Endowment Effect

We found that the underlying theoretical model used to explain the endowment effect, that is, the reference loss model of unfavorable preference based on the expectations of Koshegi and Rabin (2006), seems unable to explain our results in a configuration that realistically reflects the characteristics of the natural experiment we are studying. … We argue that our reporting is parsimonious as it explains both the endowment effect and the greater sensitivity of sellers to observed market prices in terms of the difference between the beliefs of buyers and sellers in the respective markets, without requiring additional avoidance assumptions (as postulated, for example , Weaver & Federico, 2012). Thus, we argue that the vesting effect may largely reflect the “adaptively rational” behavior of both buyers and sellers (given their beliefs about the respective markets), rather than any property bias or a change in their inherent preferences. … [Sources: 8, 20]

Researchers trying to understand the origins of the endowment effect in the laboratory usually study how it affects the cost of simple consumer goods using three different methods. When people have worked to create a particular product, they tend to value it more, and therefore, those products may be rated higher than their counterparts. Prototype studies of the endowment effect included mugs and other products at the same price. [Sources: 1, 3, 12]

The endowment effect is a principle of behavioral economics that describes the tendency for people to value an object they own more than if they did not. The endowment effect refers to an emotional bias that causes people to value property higher, often irrationally, than its market value. Annotation The allotment effect occurs when people assign a higher value to an object they own than the same object when they do not, and this effect is often used to reflect a property-induced change in intrinsic value that people attribute to an object. … [Sources: 3, 8, 17]

The giftedness effect refers to a cognitive bias that explains how people develop attraction to an object and overestimate it when they own it, compared to how they would rate it if they didn’t. The endowment effect is a cognitive bias that describes our tendency to overestimate what is ours, regardless of its true market value. Psychologists have proposed many explanations for this effect, but it is commonly associated with loss aversion and emotional attachment (sometimes referred to simply as the property effect). [Sources: 4, 18]

This effect describes how people can pay more money to get what they currently have than for a thing they do not own. From the point of view of standard economic theory, the effect is unexpected, because when presented with a choice between two goods, rational people choose the one with the higher value. [Sources: 10, 15]

However, the effect can still be explained using microeconomic analysis [1], since the reluctance to trade due to the endowment effect can simply be considered a mistake. If this is a misunderstanding, then people are trading too little, thereby giving up the benefits of trading. An alternative explanation for the giftedness effect is imposed by cognitive psychology and perspective theory. [Sources: 15]

In contrast to claims that consumers make biased choices that do not reflect their underlying well-being, the possibility of an endowment effect is consistent with neoclassical economics. The giftedness effect is a reflection of a general bias in human psychology in favor of how things are, not how they might be. The giftedness effect makes it clear that the value that people form in their minds for an object differs before and after it is owned or used. The endowment effect is a seemingly irrational tendency to immediately value a possessed item more than the ability to receive an identical item when it is not yet there. [Sources: 4, 5, 14, 21]

The giftedness effect builds on these assumptions, as well as elements of developmental psychology (where the object is embedded in “the owner’s self-esteem, becoming part of his personality”) to suggest why we overestimate our properties. Our brains tell us that we value something simply because it is what we have. The endowment effect occurs when we overestimate what we own, regardless of its objective market value (Daniel Kahneman et al., 1991). It is also often shown that we are unwilling to trade what we already have for something of equal value (regardless of whether that object is more or less desirable than the object we already have). [Sources: 9, 14, 16, 19]

Daniel Kahneman, Nobel laureate in economics; Jack Knutch and Richard Thaler, also respected economists, in their 1990 paper; Experimental Tests of the Effect of Giftedness and the Rough Theorem demonstrated the effect of giftedness in action. In 2009, Carnegie Mellon associate professor of marketing, Carey K. Morewedge, and a team of researchers conducted two experiments that also used coffee mugs. In one experiment, they found that shoppers were willing to pay as much for a coffee mug as sellers demanded when shoppers already owned an identical mug. [Sources: 13, 19]

