Definition
The endowment effect causes people to demand more to sell an asset they own than they would pay to acquire it. This creates a gap between willingness to pay and willingness to accept. In investing, it leads to holding positions longer than warranted because the act of ownership increases perceived value. The effect is stronger for assets with emotional attachment.
lightbulb Example
An investor owns a stock at $50 and wouldn't sell it for less than $55, but if they didn't own it, they wouldn't buy it above $45. This $10 gap (endowment effect) means they're effectively holding an asset they wouldn't choose to buy at current prices.
verified_user Key Points
- Own assets valued higher than identical unowned ones
- Creates gap between buy and sell prices
- Leads to holding positions longer than warranted
- Stronger for emotionally significant holdings