Endowment Bias: Why You Value What You Own More Than It's Actually Worth

You know that feeling when you are selling something on Craigslist and you think your used couch is worth $500, but nobody will pay more than $200? That is endowment bias in action. The moment you own something, it magically becomes more valuable in your mind.

This chapter covers one of the most well-documented biases in behavioral economics. And while the couch example is harmless enough, endowment bias in investing can cost you serious money.

The Coffee Mug Experiment

Pompian describes a classic experiment by researcher J. L. Knetsch that illustrates endowment bias perfectly.

They took 76 people and gave each one a coffee mug. Then they showed them some candy bars and offered to let them trade. Now, the researchers had already determined that this group was roughly split 50/50 on whether they generally preferred mugs or candy bars.

But when given the chance to trade their mug for a candy bar? 89% kept the mug.

Then they did the reverse. A second group of 87 people (also split about 50/50 in general preferences) received candy bars first and were offered mugs as a trade. 90% kept their candy bars.

Think about what this means. The preference had nothing to do with the actual objects. In both cases, people overwhelmingly preferred whatever they already had. Just owning something for a few minutes was enough to make them value it more than the alternative.

Knetsch concluded that people “weigh the loss of giving up their initial reference entitlement far more heavily than the foregone gains of not obtaining the alternative.” In plain language: losing what you have feels worse than missing out on something you could have.

How It Works with Investments

Standard economic theory says your willingness to pay (WTP) for something should equal your willingness to accept (WTA) compensation for it. If you would pay $100 for a bond, you should be willing to sell that same bond for $100.

But here’s the problem: that is not how people actually behave. Once you own an investment, you immediately start demanding more money to sell it than you would have paid to buy it. Ownership adds a phantom premium in your mind.

This shows up in two main ways:

Inherited securities. Someone leaves you stocks in their will. Your financial advisor looks at your portfolio and says these stocks do not fit your allocation. Logically, you should sell. But you cannot bring yourself to do it. It feels like a betrayal of the person who left them to you. Or you are uncertain about what the “right thing” to do is. Or you are worried about taxes.

Samuelson and Zeckhauser tested this directly. When investors were told to pick one of four investment options fresh, they distributed their choices across the options. But when told they had “inherited” one of the options and could switch without penalty, they overwhelmingly stuck with whatever they had been told was inherited.

Purchased securities. Even stocks you bought yourself become sticky. You paid $50 per share. The stock is now worth $50 per share (nothing has changed). Someone offers to buy it from you. Rationally, you should sell for $50. But many investors would demand more than $50, as if ownership itself added value. This leads to “decision paralysis” where people cannot bring themselves to sell anything they own.

The Two Root Causes

Pompian identifies two practical reasons why endowment bias grips investors:

Transaction cost aversion. People hold onto securities because they do not want to pay the commissions or taxes associated with selling. This is especially common with bonds. But here is the thing: a small commission is often a tiny price to pay for getting out of a bad investment. If your stock drops 20% and you did not sell because you wanted to avoid a $10 commission, you did not save money. You lost a lot of it.

Familiarity preference. You know how your current investments behave. You have watched them for months or years. Their patterns feel comfortable. Switching to something unfamiliar feels risky, even if the data says the unfamiliar option is objectively better. Familiarity adds a subjective premium to your existing holdings that has nothing to do with their actual value.

The Good News: Experience Helps

One of the most interesting studies Pompian covers is by Professor John List, who studied endowment bias in sports card trading markets. His finding? Experienced traders show significantly less endowment bias than inexperienced ones.

Professional sports memorabilia dealers showed almost no biased behavior. And people who were net sellers (who regularly parted with items) learned to overcome endowment bias faster than people who were net buyers.

This makes intuitive sense. If your job is to buy and sell things constantly, you cannot afford to get emotionally attached to every item in your inventory. You learn to evaluate things objectively because your livelihood depends on it.

The lesson for investors: the more you practice making rational buy and sell decisions, the less endowment bias will affect you. It is a skill you can develop over time.

What To Do About It

Pompian offers targeted advice for each manifestation of endowment bias:

For inherited securities: Ask yourself this question: “If I had received, as cash, the current value of this security, how much of that cash would I put into this same stock?” If the answer is zero or very little, then you know what to do. You can also think about the deceased person’s intent. Did Uncle John really want you to hold these specific shares forever? Or did he want you to be financially secure? Usually, it is the latter.

For purchased securities: Same trick works here. “If I had to convert my current holdings into cash and then start fresh, would I buy the same things in the same amounts?” If not, your current portfolio is driven by endowment bias, not by smart allocation.

For commission aversion: Do the actual math. Calculate the potential gains from switching to a better investment or the potential losses from staying in a bad one. Then compare that to the commission. In almost every case, the commission is trivial compared to the potential upside of making the right move.

For familiarity preference: Instead of going all-in on the unfamiliar new investment your advisor recommends, start with a small position. Get to know it. Watch how it behaves. Build familiarity gradually. This respects your comfort zone while still moving you in the right direction.

My Take

I think endowment bias is one of those biases that feels completely justified when you are experiencing it. “Of course this stock is worth holding. I own it for a reason.” But that is exactly the trap. The reason you bought it might no longer be valid. The market has changed. The company has changed. You have changed.

I see this in the tech world all the time. Engineers get attached to their code, their frameworks, their tools. “We have always used this database.” “This is our architecture.” And they resist changes that would objectively make things better, simply because they are already invested in the current approach.

The coffee mug experiment is so elegant because it strips away all the rationalizations. Nobody can argue that a coffee mug they held for five minutes has special sentimental value. And yet, 89% of people acted as if it did. That is how powerful endowment bias is.

The question to keep asking yourself: “Would I buy this today, at this price, in this amount?” If you would not, you probably should not be holding it.

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This is part of a series retelling “Behavioral Finance and Wealth Management” by Michael M. Pompian. Start from the beginning.