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Albert and Beth are looking at a new camera at a store that o ers a no-questions-asked return policy. They are not sure the new features are worth it. Albert decides to take one home, thinking that he can always return it tomorrow. Beth decides against taking one home, thinking that she can always come back and pick one up tomorrow.
They are both loss averse over cameras, with the same value function over cameras:
v(x) = x for gains
v(x) = 2x for losses
They both use their endowments as their reference points. Ignore any transaction costs.
Problem 1. After Albert has taken his camera home, he incorporates it into his endowment. How much of a loss in utility would he incur by returning it tomorrow?
Problem 2. Beth, who does not take her camera home, does not incorporate it into her endowment. How much of a foregone gain in utility does the camera she does not own represent to her?
Problem 3. Who is more likely to end up the owner of the camera, Albert or Beth?
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