What Is Endowment Effect? Definition And Examples

Reading Time: 8 minutes

Psychological biases rather than objective assessments often influence people’s perceptions of value. One such bias, the endowment effect, is crucial in how individuals and consumers make decisions. 

This psychological phenomenon suggests that people value objects more simply because they own them. 

Understanding and leveraging the endowment effect can significantly impact users’ engagement with products and services in the context of UX design, product strategy, and consumer behavior.

This article from Design Journal explores the endowment effect bias, its psychology, and examples in action.

What is endowment effect?

The endowment effect is a cognitive bias in which individuals value something more highly merely because they own it. 

Economist Richard Thaler first introduced this effect in 1980. It challenges traditional economic theories that assume people always make rational decisions based on an objective valuation of goods.

At its core, the endowment effect reveals that ownership creates a psychological attachment to objects, leading to an overvaluation of personal belongings. 

This means that people often demand a higher price to sell an item than they would be willing to pay to acquire it.

Other types of Cognitive bias that you need to pay attention while designing:

• Confirmation Bias
• Hindsight Bias
• Anchoring Bias
• Halo-Effect
• Self-Serving Bias

Endowment effect definition

The endowment effect is a psychological bias in which individuals assign more excellent value to goods, services, or objects simply because they own them. This results in a reluctance to part with them at a fair market price.

This phenomenon is particularly prominent in behavioral economics, demonstrating how emotions and psychological attachment override pure economic rationality.

Endowment effect psychology

From a psychological perspective, the endowment effect is deeply rooted in loss aversion, a concept introduced by Nobel laureates Daniel Kahneman and Amos Tversky. 

Loss aversion suggests that people experience the pain of losing something more intensely than the pleasure of gaining something of equal value.

For example, if a person is given a coffee mug as part of a study, they are likely to demand more money to sell it than they would be willing to pay for it if they had not received it in the first place. 

This happens because ownership heightens emotional attachment and perceived usefulness, making the item more valuable to the owner.

Scientific studies on the endowment effect:

• In this classic study, Kahneman, Knetsch, and Thaler’s Experiment (1990): Participants were randomly given coffee mugs. Later, those who received a mug were asked how much they would be willing to sell it for, whereas those without a mug were asked how much they would pay to purchase one. The results revealed that sellers consistently valued the mug at nearly double the price buyers were willing to pay.
• Johnson et al. (2007) examined the endowment effect in digital products and found that individuals valued digital possessions as strongly as physical ones. This study reinforces the relevance of this bias in modern digital product design.

Read Next on top product design trends to watch in 2025

How do designers apply the endowment effect?

Designers use the endowment effect to create stronger user engagement and retention by fostering a sense of product ownership. 

By thoughtfully designing the user experience, they can inspire users to form emotional connections with digital and physical products, enhancing perceived value and decreasing abandonment rates.

Encouraging early interaction

One of the most effective ways to create a sense of ownership is by encouraging early interaction. 

When users engage with a product personally, they develop a connection to it. This is why many onboarding experiences are crafted to encourage immediate action, such as setting preferences, selecting themes, or completing an introductory task. 

When users make small, personal decisions early on, they subconsciously feel the product is tailored to them. 

A great example is a music streaming app that asks users to select their favorite artists upon signing up. 

The app creates a sense of personal investment by curating a playlist based on these selections, making the user feel like the platform already understands their taste.

Enhancing personalization

Another powerful application of the endowment effect in design is enhancing personalization. 

When users can modify and customize product elements—changing themes, selecting a profile picture, or adjusting settings—they see it as an extension of themselves. 

The more a product reflects a person’s choices, the more attached they become. This is why platforms like design tools, social media apps, and gaming interfaces offer extensive customization options. 

Allowing users to choose between light and dark mode or reorganize their dashboard layout (dashboard design ideas) can significantly increase their attachment to the product.

Building investment over time

Over time, investing through continued use enhances this sense of ownership. 

When users see the time and effort they’ve put into a platform reflected at them, they are less likely to leave. 

Features such as progress tracking, usage statistics, and achievement badges foster a psychological commitment, making users feel they have something to lose if they stop engaging. 

For example, a language-learning app such as Duolingo employs streaks and milestone achievements to motivate users to return. 

Once users see their progress in visual form, quitting feels like abandoning something they’ve built.

Reducing perceived loss

In addition to fostering investment, designers also use the fear of loss to retain users. 

People naturally dislike losing valuable things, so UX strategies often highlight what users will forfeit if they stop using a product. 

This can be seen in subscription-based platforms that remind users of the benefits they’ll lose upon cancellation, such as saved data, exclusive content, or premium features. 

Cloud storage services, for example, frequently warn users that their files will be deleted after their subscription expires, making them reconsider their decision. 

Even free platforms use this strategy. Social media networks often remind users of the friendships, memories, and content they will lose access to if they deactivate their accounts.

Strengthening emotional ties

Beyond practical and functional strategies, designers strengthen emotional ties to products by crafting compelling narratives, branding, and messaging that resonate with users. 

When people feel emotionally connected to a product, they are far less likely to disengage. This is why successful brands tell stories that align with their audience’s values and aspirations. 

