The endowment effect is an emotional attachment to an object in possession whereby the individual asks for a higher value than what they would be willing to pay for it. In other words, an individual’s willingness to accept (WTA) compensation to sell a good exceeds her willingness to pay (WTP) a similar good.
The root of the endowment effect can be similar to status quo bias – the loss aversion.
In the famous experiment carried out by Kahneman et al., students of Simon Fraser University were randomly grouped into three – sellers, buyers and choosers. Sellers were handed coffee mugs that they could sell for prices between $0.25 – $9.25. Buyer groups have the option to buy them at those sets of prices. The people in the chooser group have no mugs but can choose between mugs or that amount of money at the selling prices.
You may notice that the chooser group is equivalent to the seller but without possession of the good, and therefore, the ideal control of the experiment. The results were startling: the average asking price for the sellers was twice ($7.12) than what the chooser ($3.12) and buyer ($2.87) would have settled for.
Kahneman; Knetsch; Thaler, “The Endowment Effect, Loss Aversion, and Status Quo Bias”, Journal of Economic Perspectives, 5(1), 1991
