Behavioural traps: The endowment effect
We often tend to put a much higher value on things that we already own compared with what we would be prepared to pay for them, and this is known as the 'endowment effect'. We value our possessions more just because they're ours and so we overestimate their worth, to the point that we would pay far more than their actual price!
We need to try NOT to give too much importance or value to things that we can easily replace: for example, even though 'we're comfortable' with 'our' bank, it would be better to switch to another bank if it offers a financial product or service that is more suited to our specific needs.
To find out more, watch our video on this topic.
When we make financial decisions it is easy to fall into behavioural traps; in other words, we are vulnerable to bias. What are these traps? Errors that we commit when we make decisions that are caused by unconscious decision-making processes, or cognitive biases. Such biases affect how we think and how we interpret and use information.
The eight videos - one introductory video and seven focusing on various topics - of the series on behavioural bias describe some very common mistakes we all make: present bias, mental accounting, diversification bias, the framing effect, the overconfidence effect, representativeness bias and the endowment effect.
They were produced in partnership with Università Ca' Foscari Venice, with the involvement of its students and professors. Each video starts with a brief introduction of the key concepts, then offers practical examples and presents experiments done on students and ordinary people to demonstrate these concepts in action.