The Endowment Effect

Shopping for and owning things are exciting and emotional experiences. We take time and energy thinking about what to buy and the role it will play in our lives. In this Page One Economics®: Focus on Finance article, we look at the endowment effect—how we place more value on items we own than on items we don’t.

The endowment effect is a concept that is important to both sellers and consumers.

  • As a consumer, it is essential to keep in mind the value an item will add to your life before purchasing it. Stores are filled with items that we imagine owning to add joy or value to our lives. Spending involves making decisions and considering the opportunity cost—the value of the next-best alternative when a decision is made; it’s what is given up.
  • As a seller, removing your emotional attachment to material possessions can help you make more accurate assessments of how much your items are truly worth. If you decide to sell an item, realize that buyers will not consider the emotional investment you have made in the good.

Teachers: Visit the Reading Q&As in our Econ Lowdown Teacher Portal to find the high school/college and middle school teacher editions (including an answer key) for this issue; to assign an online version of the student materials; and to collect student scores on the questions.

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Education Level: 6-8 9-12 College Non-educators
Subjects: Personal Finance
Concepts: Decision-Making Opportunity Cost Spending Wants
Resource Types: Publication Lesson
Languages: English
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