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Endowment Effect

In a classic experiment by author and professor Dan Ariely, formerly at the Massachusetts Institute of Technology and now at Duke, and Ziv Carmon of international business school INSEAD, conducted while both were at Duke, behavior in valuing Duke University basketball tickets was assessed.29 Because tickets to games are hard to get, there is a tortuous process involving camping out in sometimes muddy fields and responding to random bullhorn announcements to be eligible to participate in a lottery for them.

For students who didn’t receive tickets at the end of this process, the most that they were willing to pay for a ticket was, on average, just under $170. For those who had won tickets, the average amount that they were willing to sell a ticket for was just over $2,400. In other words, the same good did not have a fixed value, even among a select population, but was worth more once it was “owned.”

This asymmetry of valuation has been called the endowment effect and arises in a number of situations, such as the difference between the value an owner places on her home versus what a prospective buyer may offer. A related effect is the choice-supportive bias, in which people rationalize selections that they have made or, perhaps even selections that have been made for them.

Not only do individuals overly value things the way they are—the status quo bias—they are willing to dig themselves in ever deeper—as with traders unwilling to take a loss—to protect the illusion ...