weekly mental model

for April 21 to April 27


Endowment Effect

We tend to value things we own higher than we would if we didn't own them.

Description

The Endowment Effect is a cognitive bias that causes people to ascribe more value to things merely because they own them. This effect suggests that people are more likely to retain an object they own than acquire that same object when they do not own it. This bias can lead to irrational decision-making in various contexts, from personal possessions to financial investments, where owners overvalue what they own and demand more to give them up than they would be willing to pay to acquire them if they did not own them.

Examples

  • A person might refuse to sell a family heirloom at market price, valuing it more due to its personal significance and ownership history.

  • Investors might hold on to stocks or real estate longer than rational analysis would suggest, simply because they own these assets and overvalue them compared to if they were potential buyers.