Our failure to think like traders has important practical consequences, for good and for evil. The main consequence of the endowment effect is to give stability to our lives and institutions. Stability is good when a society is peaceful and prosperous. Stability is evil when a society is poor and oppressed. The endowment effect works for good in the German city of Munich. I once rented a home there for a year, a few miles from the city center. Across the street from our home was a real farm with potato fields and pigs and sheep. The local children, including ours, went out to the fields after dark, made little fires in the ground, and roasted potatoes. In a free-market economy, the farm would have been sold to a developer and converted into a housing development. The farmer and the developer would both have made a handsome profit. But in Munich, people were not thinking like traders. There was no free market in land. The city valued the farm as public open space, allowing city dwellers to walk over grass all the way to the city center, and allowing our children to roast potatoes at night. The endowment effect allowed the farm to survive.
In poor agrarian societies, such as Ireland in the nineteenth century or much of Africa today, the endowment effect works for evil because it perpetuates poverty. For the Irish landowner and the African village chief, possessions bring status and political power. They do not think like traders, because status and political power are more valuable than money. They will not trade their superior status for money, even when they are heavily in debt. The endowment effect keeps the peasants poor, and drives those of them who think like traders to emigrate.
My alarm bells went off much earlier:
Ok maybe I was wrong here:
Some cool stuff after this.