An Analysis of Endowment and Its Applications in Behavioral Economics

Abstract

The endowment effect has many applications in behavioral economics and consumer psychology. This research demonstrates the association between the endowment, used car pricing, and takeover premiums based on existing literature and statistical data. This can help the used car companies managers set an operable price for the buyers to improve turnover. At the same time, the article also discusses the application of the endowment effect in employee management. The result shows that the endowment effect means that when people own an item, regardless of its market value, they always overestimate its value. The sellers pricing in the used car market is influenced by the endowment effect, resulting in a higher price than the reference point (a neutral reference price formed by time of use, mileage, and original price). Endowment effects in M&A (mergers and acquisitions) behavior have a significant positive explanatory effect on M&A premiums. In addition, companies can also use the endowment effect appropriately when managing employees to increase employee loyalty.