The Endowment Effect: Evidence of Losses Valued More than Gains

It has long been assumed that an individual’s valuations of a good are independent of his or her entitlement to the good. In the absence of a wealth (or income) effect, the maximum sum a person would agree to pay to obtain the good should be equal to the minimum amount the person would demand to give it up. The traditional view that, “. . . we shall normally expect the results to be so close together that it would not matter which we choose” (Henderson, 1941, p. 121) (when the usual income effects are allowed for) is central to conventional economic theory. This view also provides the working assumption of economic practice in such diverse situations as predicting market responses, assessing damages for environmental harms, and the design of public policies. There is, however, little or no empirical support for the empirical assertion of people’s symmetrical valuations of gains and losses and the presumed economic choices and behavior that results from them. Instead, tests consistently indicate that people value the loss of an entitlement more, and usually far more, than a fully commensurate gain and make choices accordingly. The early empirical evidence of a wide disparity between people’s valuations of gains and losses appeared in results of contingent valuation studies in which respondents were asked both how much they would be willing to pay to prevent a loss of an environmental or other amenity, and what sum they would demand to accept its loss. In perhaps the first of these, duck hunters were reported to be willing to pay an average of $247 to prevent the loss of an area of duck habitat but demanded $1044 to accept its loss (Hammack and Brown, 1974). Many similar results were subsequently reported of people’s valuations of environmental as well as other goods. Thaler (1980), for example, found that the minimum compensation people demanded to accept a .001 risk of death was one or two orders of magnitude greater than the maximum amount they would pay to avoid the same risk.