THE ENDOWMENT EFFECT
Researchers from the University of Pennsylvania, Yale and U.C. San Diego have recently documented a behavioral bias that we observe frequently in the property liquidation industry. The perception of an item’s value increases from the mere basis of owning it. This is known as the “Endowment Effect.”
Historical economic theory proposes that when given a choice, rational people select the item they value more. When a study participant is given one of two items at random, one that is valued and one that is not, there is a 50% likelihood that the participant will trade. However, in industrialized society, people depart from rational behavior, trading only 10% of the time.
The researchers studied the behavior of two relatively isolated tribes in Tanzania. They found that the more isolated tribe tended to be more rational, trading about 50% of the time, while the tribe located closer to industrial influences traded about 25% of the time. This finding suggested that the Endowment Effect is learned behavior among these isolated hunter gatherer societies; however, both tribes tended to be “more rational than the average western consumer when it comes to economic decisions.”
The moral of the story is…keep in mind that you have a natural bias about the value of your own possessions when the time comes to liquidate!!
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Contributors
Coren Apicella, Assistant Professor, School of Arts & Sciences, Department of Psychology, University of Pennsylvania
Eduardo Azevedo, Assistant Professor, Wharton School, Department of Business Economics and Public Policy, University of Pennsylvania
Nicholas A. Christakis, Professor of Social and Natural Science, Co-Director, Yale Institute for Network Science, Yale University
James H. Fowler, Professor of Medical Genetics and Political Science, Department of Political Science, University of California, San Diego