The Endowment Effect

Hi everyone, welcome back to another entry on Impactful Insights DXB! I'm back after a short break due to my mock exams, but I am excited to get writing again :). Today, we’re going to be taking a look at a very fascinating behavioural economics concept I've covered brefiely before, but in more detail. It relates to how we value the things we own called the Endowment Effect. Have you ever wondered why you might struggle to let go of an old piece of clothing that has gone out of trend, or why sellers often overprice their items on Dubizzle (or Ebay in America)? The Endowment Effect helps explain it all. Let’s break it down and explore how this bias shapes our decisions.

First, let's look in detail regarding exactly what the Endowment Effect is? This cognitive bias describes how we overvalue things simply because we own them. Essentially, people place a higher value on items that they possess compared to other items they don’t, even when there’s no real difference in quality or utility. This can lead to irrational decision-making, whether you're holding onto clutter, refusing to sell something at a reasonable price, or making bad investment choices.

A classic experiment demonstrating this effect was conducted by behavioural economists Richard Thaler, Daniel Kahneman, and Jack Knetsch. They gave one group of participants coffee mugs and then asked them how much they would be willing to sell them for. Another group was asked how much they would pay for the same mugs. The results showed sellers valuing their mugs significantly higher than the buyers, simply because they had already owned them!

So why does this happen? The Endowment Effect is deeply tied to loss aversion (which I have also mentioned in a blog post from last year), which is the idea that humans feel the pain of losing something more strongly than the pleasure of gaining something of equal value. Once we own something, parting with it feels like a loss, making us reluctant to let go even if it's the rational choice.

This bias affects us in so many areas of life. Take online marketplaces, for example. Have you ever tried selling something on Dubizzle, eBay or Depop, only to be shocked when no one wants to pay your asking price? As sellers, we often believe our items are worth more than buyers' willingness to pay because we’ve attached personal value to them.

Another example is the free trial trap. Companies take advantage of the Endowment Effect by offering free trials of services like Netflix or Spotify. Once you’ve started using a subscription, you feel like you “own” it, making it harder to cancel even if you weren’t originally willing to pay.

The Endowment Effect also explains why hoarding behaviour happens. People hold onto old clothes, gadgets, or even useless trinkets, believing they are more valuable simply because they already own them. This can make decluttering our rooms and houses extremely difficult! Sometimes my room ends up piling with items I don't use or forget about, yet can't let go.

This bias can also cause issues when making financial decisions. Investors may hold onto poorly performing stocks because selling them feels like a loss, even if reallocating their money would be a smarter decision.

So how can we overcome and recognise the Endowment Effect? Here are a few strategies:

• Adopt an outsider’s perspective: If you were buying the item instead of selling it, would you still think it’s worth the price? This helps in negotiations and decluttering decisions.

• Use the “30-day rule”: If you haven’t used something in 30 days (or six months for seasonal items), it’s probably not as valuable to you as you think.

• Be aware of marketing tricks: Companies exploit this bias through free trials, limited-time offers, and exclusive memberships. Stay mindful before committing.

• Make decisions based on facts, not feelings: When investing or selling, focus on market value and rational benefits rather than emotional attachment.

That’s it for today’s post! The Endowment Effect is one of those hidden biases that subtly shape our daily choices, often without us realising it. Have you ever fallen for this bias? Let me know in the comments, I’d love to hear your experiences. Thanks for reading, and see you in the next post!