The endowment effect is the theory that people often demand much more to give up an object than they would be willing to pay to acquire it. Economists first believed that when the market clears, goods will be owned by the people who value them most. However, the findings of Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler seem to suggest that this notion false, as it did not take place in any of their four trials. This is because the reservation price of buyers and sellers are not usually met; therefore, limits trades. In fact, the median selling price was double the median buying price.
In an example given by the authors, students were given mugs and pens, valued at $6 and $3.98 respectively. The experiment ran in 4 markets, using the same procedures as an earlier test, but only one of the markets would be chosen to set the parameters for the market-clearing price. Since the mugs were assigned at random to half the population (N=22) we would expect a 50% exchange of goods between “mug lovers” and “mug haters”. The results of the experiment showed that this does not occur. In the four markets, mugs were traded 4, 1, 2, and 2 times while pens were traded 4, 5, 4, and 5 times. The median owner was willing to sell for $5.25, while the median buyer was unwilling to pay more than $2.2-5-$2.75.
I find this result particularly interesting because the store value of the mugs was originally $6. Therefore, I would have believed that the buyers would be willing to pay more than 50% of the mug's original value.
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