GMAT Reading Comprehension - The Hypothesis that People Ascribe More Value to Things

Reading passage question

Question: The hypothesis that people ascribe more value to things merely because they own them is at the heart of a highly influential theory in behavioral economics, known as the endowment effect.Economists ascribing to the theory have tried to illustrate this effect with the help of several experiments that seem to show that people value the things they own more than they value identical products they do not own and that they prefer to hold on to those endowed items rather than trade or sell them.Endowment theory says that such observable events, whatever their other possible causes, are at least partially explained by the general phenomenon of loss aversion, which holds that people give possible losses more weight than potential gains of the same magnitude.Endowment theory is an application of this phenomenon, adding the hypothesis that ownership determines whether one experiences a change as a gain or as a loss.Endowment theory posits that ownership sets one’s reference point, the movement from which triggers either a perceived gain or loss, and that people perceive the transfer or sale of endowments as losses.

Although endowment theory continues to enjoy considerable influence, recent experimental data have cast doubt on the hypothesis that ownership sets the reference point and that loss aversion generates the reluctance to trade.The empirical support for endowment theory was never perfect.In recent years, experimentalists have published data suggesting that the results of earlier laboratory experiments were not caused by loss aversion but by other factors.By making a few changes to the experimental design—such as better training subjects in the auction mechanisms used in the experiments, changing the way subjects were given the items, and modifying the procedures for eliciting choices—to rule out alternative explanations, experimentalist were able to make “endowment effects” that had been observed in the laboratory disappear.Many other researchers have since replicated these results.The new data suggest that ownership alone is not enough to change people’s expressed preferences.These results have led experimental economists and cognitive psychologists to develop alternatives to endowment theory.

“The hypothesis that people ascribe more value to things merely because they own them is at the heart of a highly influential theory in behavioral economics.”- is a comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension.

This GMAT Reading Comprehension consists of 4 comprehension questions. The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analyzing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solution and Explanation

Question 1
The economists ascribing to the theory of endowment effect would consider which one of the following as an example of this effect?

1. A person who receives a gift of a hundred dollar bottle of wine would not normally spend the same amount buying it and choses to drink the wine rather than sell it.
2. A person, who buys a bottle of his favorite wine for ten dollars, refuses to pay the same amount for a bottle of wine that is very similar in every aspect to the other wine and that his friend is willing to sell.
3. A person, who receives a bottle of wine as a gift from a friend, buys the same wine again from the market at a more expensive price than the one paid by his friend.
4. A person sells a bottle of wine, which was gifted to him, at a price that is not lower than the market price of the wine.
5. A person refuses to sell a bottle of wine that was gifted to him because market survey shows that the price of that wine is likely to rise even further in the future.

Question 2
The author is primarily concerned with

1. describing a theory in detail while analyzing the influence it enjoys in the field of economics
2. explaining a theory and its underlying basis to review the individuals experiments done in its support
3. discussing a theory in detail and bringing out its deficiencies that were deliberately ignored by its proponents
4. critically evaluating a theory and its underlying basis
5. describing a theory and suggesting that it should be discarded since it has no empirical soundness

Question 3
Which of the following is most supported by the information given in the passage?

1. The value of the endowed item increases with the passage of time.
2. The way a response is extracted out of a participant in a study could have an effect in the ultimate outcome of that study.
3. The endowment theory lacks any sort of factual support.
4. As per the endowment theory, the sole reason that people are reluctant to transfer or sell their endowed item is because of the workings of the loss aversion phenomenon.
5. The real value of an endowed product is normally considerably less than the value ascribed to it by people.

Question 4
According to the passage, which of the following is NOT true?

1. The endowment theory enjoys more than limited influence.
2. The ownership of an endowed product has an important part to play in whether a particular change is perceived as a gain or loss.
3. There are holes in the empirical data that support results not in favor of the endowment theory.
4. Loss aversion is possibly not the only factor that the theory believes causes the endowment effect.
5. Some experimental economists have been influenced by the recent data that does not favor the endowment theory.

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