Ever wondered why it’s so hard to sell your old car, even when you know it’s time to upgrade? Or why you’re reluctant to switch banks despite higher interest rates elsewhere? Welcome to the world of the endowment effect: a powerful psychological bias that causes us to overvalue what we already own.
Understanding the endowment effect isn’t just an academic exercise—it’s a real-world financial advantage. With Australians facing economic uncertainty in 2025, grasping how this bias shapes our decisions can help you sidestep costly mistakes and make more rational choices with your money.
What Is the Endowment Effect?
The endowment effect is a behavioural finance phenomenon where people assign more value to items simply because they own them. It’s the reason you might price your used laptop far above its market value or hesitate to let go of a lacklustre investment in your superannuation portfolio.
- Classic Example: In a famous experiment, participants given a mug demanded nearly double the price to sell it than what they were willing to pay to buy it.
- Australian Reality: Homeowners often overestimate their property’s worth, especially during cooling real estate markets like 2024–2025.
This bias isn’t limited to physical goods. It affects investments, insurance, and even everyday purchases—often leading us to hold onto things that no longer serve us financially.
How the Endowment Effect Impacts Australian Finances
In 2025, as inflation remains sticky and wage growth modest, Australians are being urged to review their finances with a critical eye. Yet the endowment effect can sabotage our best intentions:
- Property: Sellers often resist adjusting their price expectations to shifting market realities, leading to homes lingering unsold.
- Investments: Many investors hold onto underperforming shares or funds, convinced they’re “worth more” than the market suggests.
- Everyday Life: Australians are slow to switch bank accounts, mobile plans, or energy providers—even when better deals are available—because of a sense of ownership or familiarity.
The 2025 federal budget and new consumer protection initiatives have put extra focus on financial literacy and behavioural biases. ASIC’s recent consumer guidance notes that understanding biases like the endowment effect is key to better decision-making, especially as more Aussies face cost-of-living pressures.
Strategies to Outsmart the Endowment Effect
The good news? Once you spot the endowment effect, you can take steps to minimise its impact:
- Get a Second Opinion: Ask a trusted friend or adviser for their honest assessment before making big financial decisions, like selling a car or switching investments.
- Focus on Opportunity Cost: Remind yourself of what you’re missing by holding onto outdated assets. Could that money be earning more elsewhere?
- Use Data, Not Emotion: Rely on recent market prices, not your own attachment, when valuing possessions or investments.
- Automate Good Habits: Set regular reminders to review financial products and compare alternatives—especially as fintech apps and open banking make switching easier in 2025.
By being aware of the endowment effect, you can make more objective decisions and avoid the hidden costs of overvaluing your assets.
Real-World Example: The Superannuation Shuffle
Superannuation funds are a classic endowment effect trap. Many Australians stick with their default fund for years, believing it’s “good enough” simply because it’s familiar. Yet in 2025, with new APRA performance benchmarks and the Your Future, Your Super reforms, switching to a better-performing fund can mean tens of thousands of dollars extra in retirement.
Don’t let ownership blind you to better opportunities—especially when the stakes are this high.
