The endowment effect is the cognitive bias which results in people attributing higher values to goods merely because they own then. In other words, owning something increases an individual’s perception of what it’s worth.
Summary by The World of Work Project
The Endowment Effect
The endowment effect is a cognitive bias which results in people attributing higher values to objects simply because they own then. It’s a bias that’s related to divestiture aversion, loss aversion, prospect theory and “the mere ownership effect”. What this bias really means is that, for most people, the very act of owning something increases that person’s perception of what that item is worth.
The bias has been observed to result in people being unwilling to sell goods that they own for a fair, replacement, market price. It’s also been observed to lead to situations where individuals are willing to pay (WTP) less for a new good than they would be willing to accept (WTA) for the sale of the same good that they already own. Again, this demonstrates that the mere act of ownership increases the perceived value of a good.
Learning More
The way we think as humans is fascinating. Cognitive biases clearly explain some of our “irrationality”. The Endowment Effect is just one example of this.
Understanding our Dual Process way of thinking provides some further insight into it. This “irrationality” means that we’re all suggestible and susceptible to nudging and the powers of choice architecture and persuasion.
Another tool that is often used to change people’s behaviors is communication. Ideas like the rhetorical triangle and the five canons of rhetoric shed some light on how this works. For a more detailed look at communicating for persuasion, explore Monroe’s Motivated Sequence.
Increasingly, products are also design to be persuasive, as it were. They are designed to create habits and drive increased use. Examples of this include Fogg’s model and the Hook model of behavioral design.
You can listen to our podcast, below, on nudging to learn more about how our behaviors can be influenced:
The World of Work Project View
The idea behind this cognitive bias has been around for at least as long as the phrase “A bird in the hand is worth two in the bush”. The actual bias is a bit more complicated than what’s explained here, but the main point stands. There are lots of reasons why people value things that they own, not least the effort and risk associated with replacement.
The endowment effect can have a large impact on decision making in relation to trading activities and other aspects of behavioral finance. For example, traders who own certain tradable stocks may attribute higher values to them than other traders who don’t own those stocks. Obviously, this bias can have an impact in all areas of commercial negotiation.
Our overall view is that this is an interesting bias that’s of particular import in certain area of work, but has a minor role in others. It’s worth everyone being aware of this bias as knowing about it may help with decision making, but there are no huge lessons in relation to it for most people.
Also – more widely, when it comes to the irrationality of our cognitive biases, we actually think there is some great benefit associated with this “irrationality” and think it’s worth keeping that in mind. Benefits could include the reduced energy used, but also some of the emotional / ego suport benefits associated with some biases.
How We Help Organizations
We provide leadership development programmes and consulting services to clients around the world to help them become high performing organizations that are great places to work. We receive great feedback, build meaningful and lasting relationships and provide reduced cost services where price is a barrier.
Learning more about who we are and what we do it easy: To hear from us, please join our mailing list. To ask about how we can help you or your organization, please contact us. To explore topics we care about, listen to our podcast. To attend a free seminar, please check out our eventbrite page.
We’re also considering creating a community for people interested in improving the world of work. If you’d like to be part of it, please contact us.
Sources and Feedback
Kahneman, Daniel; Knetsch, Jack L.; Thaler, Richard H. (1991). “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias”. The Journal of Economic Perspectives. 5 (1): 193–206.
We’re a small organization who know we make mistakes and want to improve them. Please contact us with any feedback you have on this post. We’ll usually reply within 72 hours.
