Endowment Effect

What is it?

The endowment effect, named by economist Richard Thaler in 1980, is the phenomenon where people value objects they own more highly than identical objects they don't own. In classic experiments by Kahneman, Knetsch and Thaler, people given coffee mugs demanded about twice as much to sell them as others were willing to pay to buy them, even though the mugs had been handed out at random. The effect is usually explained by loss aversion: selling feels like losing, and losses hurt more than equivalent gains feel good. A similar attachment seems to extend beyond physical objects to ideas, strategies and positions. In negotiations, each party may sincerely believe what they hold is worth more, making compromise difficult. In organizations, it can feed resistance to changing processes or strategies we already have. It may help explain why people keep possessions they never use, and why people demand more to give up a benefit than they would pay to acquire it. The effect tends to grow with emotional attachment. Counteracting it requires deliberately imagining not owning the object and asking what you would pay to acquire it, seeking objective market valuations, and remembering that selling something is not losing it but trading it for something else of value.