The project is underperforming. A fresh analysis would never greenlight it at current terms. But you can't seem to kill it. The mere fact of ownership has inflated its perceived value beyond any rational assessment.
This is the endowment effect meeting its cousin, status quo bias. Together they form a trap that keeps operators holding positions they'd never acquire if they were starting fresh.
The Endowment Effect
Economist Richard Thaler documented the phenomenon in a series of now-classic experiments. Give someone a coffee mug and they'll demand roughly twice as much to sell it as they would have paid to acquire it. The act of ownership itself changes perceived value.
Daniel Kahneman and Amos Tversky's prospect theory explains why: losses feel roughly twice as painful as equivalent gains feel pleasurable. Once you own something, giving it up registers as a loss—even if what you'd receive in exchange is objectively superior.
Ownership creates a valuation premium that has nothing to do with the asset's actual worth.
You're not evaluating the project objectively. You're evaluating what it would feel like to lose it.
Status Quo Bias
Political scientists William Samuelson and Richard Zeckhauser identified a parallel pattern: people disproportionately stick with whatever option is framed as the default, even when alternatives are demonstrably better.
Status quo bias isn't about careful analysis concluding the current state is optimal. It's about the current state being the path of least psychological resistance. Switching requires effort, creates uncertainty, and—crucially—creates accountability for the decision to switch.
If you stick with the current approach and it fails, you can attribute failure to circumstances. If you switch and the new approach fails, you own that failure entirely.
"The status quo is the only option that doesn't require a decision."
The IKEA Effect
There's a third mechanism that compounds both: researchers Michael Norton and Dan Ariely documented the "IKEA effect"—people dramatically overvalue things they helped create, regardless of objective quality.
The more effort you've invested in building something, the more valuable it seems. This creates a perverse dynamic: the harder you've worked on a failing initiative, the harder it becomes to see that it's failing.
A product team has spent 18 months building a feature. Market feedback is poor. The honest assessment is that the feature should be killed and resources reallocated.
But three biases conspire against that conclusion:
- Endowment: "We built this. It's ours. Killing it feels like destroying something valuable."
- Status quo: "Continuing development is the default. Killing it requires an active decision and creates accountability."
- IKEA effect: "We invested so much effort. That effort must mean something."
The result: throwing good resources after bad, not because the analysis supports it, but because quitting triggers loss aversion.
The Acquired Neutrality Test
The antidote to endowment bias is the "fresh eyes" frame. The question isn't "should we continue this?" The question is: "If we didn't already have this, would we acquire it at current terms?"
This isn't hypothetical. It's how sophisticated capital allocators actually think. Warren Buffett's famous test: "Would I buy this company today at this price?" If no, holding it is just loss aversion dressed as strategy.
- State the current position: "We have [project/asset/commitment]."
- Specify the cost: What resources does maintaining it require? (Capital, time, attention, opportunity cost)
- Apply the fresh frame: "If we had those resources free and this opportunity came across our desk today, would we allocate to it?"
- Note the gap: If the answer is "no," what's preventing you from exiting? Name the bias explicitly.
Forcing Functions
When you know endowment effects are operating, you need mechanisms that counteract them:
Mandatory Reauthorisation
Instead of "continue unless we decide to stop," flip the default: initiatives must be positively reauthorised at defined intervals. This converts continuation from a passive default to an active decision.
Zero-Based Reviews
Periodically conduct portfolio reviews that treat every commitment as if it were a new investment decision. Start from zero and ask what you would fund today with current information.
Independent Assessment
Bring in evaluators without ownership stake. They don't have endowment bias because they didn't build it. Their fresh perspective can see what insiders cannot.
Opportunity Cost Accounting
Make the opportunity cost of continuing explicit. What else could you do with these resources? When the alternative is visible, the status quo loses its invisibility advantage.
A portfolio company requires ongoing operating support from the parent. The support costs are buried in overhead, making the true cost invisible.
The fix: charge back support costs explicitly. When the subsidiary has to "pay" for support, the true cost of maintaining the position becomes visible—and the decision to continue or divest becomes genuinely economic rather than psychologically driven.
The Emotional Reality
None of this means you shouldn't feel the pull of endowment. You will. Ownership creates real emotional attachment. The point isn't to eliminate the feeling—it's to recognise it as a bias rather than a signal.
The discomfort of giving something up isn't evidence that keeping it is correct. It's evidence that you're human and that loss aversion is operating. The strategic question remains: would you acquire this today?
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This article is for educational purposes and does not constitute business or investment advice. Strategic decisions should be made with appropriate professional counsel.