In the context of loss aversion, which of the following statements is true of the endowment effect?

• A. Loss aversion has no impact on how individuals value goods they own.
• B. Individuals tend to value goods more highly once they own them, compared to before ownership.
• C. The endowment effect causes consumers to always prefer new goods over those they already possess.
• D. The endowment effect leads to consumers undervaluing goods they currently own.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of loss aversion, which refers to the tendency of individuals to prefer avoiding losses rather than acquiring equivalent gains. This means losses feel more painful than gains feel pleasurable.
2. Step 2: Recognize that the endowment effect is a behavioral economics phenomenon where people assign more value to things merely because they own them, compared to how they valued the same items before ownership.
3. Step 3: Connect loss aversion to the endowment effect by noting that because giving up an owned good is perceived as a loss, individuals demand more compensation to part with it than they would be willing to pay to acquire it initially.
4. Step 4: Evaluate the given statements in light of this understanding: the statement that individuals value goods more highly once they own them aligns with the endowment effect driven by loss aversion.
5. Step 5: Conclude that the correct interpretation is that loss aversion causes the endowment effect, leading individuals to value owned goods more highly than before ownership, rather than undervaluing or always preferring new goods.