The Endowment Effect: Why Does My Own Always Feel More Expensive?

The Secret of Human Decision-Making: An In-Depth Analysis of Loss Aversion and the Endowment Effect

• Understand the basic concepts of endowment effect and loss aversion.
• Learn how they impact investing, real estate, marketing, and everyday life.
• Discover ways to overcome irrational biases and make better decisions.

Have you ever heard the phrase “the foolish owner”? I’ve hesitated when selling barely used items on secondhand markets, thinking, “I paid this price, so I can’t sell it for less.” This psychological tendency to overvalue and cling to possessions simply because they belong to us is called the endowment effect in behavioral economics.

This irrational behavior contrasts with the traditional economic model of the perfectly rational “Homo Economicus.” Behavioral economics pioneers Daniel Kahneman and Amos Tversky demonstrated that humans are not always rational but rather “predictably irrational.”

In this article, we will delve into two key psychological drivers controlling our minds: loss aversion and the endowment effect, and explore how to escape the trap of these biases.

Loss Aversion: Why the Pain of Losing Outweighs the Joy of Gaining

Loss aversion refers to the psychological phenomenon where the pain of losing 100,000 won is felt much more intensely than the pleasure of gaining the same amount. This is a core concept of the Nobel Prize-winning Prospect Theory.

The S-shaped “value function” graph of Prospect Theory illustrates two points:

1. Reference Point: All judgments are made relative to the current state, dividing outcomes into gains and losses.
2. Asymmetry: The slope of the loss side is much steeper than that of the gain side, indicating that the pain of loss is greater than the pleasure of gain.

Experiments show that people require at least $200 in potential gain to accept a $100 loss risk. In other words, the pain of loss is about twice as strong as the pleasure of gain. This is called the loss aversion ratio.

The Endowment Effect: Activated the Moment Something Becomes “Mine”

The endowment effect is the phenomenon where owning an item causes people to assign it a much higher value than when they do not own it.

In Richard Thaler’s famous “mug experiment,” participants who received mugs for free set their selling price (WTA) at more than twice the buying price (WTP) of those wanting to purchase the mugs. Simply owning the mug for a few minutes inflated its perceived value.


This arises from a combination of attachment to possessions and the status quo bias—the tendency to prefer maintaining the current state.

Real-Life Examples of the Endowment Effect and Loss Aversion

These biases influence many aspects of our lives:

• Investor’s Dilemma (Disposition Effect): Investors hesitate to sell losing stocks due to the pain of realizing a loss, but quickly sell winning stocks to lock in gains. This behavior undermines long-term returns.
• Homeowner’s Illusion: Homeowners often anchor on the highest price they experienced rather than the actual purchase price, leading them to set prices above market value and causing price rigidity in real estate markets.
• Marketer’s Trick: Netflix’s “one-month free trial” or “100% money-back guarantee” strategies temporarily grant consumers ownership, triggering the endowment effect. To avoid the pain of losing the product after the trial, many decide to purchase.

Comparison: Why Does the Endowment Effect Occur? An Ongoing Debate

For a long time, academia viewed the endowment effect as a result of loss aversion. Selling an owned item feels like a “loss,” so sellers demand about twice the price buyers are willing to pay to offset psychological pain.

However, recent experiments by Professor David Gal offer a new perspective. When he asked owners, “How much would you pay to keep the cup?” the price gap between buyers and sellers disappeared. This suggests the endowment effect may stem less from fear of loss and more from inertia or the framing of the transaction.

Table 1: Comparison of Two Models Explaining the Endowment Effect

Four Cognitive Tools to Escape the “Foolish Owner” Trap

While we cannot be completely free from biases, these strategies can help us make better decisions:

1. Reframing Decisions Instead of asking, “Should I sell this losing stock?” ask, “If I had this amount of cash now, would I buy this stock again?” This helps break emotional attachment and promotes objective judgment.
2. Pre-commitment Set rules in advance before emotions take over. For example, use stop-loss orders in stock trading to automatically sell at a certain price.
3. Use External Perspectives Seek advice from experts or trusted friends who are emotionally detached from your decisions to gain objective viewpoints.
4. Separate Investing from Happiness Accept that rational investing can be psychologically uncomfortable. Remember, investing is about making money, not about feeling happy.

Conclusion: Becoming an “Aware Owner”

We may be wired to fear losses and irrationally cling to what we own. Thanks to behavioral economics, we can recognize these tendencies and reflect on ourselves.

Key Takeaways

1. Loss Aversion: We feel the pain of loss about twice as strongly as the pleasure of gain.
2. Endowment Effect: We overvalue items simply because we own them.
3. Everyday Impact: These biases affect investment failures, real estate delays, marketing strategies, and more.

Now, we can move beyond being “foolish owners” to becoming “aware owners” who understand and strive to overcome our irrationalities. This insight is valuable not only for physical assets but also for intangible ones like game items or digital content.

Related article: Status Quo Bias: Why Are We Afraid of Change?

Next time you sell, give up, or invest, ask yourself whether your decision is truly based on rational value judgment or just hesitation because it’s “mine.”