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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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