Psychologists Daniel Kahneman and Amos Tversky conducted the following experiments by asking a sample of people the following questions: Scenario A: "Imagine that you have decided to see a play and paid the admission price of US$10 per ticket. As you enter the theater you discover that you have lost the ticket. The seat was not marked and the ticket cannot be recovered. Would you pay US$10 for another ticket?"
Scenario B: "Imagine that you have decided to see a play where admission is US$10 per ticket. As you enter the theater you discover that you have lost a US$10 bill. Would you still pay US$10 for a ticket for the play?" As long as additional tickets are available, there is no meaningful difference between losing US$10 in cash before buying a ticket, and losing the US$10 ticket after buying it. In both cases, you are US$10 worse off. Yet, far more subjects (88 percent) in Scenario B say they would pay US$10 for another ticket and see the play while in Scenario A, only 46 percent of the subjects say they would be willing to spend another US$10 to see the play.
Which of the following is the best explanation for the results of the experiment?
A) In Scenario B, people had not anticipated spending an additional US$10 so in effect the price of the ticket is US$20 and not US$10 whereas in Scenario A, the price of the ticket is still US$10
B) In Scenario A, people make an immediate connection between the lost ticket and the play and feel poorer by incorrectly assigning a greater value to the value of the ticket whereas in Scenario B, they do not make the connection between the lost US$10 bill and the play.
C) The net benefit derived from watching the play is lower in Scenario A where the effective cost is US$20 compared to the net benefit in Scenario B.
D) The endowment effect applies in Scenario A since people already own the ticket and therefore it is more valuable but this is not so in Scenario B.
Correct Answer:
Verified
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