You will be able to explain the endowment effect and where it costs money.
The question to put to anything you keep paying for is this: if I didn't own this, would I buy it today, at today's price? If you answer honestly and the answer is no, you are holding it mainly because it is already yours.
Eight years ago, when Hui Min was in her first job, a relationship manager at her bank sold her a unit trust. The balance is now S$20,000, and in all that time she has not compared it with any other fund. A colleague once asked her whether she would buy the same fund today. She answered yes without stopping to think. Some time later she checked the fund's yearly charges for the first time. She found she had no reason at all to pick it over a cheaper fund that does the same job.
Take some example numbers. Suppose her fund's total charge is 1.5% a year and a comparable index fund charges 0.3% a year. On her S$20,000, the first costs S$300 a year and the second S$60. She pays S$240 more every year, and the gap widens as the balance gets bigger. She went eight years without asking the question, so S$240 a year is what not deciding has cost her.
Her fund may be perfectly fine. A fund can be fine and still not be the one she would choose if she were starting from nothing.
Richard Thaler named the endowment effect in 1980. He is an economist who went on to win the 2017 Nobel memorial prize in economics. The effect is the tendency to value something more once you own it. Once you have bought an object, you value it more than you did the day before you bought it.
The best-known demonstrations used ordinary coffee mugs. Some people were given a mug and some were not, and the two groups were otherwise alike. People holding a mug typically asked noticeably more to sell it than people without one would pay to buy it. The evidence has limits. Later researchers have argued over how much of the result comes from the way the experiments are run. In some versions of the experiment the effect shrinks or disappears, so it is not a law of nature. Outside a lab it is easy to spot: ask someone selling a used car what the car is worth.
The effect fits with loss aversion, which lesson 2.2 introduced. Parting with something you own feels like a loss. Losses weigh heavily, so you want more before you will let it go.
The cases that cost real money tend to be things with charges every year, more than one-off objects like mugs. Examples are a fund with high fees, a mobile plan from five years ago, a gym membership, or a savings plan your parents set up for you. Each one feels like it belongs to you. Swapping it out feels like giving something up, even when the replacement is better.
Status quo bias goes with the endowment effect. It is a preference for leaving things as they are, where making no change feels like the safe default. If you make a change and it goes badly, you blame yourself. If you stay put and that goes badly, it feels like bad luck. This bias explains why many people still hold the first fund anyone sold them, still pay for plans that renew automatically, and still keep their savings in the account they opened as students. You can also use the same tendency in your favour. People stay with whatever is already in place, so setting up the right arrangement once does most of the work. Module 5 covers how to do that. Doing nothing is also a decision, and it has costs of its own.
Choose something you own or pay for regularly and ask it the question. If the honest answer is no, owning it is the main thing keeping you in it.
For funds, shares and subscriptions the question works almost directly. You can usually sell a fund and buy another at today's prices for a small cost. Compare what you have with the alternatives and add up the cost of switching. That means any sales charge on the new fund, plus any spread or switching fee. Decide on that comparison, and don't stay in only because you already own it.
Hui Min later did this. She set her fund beside two alternatives and compared their charges, their holdings and how each one fits her plan. She hasn't moved her money yet because she wants to check the sales charge on the new fund first. She used to ask "is this still okay". Now she asks "which of these would I choose today".
You can't buy the same policy again at today's price. You are older than when you took it out, your health may have changed, and a long-term policy has front-loaded costs that you have already paid. Surrendering an old policy can lose you money even when a new one looks better. Insurance Decoded lesson 7.2, "Why replacing a policy usually costs you", shows how this happens.
For a policy, find out two things: what replacing it would cost at your current age and health, and what you would lose by surrendering it. Then ask: knowing what it would cost to replace and what I'd lose by surrendering, is keeping this the best option from here? Sometimes the answer is to keep it. That is a fine result as long as you have actually checked.
Choose one thing you pay for every year, a policy, a fund or a subscription, and put the question to it directly.
Pick one policy, fund or subscription and answer in writing: would you buy this today at today's price.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).