Mental Models - The Endowment Effect 🎁

Issue #73

Did you go through a bit of a pandemic home gym phase? I certainly did, and I still have the gear lying around to show for it.

Why haven’t I parted with it?

Have you got anything you’re hanging on to?

What is The Endowment Effect?

We irrationally overvalue goods we own, regardless of their objective market value.

A good example from Kahneman et al:

A wine-loving economist we know purchased some nice Bordeaux wines years ago at low prices. The wines have greatly appreciated in value, so that a bottle that cost only $10 when purchased would now fetch $200 at auction. This economist now drinks some of this wine occasionally, but would neither be willing to sell the wine at the auction price nor buy an additional bottle at that price.

Thaler (1980) called this pattern—the fact that people often demand much more to give up an object than they would be willing to pay to acquire it—the endowment effect.

Why is this interesting?

The endowment effect is worth knowing about so you can make more rational decisions around the stuff in your life. And it goes beyond gym gear.

The endowment effect causes us to hold onto stuff we don’t use. I came across this practical advice: if you are trying to let something go, researchers suggest:

…keeping a memento of an item being sold, such as a picture of the item or a smaller item associated with it, can help reduce feelings of loss and sadness, resulting in more willingness to sell.

Or maybe for now just check out one of my fave clips! Some George Carlin brilliance:

Want to go deeper?

🔖 Studies and more studies if you want to dive in.

🎥 Have you ever watched Hoarders? I wonder if this is endowment effect on steroids.

Revisit related mental models

Build your latticework!

🏔️ Status Quo Bias change is hard

💸 Sunk Cost Fallacy when you’ve come this far

💎 Scarcity Bias scarce isn’t always valuable

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