This bias occurs when we overvalue something that we own, regardless of its objective market value (Kahneman et al., 1991). It is evident when people become relatively reluctant to part with a good they own for its cash equivalent, or if the amount that people are willing to pay for the good is lower than what they are willing to accept when selling it. Put more simply, people place a greater value on things once they have established ownership. This is especially true for things that wouldn’t normally be bought or sold on the market, usually items with symbolic, experiential, or emotional significance. Endowment effect research has been conducted with goods ranging from coffee mugs (Kahneman et al., 1990) to sports cards (List, 2011). While researchers have proposed different reasons for the effect, it may be best explained by psychological factors related to loss aversion (Ericson & Fuster, 2014).

 

Ericson, K. M. M., & Fuster, A. (2014). The endowment effect. Annual Review of Economics, 6(1), 555-579.

Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1991). Anomalies: The endowment effect, loss aversion, and status quo bias. Journal of Economic Perspectives, 5(1), 193-206.

Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). Experimental tests of the endowment effect and the Coase theorem. Journal of Political Economy, 98(6), 1325-1348.

List, J. A. (2011). Does market experience eliminate market anomalies? The case of exogenous market experience. American Economic Review, 101(3), 313-17.