The Mug Experiment
In one of behavioral economics' most famous experiments, Kahneman, Knetsch, and Thaler gave coffee mugs to half the students in a class and asked them to trade. Standard economics predicts that about half the mugs should change hands — some mug-owners should value money more, some non-owners should value mugs more. Instead, almost no trading occurred. Sellers demanded around $7; buyers offered around $3. Identical mugs, identical people, but ownership created a 2-3x value gap.
Loss Aversion as the Engine
The endowment effect is loss aversion applied to ownership. Once you possess something, giving it up is coded as a loss. The psychological pain of losing your mug exceeds the pleasure of gaining the equivalent cash. The loss aversion coefficient (lambda) directly predicts the WTA/WTP ratio: higher lambda means sellers demand more relative to what buyers offer. This simulation lets you see how lambda translates into the market gap between buyers and sellers.
Buyers vs Sellers
The visualization shows two groups facing each other across a price scale. On the left, buyers' willingness-to-pay distribution clusters around the objective value. On the right, sellers' willingness-to-accept distribution is shifted upward by the endowment premium. The gap between these distributions represents unrealized trades — transactions that would benefit both parties but never happen because ownership bias prevents agreement. This is economic inefficiency created purely by psychology.
Experience and Markets
The market experience parameter captures an important finding: experienced traders show smaller endowment effects. John List's 2003 study of sports card dealers found that novice traders exhibited strong endowment effects, while experienced dealers traded much closer to standard economic predictions. This suggests that market participation can partially 'debias' the endowment effect — though it never disappears entirely. Slide the experience parameter to watch the WTA/WTP gap narrow as agents learn to separate ownership from value.