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The Endowment Effect is a cognitive bias wherein people ascribe more value to things merely because they own them. This phenomenon suggests an emotional attachment and often an irrational overvaluation of such items.
The Endowment Effect operates through psychological ownership, where an individual's sense of possession increases the item's perceived value. This effect often results in a discrepancy between how much people are willing to pay to acquire an object versus how much they would accept to sell it.
The Endowment Effect can lead to inflated market prices, poor decision-making in business transactions, and consumers overvaluing their possessions. It disrupts rational economic decisions, leading to inefficient market outcomes such as loss aversion and market saturation with overpriced goods.
To counteract the Endowment Effect, individuals can engage in tactics such as taking an outsider's perspective, setting predetermined evaluation criteria, or practicing mindfulness to reduce emotional attachment to possessions.
Critics of the Endowment Effect argue that it oversimplifies human behavior by attributing irrational decisions purely to ownership. Some researchers claim that the effect's strength can vary significantly across cultures and contexts, questioning its universal application.
Experimental Tests of the Endowment Effect and the Coase Theorem
Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990)
Journal of Political Economy, 98(6), 1325-1348
Bad Riddance or Good Rubbish? Ownership and Not Loss Aversion Causes the Endowment Effect
Morewedge, C. K., Shu, L. L., Gilbert, D. T., & Wilson, T. D. (2009)
Journal of Experimental Social Psychology, 45(4), 947-951