{"id":33379,"date":"2021-04-18T09:12:37","date_gmt":"2021-04-18T13:12:37","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=33379"},"modified":"2021-04-29T21:26:10","modified_gmt":"2021-04-30T01:26:10","slug":"the-endowment-effect","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/the-endowment-effect\/","title":{"rendered":"The Endowment Effect: How We Overrate Ownership"},"content":{"rendered":"\n

What is the endowment effect<\/a>? Why do we have a hard time parting with out possessions? <\/p>\n\n\n\n

The endowment effect states that when you own something, you automatically value it more than other people do. This can lead to poor selling decisions and a tendency to overvalue your possessions.<\/p>\n\n\n\n

Keep reading for more about the endowment effect.<\/p>\n\n\n\n\n\n\n\n

The Endowment Effect<\/strong><\/h2>\n\n\n\n

Ownership is an inherent, important part of your life\u2014you own all sorts of things, from clothing to cars to trinkets. Unfortunately, our sense of ownership<\/a> usually drives irrational selling and buying decisions<\/a> and creates the endowment effect. First, we\u2019ll look at how poor selling decisions are rooted in four particularities of human nature: <\/strong><\/p>\n\n\n\n

  1. You naturally start to love things as soon as you own them. <\/strong>Imagine your parents give you a dog for your birthday. You\u2019re astounded by your parents\u2019 spot-on intuition when picking him out\u2014he\u2019s a perfect match for you. However, it\u2019s very likely that you would have felt the same about any dog your parents gave you. The \u201cperfect match\u201d happened not because of your parents\u2019 intuition, but rather your natural, immediate attachment to something that\u2019s yours.<\/li>
  2. You focus on potential losses more than potential gains. <\/strong>For example, if you were thinking of putting your bike up for sale, you\u2019ll focus more on the loss of the transaction\u2014losing use of the bike\u2014than on the financial gain. This loss aversion might prevent you from putting the bike up for sale at all, or might prompt you to put a ridiculously high price on it. <\/li>
  3. You assume that the other person shares your view of the transaction. <\/strong>For example, if you were to sell your prom dress, you\u2019d likely remember the night fondly and expect your buyer to notice how flattering the fit is and how it glitters in the sunlight. Your buyer, however, just sees a dress, and they\u2019re more likely to notice some fraying around the zipper. <\/li>
  4. Your sense of ownership becomes stronger the more work you put into an object. <\/strong>If you were to buy a broken, old bike and refurbish it completely, you\u2019d likely feel a stronger sense of ownership for it than you would for a bike that you bought in brand new condition.<\/li><\/ol>\n\n\n\n

    Navigating the Endowment Effect<\/strong><\/h3>\n\n\n\n

    These particularities combine to create <\/strong>the endowment effect<\/em><\/strong>\u2014that is, when you own something, you automatically value it much more than other people do. <\/strong><\/p>\n\n\n\n

    The endowment effect contributes to poor selling decisions in several ways. <\/p>\n\n\n\n