CandleFocus Glossary Editor
The endowment effect, first discussed by Nobel Prize-winning economist Richard Thaler and his colleagues in 1990, is a phenomenon in which an individual assigns a higher value to an object they already own than the value they would place on the same object if they did not own it. This phenomenon is due to a combination of two psychological reactions – ownership and loss aversion – and it’s commonly seen with items that have an emotional or symbolic meaning for the person, such as childhood possessions, photos and jewelry.
Ownership is a feeling of possession, or of being in control. This reaction is closely linked to identity and is a natural step taken to connecting oneself to an item. As an individual becomes attached to something, their sense of ownership and their emotional investment increases, leading them to place a higher value on it than if it was someone else's.
The second reason for the endowment effect is loss aversion, which is the preference for avoiding losses over acquiring gains. This means that an individual will tend to value an item more if they are getting it rather than if they are giving it away. Research shows that this psychological reaction is even stronger if the item holds personal symbolism. For example, a person may be willing to part with a jacket they own for a price that they wouldn’t pay if they were looking to purchase it in the store.
In addition to emotional items, research has also identified the endowment effect in financial decisions. In this case, gains and losses often factor into the endowment effect more than emotional attachment. A person may be reticent to sell an item (or a financial asset) believing that it will appreciate in value over time, even though the market may show otherwise.
Ultimately, the endowment effect relies on a combination of human emotions, specifically the tendency to emotionally attach oneself to a good and the feeling of aversion to loss. Understanding the endowment effect and its causes are important for marketers, investors and policy makers, who must consider how it skews consumer decisions and the prices of goods.
Ownership is a feeling of possession, or of being in control. This reaction is closely linked to identity and is a natural step taken to connecting oneself to an item. As an individual becomes attached to something, their sense of ownership and their emotional investment increases, leading them to place a higher value on it than if it was someone else's.
The second reason for the endowment effect is loss aversion, which is the preference for avoiding losses over acquiring gains. This means that an individual will tend to value an item more if they are getting it rather than if they are giving it away. Research shows that this psychological reaction is even stronger if the item holds personal symbolism. For example, a person may be willing to part with a jacket they own for a price that they wouldn’t pay if they were looking to purchase it in the store.
In addition to emotional items, research has also identified the endowment effect in financial decisions. In this case, gains and losses often factor into the endowment effect more than emotional attachment. A person may be reticent to sell an item (or a financial asset) believing that it will appreciate in value over time, even though the market may show otherwise.
Ultimately, the endowment effect relies on a combination of human emotions, specifically the tendency to emotionally attach oneself to a good and the feeling of aversion to loss. Understanding the endowment effect and its causes are important for marketers, investors and policy makers, who must consider how it skews consumer decisions and the prices of goods.