The endowment effect is a hypothesis that people value a good (object) more once their property right to it has been established. In other words, people value something more as soon as they own it. In one experiment, people demanded a higher price for a coffee mug they had been given but put a lower price on one they did not own yet. The endowment effect was described as inconsistent with standard economic theory which asserts that a person's willingness to pay (WTP) for a good should be equal to their willingness to accept (WTA) compensation to be deprived of the good. This hypothesis underlies consumer theory and indifference curves. Economics (deriving from the Greek words οίκω [okos], house, and νέμω [nemo], rules hence household management) is the social science that studies the allocation of scarce resources to satisfy unlimited wants. ... Consumer theory relates preferences, indifference curves and budget constraints to consumer demand curves. ... In microeconomics, an indifference curve is a graph showing combinations of two goods to which an economic agent (such as a consumer or firm) is indifferent, that is, it has no preference for one combination over the other. ...

The effect is related to loss aversion and status quo bias in prospect theory. It was first theorized by Richard Thaler. In prospect theory, loss aversion refers to the tendency for people to strongly prefer avoiding losses than acquiring gains. ... Status quo bias is cognitive bias for the status quo; in other words, people like things to stay relatively the same. ... The prospect theory was developed by Daniel Kahneman and Amos Tversky in 1979. ... Richard H. Thaler (b. ...

The existence of the effect has been questioned by some economists. Hanemann (1991) noted that economic theory only suggests that WTP and WTA should be equal for goods which are close substitutes, so observed differences in these measures for goods such as environmental resources and personal health can be explained without reference to an endowment effect. Shogren et al (1994) noted that the experimental technique used by Kahneman and Thaler (1990) to demonstrate the endowment effect created a situation of artificial scarcity. They performed a more robust experiment with the same goods used by Kahneman and Thaler (chocolate bars and mugs) and found no evidence of the endowment effect. The natural environment comprises all living and non-living things that occur naturally on Earth. ...

Whether or not the endowment effect is a relevant economic phenomenon is somewhat uncertain; it is possibly a reflection of conventional substitution effects. Economics (deriving from the Greek words οίκω [okos], house, and νέμω [nemo], rules hence household management) is the social science that studies the allocation of scarce resources to satisfy unlimited wants. ...

See also

• list of cognitive biases.

Cognitive bias is distortion in the way we perceive reality (see also cognitive distortion). ...

References

• Thaler, R. (1980). Towards a positive theory of consumer choice. Journal of Economic Behavior and Organization, 1, 39-60.
• Jason F. Shogren; Seung Y. Shin; Dermot J. Hayes; James B. Kliebenstein 'Resolving Differences in Willingness to Pay and Willingness to Accept' The American Economic Review, Vol. 84, No. 1. (Mar., 1994), pp. 255-270
• W. Michael Hanemann 'Willingness to Pay and Willingness to Accept: How Much Can They Differ?' The American Economic Review, Vol. 81, No. 3. (Jun., 1991), pp. 635-647

Links

• "The WTP-WTA Gap, the 'Endowment Effect,' Subject Misconceptions, and Experimental Procedures", Charles Plott and Kathryn Zeiler, American Economic Review, 2004
• The Endowment Effect's Disappearing Act, Larry E. Ribstein, December 4, 2005