endowment effect

A cognitive bias Charlie Munger names and defines explicitly inside the Excessive Self-Regard Tendency passage of Charlie Munger — The Psychology of Human Misjudgment. Munger observes that “even man’s minor possessions tend to be overappraised. Once owned, they suddenly become worth more to him than he would pay if they were offered for sale to him and he didn’t already own them.” He gives this “overappraise-your-own-possessions phenomenon” its psychological name — the endowment effect — and folds it into his broader point that man “mostly misappraises himself on the high side, like the ninety percent of Swedish drivers that judge themselves to be above average,” over-rating not just himself but his spouse, his children, and his belongings. Munger adds that “all man’s decisions are suddenly regarded by him as better than would have been the case just before he made them” — ownership of a decision, like ownership of an object, inflates its perceived value.

The concept sits in the same family as Loss Aversion, which Kyle’s reading layer maps onto Munger’s Deprival-Superreaction examples elsewhere in the talk (the $100 lost from a wallet stinging a man with $10M in his brokerage account).

Context: The endowment effect is a well-documented behavioral-economics bias (associated with Richard Thaler and the Kahneman–Knetsch–Thaler experiments) in which people demand more to give up an object than they would pay to acquire it — valuing things more simply because they own them. It is closely related to loss aversion. (General background.)

Where this appears

• Charlie Munger — The Psychology of Human Misjudgment — Munger names and defines the endowment effect within the Excessive Self-Regard Tendency section (possessions worth more once owned; decisions rated better once made).