Tests of market outcomes with asymmetric valuations of gains and losses: Smaller gains, fewer trades, and less value

The pervasive finding that individuals value losses more than gains, suggests that actual gains from trade and numbers of market exchanges may well be much smaller than would be the case if people's buying and selling prices were equivalent, as normally assumed. The results of two sets of costless market simulations, using actual gain and loss valuations, show that the actual gains from exchange and trade volumes are less than half of those expected with conventional assumptions, and that completion of all Pareto-efficient exchanges fail by wide margins to shift entitlements to those willing to pay the most for them. These findings suggest the valuation disparity has significant welfare implications and may be a major cause of market stickiness. (C) 1998 Elsevier Science B.V.