The Endowment Effect

People value objects more when they own or possess them – or at least when they presume ownership.   In cognitive psychology this phenomenon is called the “endowment effect”.    It’s a concept that was seemingly invented to describe a lot of behaviour related to estates, philanthropy and foundations.   It’s time to give it a name.

Disputed Estates

In estates, the endowment effect is most notoriously in evidence when there are disputing beneficiaries.  A passionate manifestation relates to personal effects.  Furniture, jewelry, dishes, art and tchotchkes often take on a significant personal meaning to a family beneficiary that is well beyond the market value.  Objects in a family accumulate and store emotional value.  When a family beneficiary is fighting for a necklace s/he often feels emotional ownership that is quite distinct from legal ownership.

Giving

In philanthropy, the endowment effect can influence the very act of giving.  In fundraising circles there is constant talk about generosity, as if it is the easiest value in the world to exercise.  In my experience, many people struggle with donating wealth or major possessions during their lifetime even they plan to donate the majority of their estate to charity.  A would-be donor may be able to afford to make a substantial donation, and even have a good planning and tax rationale for doing so, but emotionally the act of “giving up” wealth or objects is difficult.  This is at least partly due to the endowment effect.

Charitable Endowments

Endowments in the charitable sector are perhaps the prime example of this phenomenon.  For trustees of charitable endowments, the endowment effect can lead to a fear of loss of capital and a pride in the growth and value of a long-term investment fund.  It can also produce a structural conflict with the charitable purpose of the endowment.  Trustees may value capital preservation over social impact.  One is a means to an end, while the other is the end.  The “endowment effect” may lurk beneath well-reasoned payout rates, fund policies and investment choices.

I’m sure readers can think of other examples of how the endowment effect haunts behaviour in the estates, trust and foundation world.  There are so many possible examples I’m half tempted to create a board game for trust, estate and philanthropy professionals called “Spot the Endowment Effect.”  I’ll keep working on the packaging; my colleagues should continue playing the game in their professional lives.