The "Endowment Effect" and Why Everyone in Business Should Be Aware of It
Welcome back to the Mid Market Insider!
Today’s newsletter edition is all about the Endowment Effect and how it plays it nearly every business decision (whether we know it or not).
Have you heard of the Endowment Effect?
It’s something every person in business should be aware of.
It’s when people more highly value an object or asset they own, and put less value on an identical object or asset they don’t own.
There’s a higher level of application of that principal, especially as it relates to private equity and business.
Here might be a literal interpretation of this cognitive bias.
Let’s say I own a widget manufacturer and that there is an identical widget manufacturer across town. I will value my company more highly for no other reason than I own it.
You can really apply this concept to every part of the business though.
Take customers for example. I often hear business owners talk about how great their top customer has been for the last 10 or 20 or 1,000 years or whatever.
As a buyer though, how certain can we be that this customer will continue to be as great as they have been?
In one of our deals, after the deal closed we found out that one of our major customers was planning to walk. That was news to us AND the former owner!
Whenever anything is for sale, the buyer will want to pay less and the seller will want to collect more.
But just because you want something, doesn’t mean it is justified.
The endowment effect might lead you to believe your business is worth more than what a buyer will pay.
💡 Quick Tip:
This cognitive bias trickles all the way through the business and applies to:
Equipment
Employees
Customer Relationships
And more…
As mentioned above, the Endowment Effect is something everyone in business should be highly aware of.
That’s all for today’s newsletter! Thanks for reading!
📅 Next Week:
Next week we’ll be getting into one of my favorite topics as it relates to having a plan and a “jazz band.” You won’t want to miss it. Stay tuned…
Keep building,
Nick
P.S.
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