Endowment Effect
Edited by Paweł Raja, PhD · Published
Definition
Endowment Effect is the tendency to value something more highly simply because you own it, so that people demand more to give up an item than they would pay to acquire it.
- Also known as:
- Divestiture aversion, Ownership effect
- Category:
- Risk & Loss
- Impact:
- Medium
- Landmark study:
- Kahneman et al. (1990)
- Evidence here:
- 5 cited studies
Why it happens: the psychology of endowment effect
Economic theory predicts that the price at which you would sell something (willingness to accept, WTA) should be close to the price you would pay for it (willingness to pay, WTP). The endowment effect is the persistent gap between the two: owners demand far more than buyers offer.
Kahneman, Knetsch and Thaler (1990) showed this with coffee mugs. Students randomly given mugs asked about twice as much to sell them as non-owners would pay, and far fewer mugs changed hands than economic theory predicted. Knetsch (1989) found that most people given a mug kept it rather than swap for a chocolate bar, and most given the chocolate kept that.
The standard explanation is loss aversion: giving up something you own is coded as a loss, while acquiring it is coded as a gain, and losses weigh more.
The effect is real but sensitive to context. List (2003) found that experienced sports-card traders showed little endowment effect, and Plott and Zeiler (2005) found the WTA–WTP gap could shrink substantially under some experimental procedures, fuelling a debate about its causes.
Endowment Effect examples
In classic experiments, students randomly given a university coffee mug asked roughly twice as much to sell it as other students were willing to pay for the same mug.
- Home sellers set asking prices well above what comparable houses sell for, because their own home feels worth more.
- People keep clothes, gadgets and gifts they would never buy again at today's price.
- Free trials that convert automatically work partly because cancelling feels like losing something you already have.
How to avoid the endowment effect
- Ask the buyer's question: if you did not own this, how much would you pay for it today? That number is a better guide to its value to you.
- Use market evidence — comparable sales, resale prices — when selling a home, car or business, rather than your own sense of its worth.
- Be wary of free trials and 'try before you buy' offers that are designed to make cancelling feel like a loss.
How to design for it (nudge strategy)
Let people experience ownership before purchase — free trials, test drives, home try-ons — and present upgrades as keeping what users have already 'unlocked'.
Ethical use: design for choices people would endorse on reflection — a nudge, not sludge. Be transparent and keep opting out easy.
Key studies
Mug owners asked roughly twice what non-owners would pay, and trading volume was far below prediction.
Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). Experimental tests of the endowment effect and the Coase theorem. Journal of Political Economy, 98(6), 1325–1348. DOI →
Most people kept whichever item — mug or chocolate bar — they had been given.
Knetsch, J. L. (1989). The endowment effect and evidence of nonreversible indifference curves. American Economic Review, 79(5), 1277–1284.
Experienced traders at sports-card shows displayed little or no endowment effect.
List, J. A. (2003). Does market experience eliminate market anomalies? Quarterly Journal of Economics, 118(1), 41–71. DOI →
Under certain procedures designed to remove misunderstandings, the WTA–WTP gap for mugs largely disappeared.
Plott, C. R., & Zeiler, K. (2005). The willingness to pay–willingness to accept gap, the 'endowment effect,' subject misconceptions, and experimental procedures for eliciting valuations. American Economic Review, 95(3), 530–545. DOI →
Key research
- Prospect Theory: An Analysis of Decision under RiskDaniel Kahneman, Amos Tversky · Econometrica (1979)
Related biases
Endowment Effect: frequently asked questions
What is the endowment effect?
The endowment effect is valuing something more just because you own it. People typically ask much more to sell an item than they would pay to buy the same item.
What is the mug experiment?
In studies by Kahneman, Knetsch and Thaler (1990), students randomly given a coffee mug asked about twice as much to sell it as other students offered to pay, even though the mugs were identical.
What causes the endowment effect?
The main explanation is loss aversion: giving up an owned item feels like a loss, and losses weigh more than equivalent gains. Psychological ownership and attachment may also contribute.
How is the endowment effect related to loss aversion?
It is loss aversion applied to possessions. Selling is coded as losing the item, buying as gaining it, and because losses loom larger, sellers demand more than buyers will pay.
Cite this page
Raja, P. (Ed.). (2026, 8 Oct 2026). Endowment Effect. Behavioral Economics Lab. https://www.behavioraleconomicslab.com/biases/endowment-effect