Endowment effect
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.
How it works
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.
Examples
- A person values a mug they own at $10 but would only pay $5 for an identical mug if they did not own it.
- Homeowners often price their property above market value due to personal attachment, believing it is worth more than what buyers are willing to pay.
- Employees hold on to company stock based on ownership rather than actual stock performance, valuing it more because it belongs to them.
Consequences
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.
Counteracting
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.
Critiques
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.
Fields of Impact
Also known as
Relevant Research
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
Recommended Books
Case Studies
Real-world examples showing how Endowment effect manifests in practice
Context
Ledgerly, a 30-person fintech startup, built a manual reconciliation feature early to differentiate from competitors. Over time the feature became more of an identity marker for the founding team than a high-value product component.
Situation
Customer research and usage metrics showed the manual reconciliation tool was used by fewer than 8% of customers and generated no meaningful upsell. Meanwhile, an automated reconciliation engine—promised to several key prospects—required reallocating two engineers and sunset of parts of the legacy tool.
The Bias in Action
Founders and the original engineers resisted sunsetting the legacy feature because they had designed it and 'owned' it from day one; they repeatedly argued it represented Ledgerly's craftsmanship. Decision meetings focused on emotional attachment (the story behind the feature) rather than objective metrics, and suggestions to run an A/B test or pilot were deprioritized. As a result, engineering and product roadmaps retained the legacy feature, consuming developer cycles and blocking the automated solution.
Outcome
The automated engine was delayed by six months, during which a competitor shipped an automated reconciliation product and won two of Ledgerly's pipeline deals. Internal morale dipped as engineers worked around the legacy code, and sales churned two prospects who needed automation immediately.