Endowment Effect

In behavioral economics, the endowment effect (also known as divestiture aversion) is the hypothesis that a person's willingness to accept (WTA) compensation for a good is greater than their willingness to pay (WTP) for it once their property right to it has been established. People will pay more to retain something they own than to obtain something owned by someone else—even when there is no cause for attachment, or even if the item was only obtained minutes ago. This is due to the fact that once you own the item, foregoing it feels like a loss, and humans are loss-averse. The endowment effect contradicts the Coase theorem, and 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, a hypothesis which underlies consumer theory and indifference curves.

Read more about Endowment EffectExamples, Background, Criticisms of The Endowment Effect, Implications of The Endowment Effect

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... deviation from what is normatively expected can be characterized by Ambiguity effect – the tendency to avoid options for which missing information makes the probability seem "unknown." Anchoring or focalism ... Backfire effect – when people react to disconfirming evidence by strengthening their beliefs ... Bandwagon effect – the tendency to do (or believe) things because many other people do (or believe) the same ...
Implications of The Endowment Effect
... Herbert Hovenkamp (1991) has argued that the presence of an endowment effect has significant implications for law and economics, particularly in ... He argues that the presence of an endowment effect indicates that a person has no indifference curve (see however Hanemann, 1991) rendering the neoclassical tools of welfare ... The endowment effect has also been raised as a possible explanation for the lack of demand for reverse mortgage opportunities in the United States (contracts in which a home ...

Famous quotes containing the words effect and/or endowment:

    Ignorant kindness may have the effect of cruelty; but to be angry with it as if it were direct cruelty would be an ignorant unkindness.
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