Adonis Diaries

This Endowment effect

Posted on: October 26, 2014

This Endowment effect

Why do we consider what we own to be more valuable as soon as we get possession of?

Though we bargained hard considering the “property” as far less valuable than what it is?

Why do you tend to cling to things that can be sold at good prices, and end up cramming every empty space in your house and feeling terrible that you have no more space for new acquisitions?

We are better at collecting properties than at casting them off

And we want to charge more than we are willing to spend on acquired objects.

It looks like Emotional attachment systematically adds a few zeros to your selling price.

For example, if group A of people are given mugs to take home or to sell, and another group B who are Not given mugs are asked to buy mugs from group A.

We could assume that 50% of group and 50% of group B would be willing to trade.

It turned out that far less than 50% in both groups were willing to trade. Why?

People in group A hiked the market price and people in group B wanted to buy below the market price.

Associated with Endowment tendencies is Winner’s Curse in auctions.

You keep bidding higher than the market value simply because you feel that you are participating in the ownership, even if you don’t get the property.

Warren Buffet warned “Just never go to auctions. Period” Why?

Most often, the winner in the bidding contest game ends up going bankrupt pretty soon.

For example, if you were unlucky and were allowed to go through all the stages of a selection process, the hurt in the final rejection is much bigger than if you were rejected outright in the initial phases.

Endowment is a broader term for inheriting properties. Most the 10% richest people earned their wealth from inheritance and they control 80% of the world wealth

Read: “The Art of Thinking Clear”

 

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