The researchers found that the more a tribe is influenced by the market economy, the more likely it is to add value to the items it receives. Similar results were obtained in the second experiment, which, in addition to confirming the ownership account, found differences between how men and women value assets within the group and outside the group. With regard to non-group goods, after social self-threat in the conditions of sale, men had a lower rating for these goods compared to ordinary goods, while sellers did not show such a change in ratings. [Sources: 6, 13]

The longer people held an object, the more likely they were that their peers would prefer their object to another object. Members of the tribe who were given the items did not seem to add value to them and would have no problem exchanging these items with other members of the tribe. [Sources: 6]

When a marketer makes you feel like an owner, you are more likely to overestimate him and pay more for what he sells. The endowment effect, invented by Richard Thaler, is the sense of ownership, in which the idea of ​​ownership increases its value regardless of its objective market value. The endowment effect is so strong that even imaginary property can add value to something. [Sources: 6, 14, 22]

The endowment effect is thought to be a by-product of loss aversion theory, in which people value losses over profits. Thaler (1980) called this model – the fact that people often ask for much more in order to give up an item than they would be willing to pay to acquire it – the endowment effect. One consequence of the endowment effect is the “supply and demand gap,” which is an empirically observable phenomenon in which people often ask for a higher price to sell a product they own than they would have paid for the same right if they didn’t own it. Right now. [Sources: 7, 10, 11]

In behavioral finance, the endowment effect, or disposition aversion, as it is sometimes called, describes the circumstances in which a person attributes a higher value to an item they already own than the value they would attribute to the same item if they did not. … This. In behavioral psychology and economics, the giftedness effect (also known as alienation aversion and associated with the simple ownership effect in social psychology [1]) is the assumption that people value things more simply because they own them. [Sources: 0, 17]


— Slimane Zouggari


##### Sources #####

[0]: https://www.ventureharbour.com/the-endowment-effect-7-ways-to-use-it-to-boost-your-conversions-with-examples/

[1]: https://hbr.org/2016/05/why-buyers-and-sellers-inherently-disagree-on-what-things-are-worth

[2]: https://peoplescience.maritz.com/Articles/2019/Know-Your-Nuggets-Endowment-Effect

[3]: https://medium.datadriveninvestor.com/why-do-businesses-offer-free-one-month-trials-endowment-effect-f86105377d78

[4]: https://www.wallstreetmojo.com/endowment-effect/

[5]: https://scholarworks.gsu.edu/psych_facpub/30/

[6]: https://kenthendricks.com/endowment-effect/

[7]: https://www.aeaweb.org/articles?id=10.1257/jep.5.1.193

[8]: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7983076/

[9]: https://gohighbrow.com/much-too-good-for-children-the-endowment-effect/

[10]: https://uxplanet.org/endowment-effect-for-product-adoption-and-retention-21e130bb00b9

[11]: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=326360

[12]: https://www.wheelofpersuasion.com/technique/endowment-effect/

[13]: https://bigthink.com/articles/rethinking-the-endowment-effect-how-ownership-effects-our-valuations/

[14]: https://www.bbc.com/future/article/20120717-why-we-love-to-hoard

[15]: https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0109520

[16]: https://www.adcocksolutions.com/post/no-18-the-endowment-effect

[17]: https://www.investopedia.com/terms/e/endowment-effect.asp

[18]: https://www.hustleescape.com/endowment-effect/

[19]: https://www.interaction-design.org/literature/topics/endowment-effect

[20]: https://voxeu.org/article/endowment-effects-evidence-ipo-lotteries-india

[21]: https://www.rff.org/publications/working-papers/how-much-relevance-does-reality-imply-reconsidering-the-endowment-effect/

[22]: https://blog.crobox.com/article/endowment-effect-marketing-examples

[23]: https://www.lse.ac.uk/granthaminstitute/publication/the-endowment-effect-discounting-and-the-environment/

[24]: https://reference.findlaw.com/lawandeconomics/literature-reviews/0720-the-endowment-effect.html