Endowment Effect’s Impact on people’s economic decisions

Abstract

This paper focuses on the endowment effect, a psychological bias first used by Nobel Prize-winning economist Richard Thaler in 1980. After completing extensive online and offline documentary research, I examined the psychology of the endowment effect in this paper. Additionally, I considered the perspectives of both buyers and sellers to explain why the endowment effect matters in terms of economic behaviors, and offered a few countermeasures to the bias, avoiding people from suffering losses as a result. I explored three different endowment effect applications, including the confiscation of farmers' land, the high cost of second-hand goods, and the use of free trials, based on my field research in rural China and the questionnaires and interviews I conducted. Looking at a real-world example in society, I identified the underlying causes of these economic decisions related to the endowment effect and then offered a few solutions that would benefit both sides of the equation. In the end, I came to the conclusion that a range of economic actions can be explained by the endowment effect. While sometimes it stands in people’s way in making reasonable economic decisions, some individuals can actually utilize the endowment effect in order to make a profit.