Psychologists first noticed the difference between the mainstream WTP and the WTA in the 1960s. [15] [16] However, the term endowment effect was first invented explicitly by economist Richard Thaler in reference to the underweight of opportunity costs and the inertia introduced into a consumer`s selection processes when goods included in his endowment are valued more than goods that are not. [17] In the following years, extensive studies on the foundation effect resulted in a multitude of interesting empirical and theoretical results. [11] David Gal proposed a psychological representation of the inertia of the endowment effect. [20] [21] In this account, sellers charge a higher price to part with an item that buyers are willing to pay for because none of them have a clear and accurate valuation of the property and therefore there is a price range on which neither the buyer nor the seller has much incentive to negotiate. For example, in the case of the classic experiments of Kahneman et al. (1990) (where sellers charged about $7 to part with their cup, while buyers were on average only willing to pay about $3 to buy a cup), it was likely that there was a price range for the cup ($4 to $6), which left buyers and sellers without much incentive to acquire or part with it. Buyers and sellers have therefore maintained the status quo through inertia. Conversely, a high price ($7 or more) significantly incentivized an owner to part with the cup. Similarly, a relatively low price ($3 or less) significantly prompted a buyer to buy the cup. The bias of the endowment effect also applies outside of finance. A well-known study that illustrates the foundation effect and has been successfully replicated begins with a college professor teaching a class with two sections, one that meets on Mondays and Wednesdays, and the other on Tuesdays and Thursdays.

The endowment effect refers to an emotional bias that causes individuals to value their own object higher, often irrationally, than its market value. Herbert Hovenkamp (1991)[37] argued that the existence of a foundational effect has important implications for law and economics, particularly with regard to the economics of well-being. He argues that the presence of a foundation effect suggests that a person does not have an indifference curve (see, however, Hanemann, 1991[23]), which renders the neoclassical tools of welfare analysis useless and concludes that the courts should instead use the WTA as a measure of value. However, Fischel (1995)[38] raises the counterpoint that using WTA as a measure of value would discourage a country`s infrastructure development and economic growth. The foundation effect significantly changes the shape of indifference curves[39] Similarly, another study focusing on the strategic redeployments of foundations analyzes how it is true that the well-being of economic actors could potentially increase if they changed their participation in foundations. Two ways in which attachment or self-association increases the value of a property have been proposed (Morewedge & Giblin, 2015). [3] An attachment theory suggests that property creates a non-transferable valetive association between self and good. The good flows into the owner`s self-image, becomes a part of his identity and imbues him with attributes related to his self-image. Self-associations can take the form of an emotional attachment to the good. Once a bond is formed, the potential loss of the property is perceived as a threat to the self. [1] A concrete example would be a person who refuses to part with a university t-shirt because he supports his own identity as an alumnus of that university. A second way in which property can increase value is through a self-referential memory effect (SRE) – the best coding and recall of stimuli associated with self-concept.

[27] People have a better memory for the property they own than for the property they do not. The self-referential memory effect for one`s own goods can therefore act as an endogenous framing effect. During a transaction, the attributes of a property may be more accessible to its owners than the other attributes of the transaction. Since most properties have more positive than negative characteristics, this accessibility bias should cause owners to rate their properties more positively than non-owners. [3] Huck, Kirchsteiger & Oechssler (2005)[30] hypothesized that natural selection can favor individuals whose preferences embody a founding effect, as it can improve the negotiating position in bilateral trade. In a small tribal society with a few alternative vendors (i.e. in which the buyer may not have the opportunity to switch to another seller), it may therefore be evolutionarily advantageous to have a predisposition to embody the foundation effect. This may be related to results (Shogren et al., 1994[24]) suggesting that the endowment effect is less severe when the relatively artificial sense of scarcity induced in experimental environments is reduced. Studies showing that the endowment effect is mitigated by exposure to modern money markets (e.g., hunter-gatherer tribes exposed to the market are more likely to show the endowment effect than tribes that do not)[31] and that the endowment effect is moderated by culture (Maddux et al., 2010[26]). The endowment effect has been observed since ancient times: Hanemann (1991)[23] develops a neoclassical explanation of the endowment effect that takes into account the effect without invoking the theory of perspectives. It has been suggested by Kahneman and colleagues that the staffing effect is partly due to the fact that once a person owns an item, abandoning it feels like a loss and people are reluctant to lose.

[5] They further suggest that the endowment effect, if seen as a facet of loss aversion, would therefore violate Coase`s theorem and has been described as incompatible with standard economic theory, which states that a person`s willingness to pay (WTP) for a good should be equal to his willingness to accept compensation in order to be deprived of the property. A hypothesis underlying the theory of consumption and indifference curves. However, these claims have been debunked, and other researchers argue that psychological inertia,[18] differences in the benchmark prices that buyers and sellers rely on,[4] and ownership (attribution of the item to itself), rather than loss aversion, are the key to this phenomenon. [19] Sellers can dictate a price based on the wishes of multiple potential buyers, while buyers can consider their own tastes. This can lead to differences between buy and sell prices, as the market price is usually higher than the idiosyncratic price estimate. According to this presentation, the foundation effect can be considered as an undervaluation for buyers in relation to the market price; or excessive prices for sellers compared to their individual tastes. Two new lines of study support this argument. Weaver and Frederick (2012) [4] presented the retail prices of the products to their participants and then asked them to indicate their purchase or sale price for these products. The results showed that sellers` ratings were closer to known retail prices than buyers`.

A second line of study is a meta-analysis of buying and selling lotteries. [28] A review of more than 30 empirical studies showed that selling prices were closer to the expected value of the lottery, which is the normative price of the lottery: therefore, the foundation effect coincided with the tendency of buyers to undervalue lotteries compared to the normative price.