Definition
Endowment Effect
The endowment effect is the tendency to value something more highly simply because you own it, making you reluctant to sell at a fair market price.
Homeowners routinely demand more for their property than buyers will pay, partly from emotional attachment and partly because ownership itself inflates perceived value. The same effect makes investors cling to inherited shares or a 'pet' stock long after the fundamentals have soured.
The endowment effect overlaps with loss aversion — parting with something you own feels like a loss. To counter it, ask the reverse question: 'If I did not already own this asset, would I buy it today at the current market price?' If not, attachment, not value, is keeping you in.
Related terms
- Loss AversionLoss aversion is the well-documented tendency for the pain of a loss to feel roughly twice as powerful as the pleasure of an equivalent gain.
- Disposition EffectThe disposition effect is the tendency to sell winning investments too early to bank a gain, while holding on to losing investments too long to avoid realising a loss.
- Status Quo BiasStatus quo bias is the preference for keeping things as they are, leading people to stick with default options and avoid changes even when better alternatives exist.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.