to accept should be similar."
- Evidence: WTP and WTA differ by factor of two or more.
- Reasoning: Ownership changes valuation asymmetrically.
- Conclusion: Buy/sell price equivalence is challenged.
Choice A is incorrect because people clearly make decisions. Choice C is incorrect because people clearly value owned objects—more than equivalent unowned ones. Choice D is incorrect because markets exist; valuations within them are asymmetric.