The endowment effect says that once you own something you start to place a higher value on it than others would
You have a large number of your favourite Reader’s Digest that you collected right from your childhood. Now you hear that Reader’s Digest has gone bankrupt and you fear you may not get more of your favourite reading material. However, you were afraid to lend them to your friend as they may not return the books after reading them. Will you be willing to sell your collection if you get a reasonable price? You may do so only if you get a desired premium; unless you have space constraints and want to dispose them anyways.
According to a research in behavioural psychology, all of us suffer from a bias called “endowment effect”. This simply means you will demand a higher price to give up your comics’ collection than the amount you will be willing to pay to buy a similar collection. Why does this happen? It is not easy for people to part with their possession. Hence, they need a premium to compensate for the pain of parting with their valuable possession.
In the late 1970s, economist Richard Thaler considered two situations. In the first case, a man owns a case of good wine he bought in the late 1950s for $5 a bottle. When a wine merchant offers to buy his wine for $100 a bottle the man refuses, though he never paid more than $35 for a bottle of wine in his life. In the second situation, a man who trims his own lawn receives an offer from his neighbour’s son to mow his lawn for $8. The man refuses, though he wouldn’t mow his neighbour’s same-sized lawn for less than $20.
Why the inconsistencies? Both situations highlight what Thaler termed the “endowment effect,” and it explains our irrational tendency to overvalue something just because we own it. Or, as Thaler puts it, “goods (that) are included in the individual’s endowment will be more highly valued than those not held in the endowment.
Endowment effect is defined as a phenomenon in which most people would demand a considerably higher price for a product that they own than they would be prepared to pay for it. Simply put, the endowment effect says that once you own something you start to place a higher value on it than others would. People often demand much more to sell an object than they would be willing to pay to buy it.