Video demonstration of what behavioral economists call the endowment effect.
In psychology and behavioral economics, the endowment effect (also known as divestiture aversion and related to the mere ownership effect in social psychology) is the hypothesis that people ascribe more value to things merely because they own them.
This is typically illustrated in two ways. In a valuation paradigm, people will tend to pay more to retain something they own than to obtain something they do not own—even when there is no cause for attachment, or even if the item was only obtained minutes ago. In an exchange paradigm, people given a good are reluctant to trade it for another good of similar value. For example, participants first given a Swiss chocolate bar were generally unwilling to trade it for a coffee mug, whereas participants first given the coffee mug were generally unwilling to trade it for the chocolate bar.
A more controversial third paradigm used to elicit the endowment effect is the mere ownership paradigm, primarily used in experiments in psychology, marketing, and organizational behavior. In this paradigm, people who are randomly assigned to receive a good (“owners”) evaluate it more positively than people who are not randomly assigned to receive the good (“controls”). The distinction between this paradigm and the first two is that it is not incentive-compatible. In other words, participants are not explicitly incentivized to reveal the extent to which they truly like or value the good.
The endowment effect can be equated to the behavioural model Willingness to Accept or Pay (WTAP), a formula sometimes used to find out how much a consumer or person is willing to put up with or lose for different outcomes.
One of the most famous examples of the endowment effect in the literature is from a study by Daniel Kahneman, Jack Knetsch & Richard Thaler, in which participants were given a mug and then offered the chance to sell it or trade it for an equally valued alternative (pens). They found that the amount participants required as compensation for the mug once their ownership of the mug had been established (“willingness to accept”) was approximately twice as high as the amount they were willing to pay to acquire the mug (“willingness to pay”).
Other examples of the endowment effect include work by Ziv Carmon and Dan Ariely, who found that participants’ hypothetical selling price (willingness to accept or WTA) for NCAA final four tournament tickets were 14 times higher than their hypothetical buying price (willingness to pay or WTP). Also, work by Hossain and List (Working Paper) discussed in the Economist in 2010, showed that workers worked harder to maintain ownership of a provisional awarded bonus than they did for a bonus framed as a potential yet-to-be-awarded gain. In addition to these examples, the endowment effect has been observed using different goods in a wide range of different populations, including children, great apes, and new world monkeys.