The endowment effect occurs when we assign a higher value to things we own.

People who select a lottery number think the probability of winning is higher because they selected it. We know statistically that the probability of selecting any number in the lottery is the same.

This happens all the time in the stock market. People, after buying a stock, defend the story of the stock even when it’s not performing well. They hold onto a losing stock because of the endowment effect.

There are two main psychological tendencies responsible for this:

Loss Aversion Bias

Winning $100 is not the same as losing $100. Losing money seems more significant than winning the same amount.

A good example of this can be seen in the stock market. People don’t sell a losing stock as the loss seems too painful.

Endowment effect in sales

Let’s see how salesman use the endowment effect to their advantage.

When you go to buy a car, the salesman usually lets you test drive it first.

In the test drive, we get a feeling of owning the car and usually assign a higher value because of the emotion.

There are many more examples where people change behavior due to the endowment effect.

In real estate, the house seller usually furnishes the house so that the buyer can get a feel, for what it will feel like to live in the house. If you just observe, you will see the endowment effect at play all around you.

I would love to hear about your experience with this.