Endowment Effect: Definition, Examples and Effects

The endowment effect is the phenomenon whereby people ascribe more value to something simply because they own it. It is a cognitive bias that affects the decisions we make in our everyday lives. Understanding the endowment effect can help us make better decisions and avoid costly mistakes.

Examples: One way you might see this in your life is through garage sales or online marketplaces. Ever noticed how hard it is to part with your belongings, even the ones you don't use anymore, unless you're getting a great deal? That's the endowment effect at work. It could also manifest in the stock market. If you own shares in a company, you may perceive them to be more valuable than they are on the market, leading you to hold onto them longer than might be financially wise.

Effects: The effects of the endowment effect are broad and it can have a significant impact on your decision-making. It can lead to poor financial decisions, like holding onto a declining stock because you perceive its worth to be higher than it really is. But on the flip side, it could also cultivate a sense of value and appreciation for what you own. The key is to remain aware of this bias, and try to step back and evaluate carefully.

Overall, understanding the endowment effect can help us make better decisions and avoid costly mistakes.

Do you want to expand your knowledge on this topic? Read our full in-depth article on cognitive biases.

Do you have extra 15 minutes today? Take our fun and interactive quiz to learn which of 16 reasoning styles you use, your overall level of rationality, and what you can do now to improve your rationality skills.