Tuesday, July 26th, 2016
The Endowment Effect has tricked us all at some point. The Endowment Effect is the idea that we value objects and also opportunities higher if we own them versus if we don’t. This causes a mismatch between buyers and sellers, where buyers are often willing to spend less than the seller deems an acceptable price.
A strange thing happens in the mind when you but something. No matter what it is —a pair of jeans, a car or even a house— in that moment when an object becomes your property, it undergoes a transformation. Because you chose it and you associate it with yourself, its value is immediately increased. If someone offers to buy it from you, the chances are you want to charge much more than they are prepared to pay.
The Endowment Effect is also called the status quo bias; This is illustrated by the observation that people will tend to pay more to retain something they own than to obtain something owned by someone else—even when there is no cause for attachment, or even if the item was only obtained minutes ago. Ownership creates satisfaction.
This is a classic heuristic trick—it’s a myth. The idea that you must own something to find value is not true. Not having something or letting go of something has real and sometimes the most value. This is a tricky one. Two tips to make this stick: Ask yourself, “If I did not own this today, how hard would I be willing to work to get it?” and trick your brain by classifying things as if you don’t own them during the evaluation.
Summing-up: The Endowment Effect is the reason that some people have lofts, garages and storage spaces full of junk with which they cannot bear to be parted. Once you own something, you tend to set its financial value way higher than other people do.