Endowment Effect - The Decision Lab

Why do we value items more if they belong to us?

The Endowment Effect, explained.BiasWhere this bias occursWhere this bias occursIndividual effectsSystemic effectsWhy it happensWhy it is importantHow to avoid itHow it all startedHow it affects productThe Endowment Effect and AIExample 1 - Individualistic culturesExample 2 - Across speciesSummaryRelated articlesWhere this bias occursIndividual effectsSystemic effectsWhy it happensWhy it is importantHow to avoid itHow it all startedHow it affects productThe Endowment Effect and AIExample 1 - Individualistic culturesExample 2 - Across speciesSummaryRelated articles

What is the Endowment Effect?

The endowment effect describes how people tend to value items that they own more highly than they would if they did not belong to them. This means that sellers often try to charge more for an item than it would cost elsewhere.

Where this bias occurs

Imagine you just upgraded your laptop and you want to sell your old one. Let’s say you bought it several years ago, brand new, for $1,000. It’s still in great condition and runs well, so you list it online for $900, thinking you’re giving people a great deal—after all, it would set someone back at least $1,000 to buy the newest model of the laptop today. Feeling confident, you sit back and wait for the responses to roll in.

To your dismay, you only receive a few messages, and everyone is lowballing you! One person offers $600 and another $400. The feedback is clear: everyone says that your laptop is too expensive. Someone even boasts that they can get it for less elsewhere. Your laptop has depreciated much more than you thought, and thanks to the endowment effect, you set the price higher than the market is willing to pay. Simply because the laptop is yours, you value it more than all those potential buyers who only see it as another used electronic device.

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Sources

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1. Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior & Organization, 1(1), 39-60.  
2. Kahneman, D., & Tversky, A. (1984). Choices, values, and frames. American Psychologist, 39(4), 341-350. https://doi.org/10.1037/0003-066x.39.4.341 
3. Weaver, R., & Frederick, S. (2012). A reference price theory of the endowment effect. Journal of Marketing Research, 49(5), 696-707. https://doi.org/10.1509/jmr.09.0103 
4. Morewedge, C. K., & Giblin, C. E. (2015). Explanations of the endowment effect: An integrative review. Trends in Cognitive Sciences, 19(6), 339-348. https://doi.org/10.1016/j.tics.2015.04.004 
5. Beggan, J. K. (1992). On the social nature of nonsocial perception: The Mere ownership effect. Journal of Personality and Social Psychology, 62(2), 229-237. https://doi.org/10.1037/0022-3514.62.2.229
6. Hendricks, K. (2018, December 11). The endowment effect: Why ownership makes you overvalue your things. Kent Hendricks. https://kenthendricks.com/endowment-effect/
7. Maddux, W., Yang, H., Falk, C., Adam, H., Adair, W. L., Endo, Y., Carmon, Z., & Heine, S. J. (2010). For whom is parting with possessions more painful? Cultural differences in the endowment effect. SSRN Electronic Journal, 21(12), 1910-1917. https://doi.org/10.2139/ssrn.1670617
8. Lakshminaryanan, V., Keith Chen, M., & Santos, L. R. (2008). Endowment effect in capuchin monkeys. Philosophical Transactions of the Royal Society B: Biological Sciences, 363(1511), 3837-3844.
9. Strahilevitz, M. A., & Loewenstein, G. (1998). The Effect of Ownership History on the Valuation of Objects. Journal of Consumer Research, 25(3), 276-289. https://doi.org/10.1086/209539
10. Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). Experimental Tests of the Endowment Effect and the Coase Theorem. Journal of Political Economy, 98(6). 1325-1348. https://doi.org/10.1086/261737 
11. Clarity Recruitment. (2016, December 13). The endowment effect. https://findingclarity.ca/blog/the-endowment-effect/
12. Savov, V. (2016, October 2). BlackBerry’s success led to its failure. CNBC. https://www.cnbc.com/2016/10/02/blackberrys-success-led-to-its-failure.html
13. Fallon, N. (2024, May 6). How AI can optimize your pricing strategy. U.S. Chamber of Commerce. https://www.uschamber.com/co/run/finance/ai-price-optimization 
14. Shu, S. B., & Peck, J. (2011). Psychological ownership and affective reaction: Emotional attachment process variables and the endowment effect. Journal of Consumer Psychology, 21(4), 439-452. https://doi.org/10.1016/j.jcps.2011.01.002

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