What I own is worth more. The Endowment effect

Introduction

The endowment effect is a cognitive bias that describes our tendency to value things that we own more than things that we do not own. This bias can have a significant impact on our decision-making

How the endowment effect works

The endowment effect works by tapping into our cognitive biases.

One of the most common cognitive biases that the endowment effect exploits is loss aversion. Loss aversion is our tendency to feel the pain of a loss more intensely than the pleasure of an equivalent gain. This means that we are more motivated to avoid losses than to acquire gains.

Another cognitive bias that the endowment effect exploits is status quo bias. Status quo bias is our tendency to prefer the current state of affairs to any change. This means that we are more likely to value things that we already own than things that we do not own, even if they are of equal value.

Real-life examples of the endowment effect

• Selling a car: People are often reluctant to sell their cars, even if they are no longer needed or are worth more money. This is because they have become attached to the car and view it as an extension of themselves.
• Negotiating a salary: People are often more likely to accept a lower salary offer than they would be willing to accept if they were starting a new job. This is because they value their current job more than they would value a new job, even if the new job pays more.
• Investing: Investors are often reluctant to sell stocks that they own, even if the stocks are losing money. This is because they have become attached to the stocks and view them as a long-term investment.

The impact of the endowment effect

The endowment effect, can lead us to make irrational choices, such as paying more for things that we already own or refusing to sell things that we no longer need. It can also make us more susceptible to scams and other forms of fraud.

How to overcome the endowment effect

There are a few things you can do to overcome the endowment effect:

• Be aware of your biases: The first step to overcoming the endowment effect is to be aware of it. Once you are aware of your biases, you can start to question your beliefs and to seek out information that challenges them.
• Consider opportunity costs: Opportunity costs are the benefits that you give up by making one choice over another. When making a decision, try to consider the opportunity costs of both choices. This can help you to make more rational and informed decisions.
• Get multiple perspectives: If you are struggling to make a decision, talk to other people and get their perspectives. This can help you to see the situation from a different perspective and to make a more informed decision.
• Use decision-making tools: There are a number of decision-making tools that can help you to make more rational choices. For example, you can use a decision matrix to weigh the pros and cons of different options.
• Take your time: Don’t rush into making a decision. Take your time to gather information and to consider all of your options.
• Don’t be afraid to change your mind: If you change your mind about a decision, don’t be afraid to reverse course. It is better to make a different decision than to stick with a bad decision.

Conclusion

It is important to remember that everyone is susceptible to the endowment effect. It is a natural human tendency to value things that we own more than things that we do not own. However, by being aware of our biases and taking steps to overcome them, we can make more realistic and informed decisions.