From Futurity:
Experience in trading may change how the human brain evaluates the
sale of goods, muting a well-established economic bias known as the
endowment effect.
The findings, published in the Proceedings of the National Academy of Sciences,
come from a set of experiments on why traders are less susceptible to
the effect—a phenomenon in which people demand a higher price to sell a
good than they’re willing to pay for it. Such behavior contradicts
standard economic theory, distorting prices and reducing market
activity.
Researchers found that while selling, experienced traders had reduced
activity in an area of the brain often associated with pain and
negative emotions. A separate experiment showed a similar reduction in
brain activity after people previously inexperienced in trading were
given incentives to trade objects on eBay for two months.
The results suggest such experience reduces the emotional pain tied
to selling objects, mitigating the role the endowment effect plays in
economic decision-making.
“We were excited to see that our brief intervention can reduce the
endowment effect, both in terms of the behavioral response and the brain
mechanisms involved. The brain activation patterns of the subjects who
were incentivized to trade on eBay began to look very similar to that of
experienced traders,” says Ali Hortaçsu, professor in economics at the
University of Chicago.
Past research has shown the endowment effect is limited among experienced traders, but little is known about why that happens.
The new study used magnetic resonance imaging to create pictures of
the brain. The images demonstrated that specific economic experiences
can modify how the brain responds, changing the process people use to
make future decisions....MORE
PNAS says the significance of the paper "
Trading experience modulates anterior insula to reduce the endowment effect" is:
Significance
Trading experience has been shown
to reduce the endowment effect, a decision-making bias that distorts
market prices and reduces
trade. Understanding the mechanisms
underlying how experience changes this bias will provide important
insights for developing
interventions to improve market
efficiency. Using functional magnetic resonance imaging, we show that
market experience causes
a reduction in right anterior insula
activation during selling, which mediates a decrease in the endowment
effect. These findings
suggest that trading mitigates negative
affective responses in the context of selling.
