Unveiling the Endowment Effect: Understanding Its Significance and Applications

Abstract

The endowment effect is a widespread prevalent cognitive bias that affects peoples decision-making process in various aspects. This phenomenon is mainly because of peoples cognitive biases towards certain things. The primary manifestation of this cognitive bias is that when a person owns an item or asset, his/her evaluation of the value of the item or asset is more significant than when he does not own the item or asset. Thus, this research paper aims to unveil the significance and applications of the endowment effect and its relationship with risk aversion. Meanwhile, the paper will also explore how individuals tend to assign higher value to items they own. To conduct this research, a comprehensive literature review was performed to examine existing studies on the endowment effect, loss aversion and related behavioural economics theories. Real-life examples and case studies were also analyzed to illustrate the practical implications of these cognitive biases. The findings of this research paper demonstrate that the endowment effect and loss aversion are deeply ingrained in peoples decision-making process, leading individuals to make emotional rather than rational choices.Understanding the endowment effect is crucial for making informed decisions, as it allows individuals to distinguish between subjective and objective thinking. While it may not eliminate these biases from decision-making processes, strategies such as seeking outside perspectives, considering alternatives, and conducting thorough analyses may mitigate the endowment effects influence.