Here's the psychological reason most people overvalue things they already own

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used car lot

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The car's owner probably places a higher value on it than the buyer, a phenomenon that's explained by the endowment effect.

Behavioral economists have pointed out dozens of ways in which human behavior deviates from standard economic theory.

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As it turns out, our decisions and behavior aren't always rational, but are instead heavily influenced by emotions and cognitive blind spots.

One of the most well-known examples is the endowment effect, which describes our tendency to value things more highly when we already own them. If I'm trying to sell you my car, I might think it's worth $10,000, while you might think it's only worth $7,000.

The endowment effect was first identified by economist Richard Thaler in the 1970s. Thaler gave the example of a man who bought a case of wine in the late 1950s for about $5 a bottle. A few years later his wine merchant offers to buy the wine back for $100 a bottle and the man refuses, even though he's never paid more than $35 for a bottle of wine.

In 1990, Thaler, along with Daniel Kahneman and Jack Knetsch published experimental research that illustrated the power of the endowment effect.

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For the study, college students were randomly assigned to one of three conditions: seller, buyer, or chooser. Sellers were given a university mug and asked if they would sell it for between $0 and $9.25. Buyers were asked if they would purchase the mug for a price in that range. Choosers were given the option at each price to choose between a mug and the same amount of cash.

Results showed that sellers (who already owned the mugs) placed a significantly higher value on the mugs than the other two groups did. Specifically, they required a median sum of $7.12 to give up the mug, while choosers said the mug was worth a median of $3.12 and buyers were willing to pay a median of $2.87.

The question is: What exactly causes the endowment effect?

Behavioral economists initially proposed that the effect occurred because humans are naturally loss-averse. We place more significance on losses (like giving away the car we've had for a decade) than we place on gains (like buying that used car).

writing pen

A. Birkan ÇAGHAN/Flickr

Sellers who'd experienced a threat to their identity placed a higher value on the pen.

More recent research suggests that ownership of an item creates a link between that item and our identity.

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In 2012, Sara Loughran Dommer and Vanitha Swaminathan had undergrads role-play a transaction around a ballpoint pen. Specifically, "sellers" were given pens and asked whether they would prefer to keep the pen or exchange it for a cash amount between $0.25 and $10.00. "Buyers" saw the pen and decided whether to take the pen or a cash sum in that range.

Before the role play, experimenters asked some students to imagine a past relationship in which they felt unloved and write about their thoughts and feelings. Others wrote about an average day.

Results indicated that sellers who'd thought about rejection placed a higher value on the pen than students who'd written about an average day. But self-threat did not have the same effect on buying prices.

The researchers write: "After a social self-threat, individuals likely have strong possession-self links because possessions can enhance the self and help individuals cope with the threat." In other words, we may have a hard time separating from things once we feel like they're part of us.

Whether you're involved in a transaction for a mug, a pen, or a car, it helps to be aware of the endowment effect and its influence on our behavior. If you can take a step back and realize why an item is so meaningful to you or to someone else, you may have an easier time negotiating a favorable outcome.

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