Why We Overvalue What We Own

(1) Traditional economic theory assumes that people assign a stable value to an object, regardless of whether they already own it. If you would pay a certain price for a coffee mug, the theory suggests, you should also be willing to sell the same mug for roughly the same price. Everyday experience, however, suggests otherwise, and for several decades psychologists and economists have tested this assumption in carefully designed experiments.

(2) In one well-known study, published in 1990 by Daniel Kahneman, Jack Knetsch and Richard Thaler, half of the students in a classroom were given a mug, while the other half received nothing. Those who owned a mug were asked for the lowest price at which they would sell it; the others were asked for the highest price they would pay. Since the mugs had been distributed at random, the two groups should, in theory, have valued them similarly. Instead, the owners typically demanded about twice as much as the potential buyers were willing to offer. Thaler had earlier given this pattern a name: the "endowment effect."

(3) The most common explanation draws on the idea of loss aversion, developed by Kahneman and Amos Tversky: losses tend to weigh more heavily in our minds than gains of equal size. For the owner, parting with the mug feels like a loss, whereas for the buyer, acquiring it is merely a gain. Other researchers have suggested that ownership itself creates a sense of attachment, so that an object becomes, in a modest way, part of a person's identity.

(4) The effect may have practical consequences. Home sellers often ask for prices that buyers consider unrealistic, and companies that offer free trial periods may be counting on the fact that customers who have begun to feel that a product is theirs will be reluctant to give it up. Nevertheless, the effect is not universal: it appears to be weaker among experienced traders, who are accustomed to treating goods as items to be exchanged rather than kept.

(1) Traditional economic theory assumes that people assign a stable value to an object, regardless of whether they already own it. If you would pay a certain price for a coffee mug, the theory suggests, you should also be willing to sell the same mug for roughly the same price. Everyday experience, however, suggests otherwise, and for several decades psychologists and economists have tested this assumption in carefully designed experiments.

(2) In one well-known study, published in 1990 by Daniel Kahneman, Jack Knetsch and Richard Thaler, half of the students in a classroom were given a mug, while the other half received nothing. Those who owned a mug were asked for the lowest price at which they would sell it; the others were asked for the highest price they would pay. Since the mugs had been distributed at random, the two groups should, in theory, have valued them similarly. Instead, the owners typically demanded about twice as much as the potential buyers were willing to offer. Thaler had earlier given this pattern a name: the "endowment effect."

(3) The most common explanation draws on the idea of loss aversion, developed by Kahneman and Amos Tversky: losses tend to weigh more heavily in our minds than gains of equal size. For the owner, parting with the mug feels like a loss, whereas for the buyer, acquiring it is merely a gain. Other researchers have suggested that ownership itself creates a sense of attachment, so that an object becomes, in a modest way, part of a person's identity.

(4) The effect may have practical consequences. Home sellers often ask for prices that buyers consider unrealistic, and companies that offer free trial periods may be counting on the fact that customers who have begun to feel that a product is theirs will be reluctant to give it up. Nevertheless, the effect is not universal: it appears to be weaker among experienced traders, who are accustomed to treating goods as items to be exchanged rather than kept.

(1) Traditional economic theory assumes that people assign a stable value to an object, regardless of whether they already own it. If you would pay a certain price for a coffee mug, the theory suggests, you should also be willing to sell the same mug for roughly the same price. Everyday experience, however, suggests otherwise, and for several decades psychologists and economists have tested this assumption in carefully designed experiments.

(2) In one well-known study, published in 1990 by Daniel Kahneman, Jack Knetsch and Richard Thaler, half of the students in a classroom were given a mug, while the other half received nothing. Those who owned a mug were asked for the lowest price at which they would sell it; the others were asked for the highest price they would pay. Since the mugs had been distributed at random, the two groups should, in theory, have valued them similarly. Instead, the owners typically demanded about twice as much as the potential buyers were willing to offer. Thaler had earlier given this pattern a name: the "endowment effect."

(3) The most common explanation draws on the idea of loss aversion, developed by Kahneman and Amos Tversky: losses tend to weigh more heavily in our minds than gains of equal size. For the owner, parting with the mug feels like a loss, whereas for the buyer, acquiring it is merely a gain. Other researchers have suggested that ownership itself creates a sense of attachment, so that an object becomes, in a modest way, part of a person's identity.

(4) The effect may have practical consequences. Home sellers often ask for prices that buyers consider unrealistic, and companies that offer free trial periods may be counting on the fact that customers who have begun to feel that a product is theirs will be reluctant to give it up. Nevertheless, the effect is not universal: it appears to be weaker among experienced traders, who are accustomed to treating goods as items to be exchanged rather than kept.