The endowment effect is a cognitive bias which was first hypothesized by economist Richard Thaler. According to Thaler's theory, people value an object more if their ownership is clearly established. The results of this effect can sometimes be quite interesting, and being aware of it can be very important whether you are buying or selling something.
Numerous studies have been conducted to explore the endowment effect. In a classic study, people were asked to assess the value of coffee cups which had been given to them. Another group in the study was also asked to estimate the value of coffee cups, but these coffee cups were generic, rather than being owned by the subjects. The subjects who owned their coffee cups consistently valued them higher than the other subjects, and in some cases they said that they would prefer to keep their coffee cups, rather than selling them.
This effect seems to apply specifically to objects. When people in a similar study were offered tokens which could be exchanged for coffee cups, the endowment effect was not observed, suggesting that people formed an attachment to the specific object, not to an abstract concept.
You can probably think of some examples of the endowment effect in your own life. For example, real estate prices are often subject to this effect, with the sellers asking a price which exceeds consumer willingness to pay. On a smaller level, you can probably see it if you look around your house and think about the value of the items you own. For example, how much do you think the chair that you are sitting on is worth?
This cognitive bias is also known as Divestiture Aversion, referencing the idea that because people become attached to objects they own, they often develop an aversion to selling them or passing them on. One significant contribution of the endowment effect to the field of economics has been a reworking of the understanding of the relationship between willingness to pay for items, and willingness to accept compensation for such items. As a general rule, people are willing to pay less for items they don't own, and they expect more compensation to sell the items they do own, despite the fact that this contradicts traditional economic theory.
The endowment effect appears to be linked to the status quo bias, which states that people prefer situations to remain static and unchanged. Change of ownership would obviously disrupt the status quo, causing unease.
