Endowment effect

From Citizendium
Jump to navigation Jump to search
This article is a stub and thus not approved.
Main Article
Related Articles  [?]
Bibliography  [?]
External Links  [?]
Citable Version  [?]
This editable Main Article is under development and subject to a disclaimer.

The endowment effect is a phenomenon where possession of, or endowment with, a good or service increases the value one places on that good or service. In other words, we are more willing to forgo acquiring something new than to part with something equivalent that we already have. The concept was introduced by Richard Thaler.

The endowment effect is measured in terms of a WTA/WTP gap. Willingness To Accept (WTA) is the amount of money one is willing to accept to part with a good or service one already owns, while Willingness To Pay (WTP) is the amount of money one is willing to pay in order to acquire the good or service. If the endowment effect is operational, there is a positive WTA/WTP gap: one needs more money to part with something than one is willing to spend to acquire it.

The endowment effect is closely related to the concept of loss aversion introduced by Daniel Kahneman and Amos Tversky: the degree of negative emotion felt at a loss exceeds the degree of positive emotion felt at a gain.