Thursday, 21 March 2019 | 11:12 WIB

Deconstructing Human Irrationality through Behavioral Economics

Professor Richard H. Thaler (wikimedia)

Error Thinking # 2: Endowment effect

This effect essentially means you are too appreciative of excessive items you've bought or that you already have.

Once you buy or have something, you suddenly feel a sense of love for the item, and consequently you give a higher value than the market price or real value.

Suppose you have a new Honda Jazz. After a while, you want to resell it. You will most likely offer a much higher bid price than the market price. You who own the car tend to provide a higher price assessment than the actual market price.

Another example of endowment effect: You buy Telkom’s shares for example. After a few months it turns out the price dropped. But because of the effect of endowment effect, you do not immediately cut loss. You continue to overstate and justify your purchase, though the longer the price falls.

Another example: You are involved in a project. After a while this project is actually a loss, but you still invest the remaining energy, thoughts and funds to continue this losing project.

Why do not you cut right away? Because there is an endowment effect, you feel dear if the project is actually losing your losses in the middle of the road.

Endowment effect is what makes Nokia and Kodak’s business collapse.

They are caught by endowment effect: too much love their own products. Too proud and overstate his own product, so ignore the sudden changes around them.

Too much love will kill you. Apparently this romantic expression is true, which is proven through studies in behavioral economics science.