Is the endowment effect affecting your financial future during divorce?
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We humans are subject to cognitive biases, which are decision-making or other cognitive (thinking) errors that are made due to hardwired processes in our brains. Bias occurs no matter how intelligent a person is. Being aware of these biases can help those who are divorcing to think through their decisions more objectively, which results in making better choices.
The endowment effect is when people ascribe more value to the things they own. In Misbehaving Richard Thaler describes the outcome of the now-famous mug experiment. They discovered that the same group of people would pay less for a mug, than they would sell it for if given the mug for free. In other words, now that you own something, it’s more valuable to you.
“One man’s ceiling is another man’s floor.” — Daniel Kahneman
This bias is fairly common during the divorce process, with any kind of asset: personal property, the house, collections, etc. One (or both) spouses may think the house is worth more than it actually is, which can affect the outcome of the settlement. If it’s much lower, then proceeds from the sale will be less than anticipated. If one spouse wants to keep the house, they may find themselves worse off in the future.
Most divorce lawyers have a personal story about a case they worked on where the couple racked up tens of thousands of dollars in the divorce, disagreeing on personal property worth less than one thousand. The endowment effect gets tangled up in emotions, especially if the divorce is less than amicable. One spouse may not have thought an item was worth much, but then the other spouse wants it, and the struggle ensues.
It can be dangerous to your financial health to allow a squabble over low-value items to land you in court!
Combating endowment effect
For high-dollar items, such as the house and valuable collectibles and art, it’s best to have a neutral appraiser come in to value the items. There are real estate websites that can give you a ballpark figure for your home, but for various reasons you want a more accurate picture.
As you know, the price of an object is whatever someone will pay for it.
The appraiser can’t give you a guaranteed price, but can advise you as to what similar items have sold for. Having a neutral person establish the ranges can guide you towards a settlement that won’t leave you disadvantaged years down the road.
It will also give you a more realistic idea of what you can expect. Collectibles go in and out of fashion, so chances are it’s not worth as much as you may have thought, if you’ve seen earlier prices. In some cases it could be higher. If you haven’t done the research or you did it years ago, you’ll need an updated value.
It’s a little tougher for items that aren’t worth paying an appraiser for. This is where you’ll have to get as objective as you can. Is the dishware set worth your time and energy fighting over when you can easily get a replacement at a discount/housewares/web store? If the object has genuine sentimental value to you (and not just because your spouse wants it) you probably want to fight harder for it.
The endowment effect can make your property appear more valuable than it actually is. If the assets are worth it, an appraiser can help you get a realistic value for it. If not, consider whether it’s easily and cheaply replaced; and if so, whether you’ll save yourself grief by replacing it rather than arguing over it.
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Originally published on Divorce Nest.