“It is preoccupation with possessions, more than anything else, that prevents us from living freely and nobly.”
-Bertrand Russell
Welcome to another installment in my ongoing series called “Money On My Mind,” where I publish articles to help you deal with the psychological aspects of managing money. Check out past editions of the series here.
We continue our exploration of cognitive biases by unpacking the endowment effect.
Continue reading to learn:
- Why we have emotional attachments to the things, we own.
- How those attachments can hurt our finances.
- How culture and gender impact the endowment effect
- The impact the endowment effect can have on your career
- Three tips to avoid the endowment effect
What is the Endowment effect?
Richard Thaler defined the endowment effect as the “underweighting of opportunity costs.”
One of the most important lessons in economics is that every decision has an opportunity cost; what we don’t get by choosing one action over another.
Let’s say you are thinking of selling your house. Similar homes in your neighborhood are selling for an average of $500,000. But you decide to list your house for $600,000.
You tell yourself it’s because of the new renovations or that you have a slightly bigger backyard than your neighbors. In reality,