Asymmetry of Pleasure and Pain
The pleasure a person gains from $10 is not equal to the pain brought by losing $10. In other words, the damage caused by loss far exceeds the pleasure caused by gain. Furthermore, if a person is about to receive something they desperately desire, but this item is snatched away at the last moment, their reaction will be as if they had owned it for a long time only to have it suddenly taken away.
Examples of the Endowment Super-Reaction Tendency
The Munger couple once kept a gentle and kind dog that exhibited a clear endowment super-reaction tendency. There was only one way to make this dog bite: to snatch the food from its mouth while feeding it. Once you do this, this friendly dog will immediately bite you; it cannot control itself. For the dog, there is nothing more foolish than biting its owner. However, this dog cannot avoid this foolishness because it naturally possesses an automatic endowment reaction mechanism. Humans are similar to the Munger family’s dog; when people face the loss or potential loss of property, love, friendship, sphere of influence, opportunity, identity, or any other valuable thing, they typically generate strong, irrational reactions, even if the loss is slight. Therefore, internal conflicts arising from a threatened sphere of influence often cause massive damage to the entire organization.
The Impact of the Endowment Super-Reaction Tendency on Ideology
The endowment super-reaction tendency usually helps protect a certain ideology or religious view because it stimulates feelings of aversion or hatred toward public questioners. Part of the reason for this is that these views are already stable and possess a powerful belief maintenance system, and if the ideas of the questioners are spread, their influence will be weakened. Humanities and Social Sciences departments in universities, law schools, and various business organizations all exhibit this ideology-based group consciousness, and they almost reject all external information that contradicts their knowledge system. If the public critic was once a member of that ideology, the hostility will be even stronger for two reasons: (1) the act of betrayal triggers an additional endowment reaction because a “comrade” is lost; (2) there is concern that the opponent’s views are more persuasive because they come from a former member.
The Impact of the Endowment Super-Reaction Tendency on Labor-Management Relations
The endowment super-reaction tendency has had a profound impact on labor-management relations. Most of the deaths in labor disputes before World War I were caused by employers attempting to cut wages. Although fatal conflicts are less common today, more companies have gone bankrupt because fierce market competition only leaves two choices: either lower wages—which is usually difficult to reach a consensus on—or the enterprise goes bankrupt. The endowment reaction prompts many workers to resist wage reduction plans, even though accepting the wage cut might be more beneficial to themselves.
The Endowment Super-Reaction Tendency and Gambling Behavior
The endowment super-reaction tendency is also one of the important reasons why some gamblers lose everything. Firstly, it makes gamblers eager to recover the situation after losing money; the more they lose, the stronger this psychological reluctance becomes. Secondly, the gambling forms that are easiest to make people addicted to often involve scenarios designed as “almost winning,” and these scenarios trigger a strong endowment reaction. Some slot machine programmers deliberately exploit this human weakness.
The Endowment Super-Reaction Tendency and Auction Behavior
The endowment super-reaction tendency often causes participants in public auctions to pay high prices. The “social validation” tendency we will discuss next prompts bidders to believe that others’ bids are reasonable, while the endowment reaction drives them to bid higher prices. To avoid paying unreasonable prices at public auctions, the best method is Warren Buffett’s advice: don’t participate in these auctions. The endowment reaction, combined with the tendency to avoid inconsistency, often leads to a form of business failure: exhausting all high-quality assets in order to save a poor investment project.
The Endowment Super-Reaction Tendency and Investment Decisions
Shareholders of Berkshire Hathaway never sell or even gift a single share after the company’s market value increases significantly. This behavior stems partly from rational calculation, but several psychological factors are also at play: (1) the reward super-reaction; (2) the “status quo bias” caused by the tendency to avoid inconsistency; (3) the “endowment effect” triggered by overestimation of self-worth.