What is the endowment effect and why is it bad for investing?

  1. Person A had bought a ticket for the Champions League final for $200 half a year before the games started. One month before the final the price of the ticket soared to $2000. Having learned that Person A had such a ticket, his neighbor offered him to buy it out for the new price. However, Person A declined the offer. In fact, he had a chance to earn $1800 but it didn’t feel like enough. This is a typical case of the endowment effect. The ticket will bring his owner unforgettable emotions that cannot be measured in money. Before having bought the ticket the Person A was only ready to pay $200 for it. However, after becoming the lucky owner of it he estimated it as something of a much higher value.
  2. Person B had bought a coin collection at a flea market on a business trip. For some time after coming back home, he used to spend his nights looking at the coins and enjoying the purchase. Eventually, he lost interest in the collection and it was left on a shelf to gather dust. He wouldn’t use it for years. One day while surfing the Net he found out that the price of his collection had increased by 50 times. Will he sell the collection? We strongly doubt it. And even if he does, he will most likely be belonging for the good old days when he was happy looking at his coins.
  3. Senior C decided to move to her cottage house so she could make her living by renting out her flat in Moscow. However, she can’t let it for rent at a market price as the flat is furnished with old-fashioned furniture from the 1970s. She doesn’t want to move the furniture to her cottage house nor does she want to get rid of it as this furniture once was in huge deficit.

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