Concept
Endowment Effect
The endowment effect is the tendency to value something more once you own it, so that the price you would demand to give it up is well above the price you would pay to acquire it, because giving it up registers as a loss and losses loom larger than gains.
The economist Richard Thaler named the effect, and in a series of classroom experiments with Daniel Kahneman and Jack Knetsch, half the students were given a coffee mug and offered the chance to sell it to the other half. Because the mugs were handed out at random, standard theory predicts that about half of them should change hands. Far fewer did: owners asked much more than non-owners were willing to pay, although the mug had been theirs only a short while. In Thinking, Fast and Slow Kahneman explains the gap through prospect theory. For the owner, selling is a loss; for the buyer, buying is a gain; and loss aversion makes the first weigh more. He also notes where the effect disappears: goods held for exchange, such as a shopkeeper's stock or the money in your wallet, do not trigger it, because parting with them is the point. In everyday life the effect shows up when we overprice our house or car, keep subscriptions and possessions we would never buy today, and defend the existing plan against a better one simply because it is ours. The test is to ask the buyer's question: would I acquire this, at this price, if I did not already have it?
A real-life example
Kerem lists his motorbike in Antalya at a price he considers fair, and three months pass without a serious offer. A friend asks him to price an identical bike, same year and mileage, as if he were buying it, and Kerem names a figure well below his own listing. He lowers his price to the buyer's figure and sells within two weeks.
How to use it
- 1Before pricing something you own, look up what identical items actually sell for, not what they are listed at.
- 2Ask the buyer's question: if I did not own this, would I buy it today at this price?
- 3Once a year, review the subscriptions, tools and plans you keep, and drop the ones you would not choose again from scratch.