We humans have a habit of attaching ourselves with materialistic things. It is something that we have been carrying since our childhood. Toys are more just than stuff made up of plastics; it becomes the source of our immense happiness. Similarly, as we grow up, we end up latching ourselves with numerous things. These could be our bike, gadgets, shoes or most probably anything.
Hence, often people generally end up piling up things which they don’t need. And, when it comes to selling them, they are so much emotionally attached that they overvalue it. Therefore, they look for the price twice or even higher for that particular item. This habit of emotional attachment with things and overvaluing them is known as “Endowment effect”.
Now, let us further understand this concept more vividly.
What exactly is the Endowment effect?
It refers to the phase where the people start to overvalue things that they own, just because they are attached to it due to several reasons. Now, when this habit goes beyond the limit, it starts affecting your financial stability and other sections of your life.
This is what we will be covering in this blog where the ill-effects of the Endowment effect will be highlighted. Here is the tiny glimpse of how it can affect your life:
- As it causes you to overall things, you will end up accumulating much stuff that you need or don’t require any longer.
- Many companies use this concept as their marketing strategy.
- There will be a chance that you will be overvaluing things and pay more than the actual price.
Now, let us understand the other ways how it can affect your financial behaviour.
Wrong money decisions
The endowment effect is not only limited to the physical items but others like stocks, properties, and bond. The main objective of an investment is to keep purchasing and selling it from time to time when there is a potential of maximum gains. Now, we humans hate seeing loss, and we make every effort to do the right what went wrong.
So, if your stock is not performing or even degraded within time, it’s better to sell it as soon as possible. In the same way, if you ended up making a poor decision during the time of any emergency, then take actions before things get worse.
Suppose, if your credit score has hit rock bottom due to your poor financial choices, then you can approach a lender and apply for Very Bad Credit Loans from British-lenders.uk. The timely payment of the loan will help you boost your credit score, and you can keep the money as an emergency fund.
The Store effect
The companies know that the chance to improve the selling rate of the items is to make the customers feel that they already own it. Thus, you must have experienced it that when you go to a mall or store, you are allowed to touch the items and even try them. You can find any fancy dress and go to the trial to find whether it fits you or not.
After wearing the dress, you visualise the numerous occasions where you can wear a dress. So, you already develop an emotional sentiment with that item even if you haven’t purchased. Therefore, you will pay for the dress even if you think its price is a bit higher than your budget.
The endowment effect often compels people to buy more things as they get attached to things fast. Let us see how this can aggravate the problem further:
- Because of this, we often overuse credit cards and pile up things that were not necessary.
- This ultimately results in overspending habits that affect finance drastically
- The overuse of the cards will affect your financial balance and degrade your creditworthiness.
So, if you have a massive amount of credit cards bills to deal. Then, you can take out quick loans with no credit check from private lenderes UK. Such funding will help you get rid of your high-interest debt.
Use of subscription service
Nowadays, every platform like NetFlix, Spotify and others offer free 30 days trial to the users. Even if you even have the intention of cancelling the account within the trial period. There will be a chance that you will not do it and use it further. As long as you use the platform, it gets customised as per your preference, and you somehow get used to it. So, paying every month for the renewal doesn’t seem to be expensive at all.
Somehow, it becomes the part of your monthly expenses for which you are willing to pay. So, the thing that was just a test and trial will convert into something permanent. Well, this can disturb your budget and intentionally or unintentionally, your cost of living will gradually increase.
So far, you must have well-understood how the endowment effect negatively impacts your financial stability.