The Endowment Effect

Barack Obama’s greatest gift to the Democratic party was inserting pre existing conditions into the Affordable Care Act. Under this term, an insurance company can’t refuse to cover treatment or increase your premium if you have a pre existing medical condition when you started your insurance. During the mid term elections in 2018, Democrats campaigned hard about keeping this on your insurance while the Republicans, who were going to take it away. Their promise was smaller government and more money in your pocket through lower taxes. What they failed to realise was the value of this benefit to people and as a result, lost control of the House of Representatives when the Democrats gained 41 seats.

This is called the Endowment Effect, where people are less likely to give up something that they own rather than buy it when they don’t own it already.

Another example is say you have two tickets for the Champions League final next year in Istanbul (where Liverpool retain their title!) but you need another one. You are willing to pay €1,000 for this extra ticket. But someone offers you €5,000 for the two you already have, 250% more than you are willing to pay for that extra ticket. But you don’t sell. Going to the Champions League final is worth more than €5,000 (even though you were unwilling to actually pay that for a ticket yourself).

The endowment effect has a huge influence in personal finance and planning for the future. It has a huge impact on why so few people in the private sector have pensions. They don’t want to give up income that they already have for something that they will get in the future. They don’t see the value.

As a financial planner, it is important for me to know what my clients love doing and what you spend your money on. If you love something like mountain biking and spend money on great bikes and biking down different trails around Europe, there is no point in me telling you to stop and save the money. You are not going to give up something you have for something else in the future.

What we need to do is get you to recognise how great these trips are and really enjoy them. We can then look at other things you spend your money, things you are more likely to give up on as the most important things are looked after.

What do you have that you won’t give up, even if you were offered loads of money for it? It doesn’t have to be a physical item, it could be days leave or your annual family holiday. Let me know at