The endowment effect and a holding you chose

The endowment effect is the gap between what an owner would accept to part with a thing and what the same person would pay to acquire it. Ownership alone moves the two apart, and choosing the thing moves them further apart still.

The gap is measurable whenever both prices can be stated. Suppose a holder would part with a holding at $142 and would not buy it at today's price of $126.30. The difference is ($142 − $126.30) ÷ $126.30 = 12.4 percent, and it is a valuation carried by the owner rather than by the market. On 7,900 shares the internal figure is 7,900 × $142 = $1,121,800 against a mark of 7,900 × $126.30 = $997,770, a difference of $124,030.

Under a pledge the gap converts directly into an expectation error. At a 52 percent advance rate, capacity computed on the internal figure would be $1,121,800 × 0.52 = $583,336, and capacity computed on the mark is $997,770 × 0.52 = $518,840. The shortfall against expectation is $64,496, and it is produced entirely by a price at which no transaction has ever occurred.

There is a second consequence that has nothing to do with capacity. A lender liquidating collateral transacts at the market price by definition, so the endowment premium is not merely unrecognised — it is the exact quantity that disappears when someone else does the selling. The owner's valuation and the recovery valuation differ by the whole of the gap.

Willingness to accept and willingness to pay are both estimates of the same quantity, produced by the same person, differing only in the direction of the imagined trade. When they disagree by 12.4 percent, that figure measures the ownership rather than the asset.