The Endowment Effect: Why We Overrate the Value of Stuff

Macbook air

Problem-solving objects are highly valued.

Selling and buying stuff at the second-hand market has become a trend. The possibility of saving loads of money is appealing to us. But too often, we are confronted with sellers, who we think overrate the value of their stuff.

This is in fact frustrating, when we think we know the exact price of the product. A social experimental study has showed that overrating might be due to a psychological process called The Endowment Effect.

The effect has been studied by Morewedge and colleagues (2009). In earlier studies, it was assumed that people overvalue because they are afraid of losing money in a trade, but in this study, it was found that people overvalue due to an affective component that co-exists with owning something.

The endowment effect is more profound when the object is, somehow, associated with the self (Tom, 2004). For example, owning something that you have received from your partner for a meaningful reason, or someone significant to you, will increase the effect.

The objects that you value the most is often something that contributes to solving problems in everyday life, such as computers and cell phones etc. (Loewenstein & Issacharoff, 2006). I have found Apple products to be very expensive at the second-hand market, even 3 years old products, and perhaps the endowment effect accounts for this.

Of course, the effect is less pronounced among frequent traders (List, 2003), and this is no surprise, since these traders exchange many products each day.

The above-mentioned studies can plausibly explain why some people accumulate stuff over the years (see hoarding disorder). Perhaps it is because of the feelings that they attribute to the objects. Being the owner of something is nice, having an object that solves a problem is nice, and having an object that you feel attached to is nice.

All these factors will make the probability of selling or abandoning a object less likely, or the price will at least be unreasonable.

Photo: Randomix