In behavioral economics, the endowment effect (also known as divestiture aversion) is the hypothesis that a person's willingness to accept (WTA) compensation for a good is greater than their willingness to pay (WTP) for it once their property right to it has been established. People will pay more to retain something they own than to obtain something owned by someone else—even when there is no cause for attachment, or even if the item was only obtained minutes ago. This is due to the fact that once you own the item, foregoing it feels like a loss, and humans are loss-averse. The endowment effect contradicts the Coase theorem, and was described as inconsistent with standard economic theory which asserts that a person's willingness to pay (WTP) for a good should be equal to their willingness to accept (WTA) compensation to be deprived of the good, a hypothesis which underlies consumer theory and indifference curves.
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Famous quotes containing the words endowment and/or effect:
“I wish more and more that health were studied half as much as disease is. Why, with all the endowment of research against cancer is no study made of those who are free from cancer? Why not inquire what foods they eat, what habits of body and mind they cultivate? And why never study animals in health and natural surroundings? why always sickened and in an environment of strangeness and artificiality?”
—Sarah N. Cleghorn (1976–1959)
“Ignorant kindness may have the effect of cruelty; but to be angry with it as if it were direct cruelty would be an ignorant unkindness.”
—George Eliot [Mary Ann (or Marian)