The Endowment Effect

Natalie Sirianni

The Endowment Effect is a term in behavioural economics which shows that individuals put greater value on something that they own compared to something they do not. Or in other words, “the fact that people often demand much more to give up an object than they would be willing to pay to acquire it” (Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias by Daniel Kahneman, Jack L. Knetsch, Richard H. Thaler https://scholar.princeton.edu/sites/default/files/kahneman/files/anomalies_dk_jlk_rht_1991.pdf).

While I recently learned of this term, it is something I have been seeing and experiencing in my work as a pharmacy business broker for many years!

The Endowment Effect has been tested many times and Daniel Kahneman did one study with Jack L. Knetsch, Richard H. Thaler, which tested the Endowment Effect on something as mundane as a mug from a college bookstore (per article mentioned earlier). In the experiment, students in an advanced undergraduate economics class at Cornell University participated in a series of markets where they could buy and sell a mug that sold in the University bookstore for $6 each. The results showed that the median owner was unwilling to sell for less than $5.25 (even though they got it for free), while the median buyer was unwilling to pay more than $2.25-$2.75. A massive difference!

The reason that I mention the mug is because, if studies are showing that people act in this behaviour of placing greater value on something they own with an object as small and insignificant as a mug from a college bookstore, imagine the kind of behaviour we experience in something as significant and emotional as a pharmacy business sale.

So, my one tip to vendors selling their pharmacy is to be aware of the Endowment Effect and how this emotional bias can impact on you selling your business. While we all want to achieve top price when we sell our businesses, it is also important to be aware of market conditions and prices when setting your asking price and considering offers that you receive. Due to the Endowment Effect we are all likely to place more value on the businesses that we own than the businesses we are looking to buy. And because of this, may miss out on good, solid offers that come our way. Therefore, in order to ensure you get a successful sale of your business, make sure you keep this in mind.

If you have any questions about the market conditions in your area, or the pharmacy business sales process, please feel free to call me on 1300 ATTAIN (288 246). I look forward to discussing with you further.

Sources:
D Kahneman, J Knetsch & R Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias”, The Journal of Economic Perspectives, 5(1), pp. 193-206, Winter 1991 https://scholar.princeton.edu/sites/default/files/kahneman/files/anomalies_dk_jlk_rht_1991.pdf