Pronunciation: en-dow-munt uh-fekt
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The endowment effect is the cognitive bias where individuals assign more value to things simply because they own them, even if identical alternatives are available. In investing, it shows up when:
A retired shop owner in Coimbatore owned a small plot of land on the outskirts of the city that he inherited years ago. When a real estate agent suggested selling it for 18 lakh rupees based on recent transactions in the same area, he insisted it was worth at least 30 lakh. He had no updated market data or valuation report but felt the land was special simply because it belonged to him and carried emotional weight from his family’s past. Buyers who visited pointed out practical issues like limited road access and slow development in the locality, yet he rejected all offers below his self-assigned value. His attachment to the property made him believe it was more valuable than what the market was willing to pay.
Documented by Richard Thaler in the 1980s, the endowment effect was a cornerstone in developing behavioral economics. It challenged classical models of rational utility by showing valuation can vary based on ownership status alone.