Definition: The idea that we value what we have just because we own it.
Reference: Ellen Langer Harvard psychologist; Richard Thaler demonstrated the Endowment Effect in studies.
Example: Most people respond with opposite answers to the following two questions with exactly the same meaning but are framed differently: 1. Could you live on 80% of your current income? 2. Could you give up 20% of your current income.
Insight: Owners overvalue items and tend to want to sell at a higher price than market or that others are willing to pay.
Insight: The Endowment Effect is linked to Loss Aversion (Kahneman and Tversky), or the idea that we feel the pain of losing something more strongly than the pleasure of gaining the same thing. We don't want to lose what we own because we overvalue it, and we overvalue things because we don't want to lose them.
Insight: Tangible items are regularly subject to the endowment effect because they are easily visible.
Definition: The reluctance of people to part from assets because of ownership.
Example: Concert tickets.
Insight: The endowment effect does not have a significant impact in situations of regular economic exchange. For example the owner of a store does not significantly overvalue goods because of ownership.
Insight: When it is more painful to give up an item than it is pleasurable to obtain it, buying prices will be lower than selling prices.
Reference: Richard Thaler, 1980 - coined the term endowment effect.
Example: Buying a new car - when judging the 'optional extras' people tend to feel the loss when not adding these extras more than the price of the extra.
Insight: Parting with things we own makes us feel a loss, and we tend to feel losses more strongly than gains.
Insight: The endowment effect helps explain why companies can afford to give money back guarantees - once people own an item it usually is worth more to them than the cash value of the item.
Reference: Daniel Kahneman - "a good is worth more when it is considered as something that could be lost or given up than when
it is evaluated as a potential gain."
Insight: We consider loss of things we own more significant than potential gains.
Insight: Because of the endowment effect, people would demand more money in exchange for an item they own than they would be willing to spend to acquire the object.
Insight: We tend to want to maintain the status quo because of the fear of loss of what we have.
Definition: We consider things more valuable the moment we own them.
Example: Real Estate - people become emotionally attached to their homes and thus place a higher value on them.
Insight: The price we are willing to sell things that we own is higher than what we'd be willing to spend to acquire it.
Reference: Dan Ariely - sports tickets experiment.
Reference: Richard Thaler: coffee mug experiment - half the class were given a mug and then asked how much they would sell it more, the other half were asked how much they were willing to pay for a mug (less than half of what those that had just been given the mug were willing to sell it for).
Definition: The tendency to consider an object more valuable than it it simply because we own it.
Insight: The endowment effect explains why it is so difficult to get rid of our stuff - because it is ours.
Principle: We have to be deliberate about not placing false value on the things we have.
Principle: Ask: do I need this?
Example: Special concerts and sporting events are particularly prone to the endowment effect.
Insight: Thaler describes the finding that "suggested people valued things that were already part of their endowment more highly than things that could be part of their endowment, that were available but not yet owned."
Insight: Economic decisions are made through the lens of opportunity costs. People do not like to give up their endowment.
Insight: Once we own things, we value them more.
Insight: The endowment effect can mean that objects have a claim on you, we perceive them to be more important than they are.
Insight: We can find it difficult to give up that which we own.
Insight: Accumulation is costly at any price.
Insight: Physical items that we own consume time, space and energy.
Principle: We cautious about the things you acquire, including free things.
Definition: A sense of ownership increases our valuation of the thing in question; we overvalue what we own.
Example: The free trial in software. Creating a free account before requesting payment gives the user a sense of ownership and they value it more highly.
Insight: The strength of the endowment effect is determined by: (1) A sense of completion (2) The amount of effort invested in the item.
Insight: The IKEA effect is a version of the endowment effect.
Reference: Daniel Kahneman experiment - free mugs or pens. Half of a group was given free mugs or pens, and the other half was asked what they were willing to pay for the mugs or pens vs the price that the group given the free mugs or pens was willing to accept for parting with the newly owned items. The amount the sellers were asking was around twice as much as the buyers were willing to pay.
Reference: Daniel Kahneman - coffee mug experiment.
Example: No one washes or cleans a rental car.
Insight: A feeling of ownership is powerful.
Insight: We have a tendency to undervalue what isn't ours and overvalue what is.
Principle: Beware the endowment effect. Of your possessions ask: "If I did not own this item, how much would I pay to obtain it?"
Definition: We place a higher significance on things we own than on identical items that we don't.
Insight: We tend to cling on to possessions, often hoping that they will be valuable to us in the future. We do this because of Loss Aversion and the Endowment Effect - we fear loss and value our own possessions more highly that identical items that we don't own.
Insight: Because of the endowment effect and loss aversion we commonly overvalue what we own. Losses are psychologically painful and we need greater incentives to give things up.
Definition: People attach value to what they own, just because they own it.
Insight: People are reluctant to part with their possessions, even if it makes economic sense to do so.
Definition: The tendency of people to value something more highly once they own it.
Insight: The endowment effect applies to truth. We can be very attached to our truths, but not as motivated to gain more.
Insight: Taking the time to think about how much we value what we have (including truth) can motivate us to add to it.
Definition: The irrational mindset that places a disproportionately high value on what one owns.
Example: Investments. Before making an investment we are usually entirely rational, but after investing we tend to become emotionally attached to what we own.
Definition: We prefer things simply because we own them.
Insight: We tend to like and hold on to what we already own. This bias can lead to unbalanced investment types, where we stick with or overvalue what we already have and know.
Example: A painting bought at $20,000 is now worth $40,000. If you had no painting, would you buy it at the current price? If not then you are married to your position because of the endowment effect, or your emotional investment.
Insight: There is no rational reason to keep an asset you would not buy at the current market rate. This is the endowment effect at work.
Definition: The tendency to overvalue things simply because we own them.
Example: Stocks.
Example: Overvaluing a plan because it is your plan.
Key Insights & Principles
Decision Making
We feel the pain of losing something we own more than the pleasure of gaining it, which is why we tend to overvalue what we own.
Tangible or physical items have a strong endowment effect because they are easily visible
People will demand more money in exchange for an item they already own than what they would be willing to pay to obtain it.
The endowment effect explains why it is often difficult to declutter.
We cling on to things, and the hope that we may find a use for them in the future.
Accumulation is costly at any price. Things consume our time, space and energy.
Money back guarantees and free trials work in business because people are reluctant to give up what they already own.
Be deliberate about objectively valuing the things that you have.
For what you don't own ask: "Do I need this?"
For what you do own ask: "If I did not own this, how much would I pay to obtain it?"
