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Endowment Effect

Definition: Endowment Effect

Originally coined by economist Richard Thaler, the endowment effect hypothesizes that people overvalue what they possess. Once an item has been acquired, its owner considers it more valuable than it actually is because they've established a sense of ownership. In one experiment, Thaler found that people demanded $7 for a mug that had been given to them but would only pay $3 to buy a mug from someone else.

We can find evidence of the theory in our everyday lives. Some of the extremely high starting bids on eBay auctions is one place I can definitely see the effect in action. Where else can you find it?

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insanitypepper insanitypepper 7 years
Oh, this definitely shows up in my salary.
a-nonny-mouse a-nonny-mouse 7 years
"I don't think it's because of some vague "sense of ownership". It's just that everyone would like to have more money, that's perfectly logical." Well written, looseseal. This is rampant in consignment shops. While looking through the children's items, I often cannot believe how much money people expect to receive; I get sticker shock. Even in my relatively small town situated in upstate New York, I frequently find single used onesies tagged for a few dollars. Chuckling aloud, I think, "Are you serious? It's a used snap-crotch piece of cloth that some other parents' child probably either puked on or leaked pooh upon. I could buy them new in a pack of five for several dollars or less, but these people want two to three dollars per piece. Greedy wh0rebags!" But looseseal was correct, and I hate admitting the truth of her (his?) statement: We all want more money. Naturally, we are stingier in what we are willing to pay for other people's cast-offs, yet we expect a premium for stuff that we're looking to unload. Human nature. **shrugs**
looseseal looseseal 7 years
Work. Everyone wants to get paid more for their work, but people lowball when they have to pay someone to do work for them. It's not surprising the same principle applies in a lot of situations. Everyone wants to sell what they have for more and get what they don't have for less. I don't think it's because of some vague "sense of ownership". It's just that everyone would like to have more money, that's perfectly logical.
verily verily 7 years
Flea markets. I've seen some crazy high prices for worthless crap masquerading as "vintage" or "antique".
hippiecowgirl hippiecowgirl 7 years
Garage Sales I'm not a die-hard garage saler, but I do stop sometimes if I see something interesting. Lately it seems like things (especially clothes) have gone from 25 or 50 cents to 5 or 10 dollars.
mondaymoos mondaymoos 7 years
Craigslist. And I was shocked to find out how little my bridal set is actually worth when I sold it off. The resale value on diamonds is mind-blowingly low.
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