Hand someone a mug, and it instantly becomes worth twice as much to them.
In a classic experiment, students who were given a coffee mug demanded about twice as much to sell it as other students would pay to buy one. Nothing about the mug had changed, only who owned it. Economists call this the endowment effect, and it shows up in children, and even in apes.
Standard economic theory assumes that the most you would pay for something should roughly match the least you would accept to give it up. The endowment effect is the finding that it usually does not. Once people own something, even if they received it minutes ago and have no reason to be attached to it, they value it more than they would if they did not own it.
The best-known demonstration came from Daniel Kahneman, Jack Knetsch and Richard Thaler, using Cornell University students. Those randomly given a mug asked, on average, about 7 dollars to part with it, while those without one would pay only about 3. In a related test, people given a mug mostly wanted to keep the mug, people given chocolate mostly kept the chocolate, and people given neither split roughly evenly. Other studies found that students valued basketball tournament tickets they owned at around 14 times what they would pay for them.
Richard Thaler coined the term in 1980, though the observation is ancient, and psychologists had noticed the gap between buying and selling prices by the 1960s. The leading explanation is loss aversion, the tendency to feel a loss more sharply than an equal gain. Giving up the mug registers as losing something; buying one registers only as a gain. Not everyone agrees. The psychologist David Gal argues that simple inertia explains the gap: with no precise sense of a mug's value, people just stick with whatever they have.
The effect matters well beyond coffee mugs. It helps explain why free trials and money-back guarantees work so well, why people hold on to things they would never buy today, and why markets can see less trading than theory predicts. It has been observed in a wide range of people, including children, and in great apes and some monkeys.
Source: Wikipedia — Endowment effect · Text summarised from Wikipedia (CC BY-SA 4.0)
