Sales Strategy, Risk Investment and Property Rights Allocation: Analysis Based on Endowment Effect

Abstract

The endowment effect suggests that people value what they have now and the status quo, and thereby want to avoid losing what they have or just step out of the comfort zone. Several scholars have identified and demonstrated that people’s utility is reduced by a given quantity of loss more than it is increased by an equal amount of gain. Due to the endowment effect, the decision-making process is out of balance, and are more likely to avoid harm rather than pursue profits. This paper reviews the concepts, experiments and applications of endowment effect and loss aversion theory in behavioral economics. Furthermore, it explains endowment effect using three economic applications of sales strategy, risk investment and property rights allocation. In all the three economic applications, people’s economic behavior totally conforms to the endowment effect: people buy things that they don’t need, make the investment irrationally, or bring trade frictions. Due to its commonness, endowment effect has been widely tested and applied, attracting heated discussion among academia research and policy regulators. In this sense, this paper also provides us a good understanding of endowment effect and behavior economics.