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Wednesday, 15 June 2016

How the endowment effect stops us from letting go

We tend to undervalue things we don't own and overvalue those we already own.

Think of an item of clothing you bought but that still has the tags on, a book on your shelf that you’ve never read, or a gift someone gave you that you didn’t ask for. Whether or not they add value and meaning to your life, subconsciously, you will be more attached to them simply because you own them.
"A wine-loving economist we know purchased some nice Bordeaux wines years ago at low prices. The wines have greatly appreciated in value, so that a bottle that cost only $10 when purchased would now fetch $200 at auction. This economist now drinks some of this wine occasionally, but would neither be willing to sell the wine at the auction price nor buy an additional bottle at that price.

Thaler (1980) called this pattern - the fact that people often demand much more to give up an object than they would be willing to pay to acquire it - the endowment effect."

Rightly or wrongly this can cause us to hold on to possessions or commitments that, honestly, don't bring us value or meaning and can make letting go of them, all the harder to do.

A way to overcome this is to ask yourself - if I didn't already own this, how much would I be willing to pay for it?

If you're unwilling to pay very much for an item you already own, or if it was a gift that you would never dream of buying, it may be time to sell or donate it onwards.

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