What does the endowment effect lead individuals to do?

The endowment effect refers to a psychological phenomenon where individuals assign a higher value to items they own compared to items they do not own. This effect can be attributed to the cognitive biases that lead people to overvalue their possessions simply because they are theirs. As a result, people may be less willing to trade or sell these items, even if market conditions suggest that they should do so.

This tendency is rooted in familiarity and emotional attachment; ownership can enhance the perceived value of an object. For example, a person may experience a strong reluctance to sell a ticket to a concert for a price that exceeds what they paid, simply because they feel a connection to the ticket as their property. This behavior illustrates how the endowment effect can distort rational decision-making regarding value and ownership.

In contrast, the other options do not encapsulate the essence of the endowment effect. For instance, undervaluing potential investments or neglecting future costs is not directly related to the ownership aspect that typifies the endowment effect. Similarly, reacting positively to economic downturns does not align with the idea of how ownership influences individual valuation of goods. Thus, the primary outcome of the endowment effect is indeed that individuals tend to overvalue the goods they own.