Greg Goelzhauser has had a few interesting posts recently about his experience with a ticket to a football game. Noting that he would never pay the “market” price for a good ticket ($200), he is unwilling to part with a ticket he has fallen into possession of. That is, he is unwilling to sell his ticket for $200, so he must value it more that. However, before owning the ticket, he wouldn’t even have paid $100 for a ticket, so he must value it less than $100.

For an economist, this is an example of “irrational” behavior: that something can be valued differently depending on whether or not you own it, a phenomenon called the “endowment effect”. Cash value is supposed to be independent of ownership when a sufficiently fluid market exists, as in the case of football game tickets: if someone has a ticket they value less than the market value, they can increase their perceived value by selling the ticket. On the other hand, people who value a ticket more than they value the cash in their pocket can buy a ticket and increase their perceived value.

Rather than persist in calling people irrational (though at times they certainly are), I’d prefer to look for other forces which create value in ways that can’t be arbitraged by a market: the value of community spirit, for example, or the value of a social network, or the value of one’s personal reputation. These are all forces at work in the gift economy .

The strength of traditional economics has been the ability to quantify the various economic forces which shape most of our livelihoods. Irrational behavior such as that shown in the endowment effect is a thorn in the side of economics simply because it seems to be unquantifiable. Yet I see a positive side: with enough examples such as the football game ticket, we ought to be able to sort out exactly where that extra value is created which causes the endowment effect. I don’t think people are irrational — I think that there is real value created when you own an item like the football ticket — but that value doesn’t have an associated market — it is value in the gift economy and not the exchange economy.

And with understanding of where the value resides, we can measure the value in the gift economy by looking at its interaction with the exchange economy. It may sound very silly to ask people how much a community is worth to someone. How much is your college community worth in dollars? How much is your professional circle worth in dollars? But measuring the magnitude of the endowment effect could give us a quantitative idea about the answers to those questions. In other words, if a football ticket increases in value by $100 when you own it, that must mean that there is something worth at least $100 that isn’t for sale in any store.