The Endowment Effect

Out on the road today I saw a Deadhead sticker on a Cadillac
Little voice inside my head said
Don't look back, you can never look back.
--Don Henley

The endowment effect (Thaler, 1980), also known as status quo bias, is the general phenomenon of valuing a good more once it is owned. After I take property into my possession, I will demand more to give it up than I would pay to acquire it.

The endowment effect is more prominent for goods that we plan to own or use rather than those to be traded or exchanged.

Examples are widespread. A few that come randomly to mind:

a) Wanting to hold onto stocks once purchased because you are now an 'owner' in the company. Gekko understood the endowment effect when he warned Bud Fox to avoid getting "sentimental about stocks."

b) Being reluctant to part with items in your possession even if you don't use them often, such as old clothes.

c) Not being able to shake past memories that are good. Nick Carraway: "You can't repeat the past." Gatsby: "Why of course you can."

d) Negotiations. Neither side wants to surrender it already has.

e) Entitlements. People want to keep transfer payments that are already streaming their way. One reason why entitlement 'reform' is so difficult.

Essentially, the endowment effect is an expression of loss aversion. Letting go of a possession is viewed as a loss, and the pain of letting go is to be avoided.

Reference

Thaler, R. 1980. Toward a positive theory of consumer choice. Journal of Economic Behavior and Organization, 1: 39-60.