Apple, for instance, sells more than technology; it also sells creativity, innovation, and a sense of belonging to an exclusive community. 

Similarly, fitness apps often position themselves as companions in the user’s health journey, making it harder for users to detach without feeling like they are giving up on a part of their lifestyle.

Considerations while using endowment effect

The endowment effect can be a powerful tool in design and marketing. It enhances a user’s perception of ownership and increases their attachment to a product or service. 

However, it should be used responsibly to maintain trust and ensure a positive user experience. 

Here are key ethical considerations when utilizing this psychological principle:

Avoid manipulation

While the endowment effect can encourage users to commit to a purchase or subscription, overusing this cognitive bias may lead to unintended consequences. 

Practices such as creating artificial urgency, making cancellations difficult, or using deceptive tactics to create a false sense of ownership can result in buyer’s remorse. 

In the long run, these strategies may erode consumer trust and damage brand reputation. Instead, businesses should aim for ethical persuasion by genuinely showcasing a product’s value and benefits.

Transparency is key

A clear and honest communication strategy is crucial when implementing the endowment effect. 

Businesses should ensure that users fully understand the terms of ownership, free trials, return policies, and subscription renewals. 

Hidden fees or automatic enrollments without explicit consent can create frustration and a negative brand perception. 

Companies can foster trust and long-term customer loyalty by being upfront about pricing, commitment terms, and user rights.

Design for user benefit

The primary goal of leveraging the endowment effect should be to enhance user experience, not just to boost conversions. 

Personalization, free trials, and interactive previews can be powerful ways to create a sense of ownership while genuinely benefiting the user. 

For example, allowing customers to customize a product before purchase or providing trial periods that offer real value can increase engagement without resorting to manipulative tactics. 

Ultimately, the focus should be on enriching the user’s journey, making them feel valued, and reinforcing their confidence in their decisions.

Endowment effect examples

The endowment effect, a cognitive bias where individuals ascribe higher value to items merely because they own them, has been strategically employed in various design and marketing practices to enhance user engagement and conversion rates. 

Let’s delve deeper into each endowment effect example:

Subscription services with free trials

Platforms such as Netflix, Spotify, and Amazon Prime offer free trials to new users. 

This strategy lets users experience the service firsthand and helps them develop a sense of ownership over their curated playlists, watch histories, and personalized recommendations. 

Consequently, when the trial period concludes, users are more inclined to subscribe to retain access to these personalized features.

This approach leverages the endowment effect by making users reluctant to lose the value accumulated during the trial.

Further Reading: Endowment effect examples for retail marketing.

Customization in ecommerce

Retailers like Nike By You and Casetify enable customers to personalize products such as shoes and phone cases. 

This customization process fosters emotional attachment, as users invest time and creativity to design a product that reflects their preferences. 

This personalized involvement enhances the product’s perceived value, making customers more likely to complete the purchase and less likely to abandon their carts.

Further Reading: Shopify blog on ecommerce personalization.

Digital profiles and social media

Platforms like Facebook, LinkedIn, and Twitter encourage users to build comprehensive profiles, effectively creating a digital representation of themselves. 

As users invest time in curating their profiles, connecting with others, and sharing content, they develop a strong sense of ownership over their digital persona. 

This investment makes it challenging for them to leave the platform, as doing so would mean relinquishing a part of their online identity.

Further Reading: UI Patterns article on Endowment Effect

Loyalty programs and gamification

Brands such as Starbucks Rewards and Duolingo implement loyalty programs that track progress, award achievements, and offer rewards. 

These elements create a sense of investment, making customers feel they “own” their accumulated points and status. 

This perceived ownership encourages continued engagement, as users are motivated to maintain and enhance their standing within the program.

Further Reading: Design strategies to promote ownership.

Conclusion

The endowment effect is a powerful psychological principle influencing consumer behavior, product design, and marketing strategies. 

By understanding how ownership affects perceived value, designers can create experiences that enhance user engagement, improve retention, and deepen the emotional connection between users and products. 

However, ethical application remains crucial to maintaining trust and delivering genuine value to consumers.

As behavioral economics continues to shape digital experiences, responsibly leveraging the endowment effect psychology can help designers and businesses build products that users value emotionally and functionally.

Subscribe to our Design Journal for exclusive design principles and stay ahead with the latest trends.

Frequently asked questions

What is the endowment effect?

The endowment effect is a cognitive bias in which people assign higher value to things they own than to identical items they do not. This psychological tendency makes individuals reluctant to part with their possessions, even if the transaction is economically beneficial.

What is the best definition of the endowment effect?

The endowment effect is a phenomenon in behavioral economics in which individuals place a higher value on items simply because they own them. This often leads to irrational decisions about buying, selling, and negotiating.

What is an example of an endowment bias?

A typical example is when a person refuses to sell a concert ticket they own for a higher price than they originally paid, despite not planning to attend. The mere fact of ownership makes them perceive the ticket as more valuable than its market price.

Who introduced the endowment effect?

Richard Thaler, a Nobel Prize-winning economist, introduced the endowment effect in 1980. He observed that individuals tend to overvalue items they already possess, which contradicts conventional economic theories of rational decision-making.