The endowment effect is a psychological phenomenon in which people ascribe higher value to things merely because they own them. This bias occurs when an individual values an owned object higher than its market value, simply because it is in their possession.
This effect was first identified by economist Richard Thaler in the 1980s. It challenges the conventional economic theory that people always behave rationally, making decisions based purely on objective market values. The endowment effect shows that ownership can create a subjective value for items, influencing decision-making and market transactions.
For example, a person might be unwilling to sell a coffee mug they own for 3 for the same mug if they did not own it. This discrepancy in valuation is not due to any difference in the mug itself, but rather the owner’s psychological attachment to it.
The endowment effect has implications in various fields, including economics, marketing, and psychology. It helps explain why people often demand much more to give up an object than they would be willing to pay to acquire it, and it is a key factor in understanding consumer behavior and market dynamics.