The Endowment Effect — The Moment It Becomes Mine, It Gets More Expensive
When you sell your own item secondhand, you feel 'I should get at least this much,' yet you won't pay that price for the same item someone else is selling. Why is that?
What Is the Endowment Effect
The Endowment Effect is the phenomenon where, the moment you come to own something, you assign it a higher value than before you had it.
Behavioral economists Kahneman, Knetsch, and Thaler demonstrated it clearly in a 1990 experiment. The core is that 'the price I demand to sell (WTA)' becomes much wider than 'the price I'm willing to pay to buy (WTP).'
The Classic Experiment: Mugs
Cornell students were randomly split, giving one group a university-logo mug (worth about $6) and not giving one to another group. Thirty minutes later they were allowed to trade with each other.
Even though the item was received randomly, the lowest price the mug owners were willing to sell for (a median of about $5.25) was about double the highest price the buyers were willing to pay (a median of about $2.25–2.75). Because of this gap, almost no trades took place. Even for an item that had come into their hands randomly just minutes earlier, the mere fact that it had become 'mine' doubled its value.
The reason this experiment is powerful is that handing out the mugs randomly removed any 'reason to prefer that particular mug.' It shows that valuation changes from 'ownership' alone.
The Endowment Effect in Investing
A typical case is valuing a stock you bought above its objective value. Simply because it's an asset 'I chose,' you get attached to it, and even as reasons to sell accumulate, you repeat 'just a little more.'
Especially for inherited or long-held assets, this attachment grows stronger, hindering a cool reassessment. The defense is to ask, 'If I didn't own this asset, would I buy it new at today's price?' If the answer is 'no,' there's a good chance you're being held captive by the endowment effect. You need to practice separating the reference point of the purchase price and the attachment of ownership, and judging by 'the outlook going forward' alone.
Preguntas frecuentes
Q. How are the endowment effect and loss aversion connected?
Closely. Selling what you own feels like a 'loss,' and a loss lands larger than a gain (loss aversion), so you demand higher compensation. That's why the selling price (WTA) becomes greater than the buying price (WTP). The endowment effect can be seen as the way loss aversion reveals itself in a situation of ownership.
Q. Why is the 'would I buy it new now' question effective?
This question erases the attachment of ownership and the reference point of the purchase price, making you look at the asset with 'neutral eyes.' Once you strip away the frame of 'something I already own,' the overvaluation reveals itself. However, you should separately factor in actual trading costs such as taxes and fees.
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📋 Los resultados se basan en datos históricos; las rentabilidades pasadas no garantizan rentabilidades futuras.
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