Matthew Nagler is a Professor of Economics at The City College of New York and The Graduate Center, CUNY.
Title: “Choosing and Adjusting”
Abstract: The paper develops a model of individual decision-making in which cognitive adjustment complements choice of action. Because adjustment is durable, initial positions in consumption (“endowments”) matter for future consumption decisions. Thus the theory provides a unified foundation in primitives for the endowment effect, behaviors traditionally attributed to sunk-cost bias, and the effectiveness of marketing practices. Demonstrations of cognitive dissonance in the literature fit a pattern of adjustment effects predicted in the model based on restriction of the individual’s choice set. Natural experiments that similarly leverage choice-restricting events could allow identification of endowment effects and other adjustment phenomena in the market.