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Cognitive biases · Decisions and choices

Endowment effect

Owning something can make it seem worth more than we would have paid to get it.

What it is

The endowment effect is the tendency to value an item more highly simply because you own it. In practice it shows up as a gap: the price people demand to give something up is often higher than the price they would pay to buy the same thing.

An everyday example

Someone is selling a used bike online. They bought it for a modest price, rode it for three summers, and now list it for close to what they paid. Offers come in lower, and every one of them feels a bit insulting.

Yet if the same person were shopping for a second-hand bike of that age and condition, they would never pay their own asking price. The bike has not changed; only their position as owner has.

Why it happens

The most common explanation is loss aversion: giving up something we own registers as a loss, and losses tend to feel larger than equivalent gains (Kahneman et al., 1990). Ownership may also bring attachment and memories that a buyer does not share.

Some economists argue that part of the measured gap comes from how experiments are run, for example from participants misunderstanding how the price-setting procedure works (Plott & Zeiler, 2005). This is discussed below.

How to counter it

  • Swap roles. Ask, “If I didn’t own this, how much would I pay for it today?” Use that figure as your anchor.
  • Look up market prices for similar items rather than relying on how the item feels to you.
  • Separate memories from the object. Keeping a photo of an old item can preserve the meaning while letting the thing go.

What the research shows

In classic experiments, Kahneman, Knetsch and Thaler (1990) gave coffee mugs to a random half of a group. Since the mugs were assigned by chance, about half should have changed hands in a market, but far fewer trades took place. Owners asked for much more to sell than non-owners offered to buy.

Whether this is a stable feature of preferences is debated. Plott and Zeiler (2005) used procedures designed to remove misunderstandings, including training and practice rounds, and found no gap for mugs. In a published comment, Isoni, Loomes and Sugden (2011) reported that data from the same study showed a persistent gap for lotteries under the same procedures. The current picture: the gap is real in many settings, but its size depends strongly on how values are measured.

Related biases

  • Loss aversion — Losing something tends to feel worse than gaining the same thing feels good.
  • Status quo bias — We tend to stick with the current option or the default, simply because it is already there.

Sources

  1. 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
  2. Plott, C. R., & Zeiler, K. (2005). The willingness to pay–willingness to accept gap, the "endowment effect," subject misconceptions, and experimental procedures for eliciting valuations. American Economic Review, 95(3), 530–545. https://doi.org/10.1257/0002828054201387
  3. Isoni, A., Loomes, G., & Sugden, R. (2011). The willingness to pay–willingness to accept gap, the "endowment effect," subject misconceptions, and experimental procedures for eliciting valuations: Comment. American Economic Review, 101(2), 991–1011. https://doi.org/10.1257/aer.101.2.991

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