Abstract:

If the influence of income and trade cost were neglected, it is natural that people are willing to pay the same for something as they would require when sell it. However, Prof. Thaler discovered that it is not always the truth. It happens in daily life that individuals attach higher value to the things they own and thus their willingness to pay and willingness to sell for the very item may differ. Enlightened by the prospect theory, Thaler explained this anomaly by loss aversion and named it endowment effect. Following him, many researchers have made further exploration and argument from various angles. In this paper, we summarized previous work about endowment effect and list different explanations including loss aversion theory, psychological ownership theory, biased cognitive processing theory and evolution theory. This paper elaborated the interrelationship and disputes among the theories and finally gave the reason why endowment effect is not abnormal. Meanwhile, endowment effect plays an important role in guiding government work as well as business strategy making. Future research should enrich the theory framework, expand applications and strengthen the research in Chinese background.

Key words: endowment effect, loss aversion, ownership effect, cognitive bias, psychology, economics