Week 6 neoclassical theory versus prospect theory: evidence from the marketplace

This week reading focused on the endowment: Neoclassical THEORY VERSUS PROSPECT THEORY. Having read the paper I didn’t fully comprehend what the article was about at the beginning but after reading it a couple of times I started to understand the concept of the article. Neoclassical theory postulate s that preferences between two goods are independent of the consumer's current entitlements. Several experimental studies have recently provided strong evidence that this basic independence assumption, which is used in most theoretical and applied economic models to assess the operation of markets, is rarely appropriate.
My understanding of this article to start with is that neoclassical theory assumes that preferences between two goods are independent on the costumer’s current entitlements. However prospect theory sufficiently organizes behaviour among inexperienced consumers, whereas consumers with a intense market experience behave mainly in accordance with neoclassical predictions where nearly 500 participants were drawn from actively participating in a well functioning marketplace. The pattern of results indicates that learning primarily occurs on the sell side of the market: agents with intense market experience are more willing to part with their entitlements than lesser-experienced agents.
Therefore this evidence suggests that behaviour does change as market experience is accumulated. Moreover according to the endowment effect states that consumers that have significant market experience do not exhibit behaviour consistently with prospect theory; rather their behaviour is in the line with neoclassical prediction. Consequently neoclassical theory states that people tend to overprice item when they trying to sell something in order to make a profit exceeding the value of the goods. Furthermore to what I reached is that people make decisions only if they are benefiting from the decisions that they are making


Ps: i have been trying to edit the graph for the exercise you gave us in week 5 or 6 but im having difficulties with adding it to my report as its not accepting the graph it says that it an error in the page so i will however send it to you David hardman by email to prove that i have done the exercise thanks you








By Zina Kahdum