Don't Let 'Endowment Effect' Hurt Finances

First theorized by Richard Thaler almost 30 years ago and supported by many experiments, the endowment effect shows that people believe something they own is worth more than the exact same thing they don't. What it means for those who need extra money in a poor economy is that they may end up hurting their finances unless they come to terms with the endowment effect.

An example of the endowment effect is housing prices. Many homeowners feel the value of their house is worth a certain amount and set the price to reflect this, but with the current economic turmoil and falling housing prices, the price is higher than what buyers are willing to pay. Prospective buyers simply shake their heads and move on to the next property.

Everyone wants to get paid for what their stuff is worth. But be careful of the endowment effect, which can have the following negative consequences.

You sell later than you should: An item loses value over time, with the exception of collectibles. If you realize you don't need something, selling it immediately will put more money in your wallet. The endowment effect encourages you to wait longer to try and get a better price. When it comes to a house, even a few months can mean thousands of dollars lost.

You keep too much junk: If you have a lot of junk lying around the house, it's possible you aren't willing to get rid of it because of the endowment effect. The items end up sitting in your house even though you won't ever use them again. The longer you hold on to them, the greater the likelihood you will throw them out or give them away.