Endowment effect
Topic: Schools of Economic Thought and Economic Laws · NCERT: Beyond NCERT
Meaning
The endowment effect is the tendency to value something more just because one owns it. People ask for much more to sell an item than they would have paid to buy it. It comes from prospect theory (Kahneman-Tversky, 1979) and loss aversion: giving up something one owns feels like a loss, and losses hurt more than equal gains please. It goes against the standard assumption that a good's value does not depend on who holds it.
Example
A person gets a free ticket to a cricket match. They refuse to sell it even for a price well above what they would ever have paid to buy one.
Don't confuse with
- Status quo bias: a general preference for the current state of affairs, such as sticking with defaults. The endowment effect is specifically about valuing owned items more.
Related concepts
- Behavioural economics
- Bounded rationality
- Satisficing
- Heuristics
- Anchoring
- Availability heuristic
- Confirmation bias
- Overconfidence bias
- Prospect theory
- Loss aversion