Loss Aversion Bias: Difference between revisions
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=== Endowment Effect === | === Endowment Effect === | ||
[[File:Endowment Effect.png|alt=Endowment Effect|thumb|'''Figure 2'''. The grass is always greener on the other side of the fence with the Endowment Effect.]] | |||
When people own something, they begin to value it more than before they owned it. If asked to part with it, they feel the loss more acutely than the gain of receiving its equivalent in money or another item. Thus, the overvaluation of owned items (endowment effect) is a direct consequence of the desire to avoid the feeling of loss (loss aversion). | When people own something, they begin to value it more than before they owned it. If asked to part with it, they feel the loss more acutely than the gain of receiving its equivalent in money or another item. Thus, the overvaluation of owned items (endowment effect) is a direct consequence of the desire to avoid the feeling of loss (loss aversion). | ||
In essence, loss aversion provides the emotional basis for why people experience the endowment effect. It's the underlying reason why ownership increases the value placed on items, as owners anticipate the potential loss of that item and weigh it more heavily than its acquisition. | In essence, loss aversion provides the emotional basis for why people experience the endowment effect. It's the underlying reason why ownership increases the value placed on items, as owners anticipate the potential loss of that item and weigh it more heavily than its acquisition. | ||