Overview and application of Endowment Effect, Anchoring and Hindsight Bias

Abstract

This paper systematically examines three core cognitive biases in behavioral economics: the endowment effect, anchoring effect, and hindsight bias, delving into their respective applications and impacts across diverse economic scenarios. Research indicates that the endowment effect causes individuals to assign higher value to possessions they already own, exerting a significant influence on investors’ stock-holding behaviors and the formulation of environmental policies. The anchoring effect reveals the significant influence of initial information on judgments, manifesting prominently in areas such as real estate pricing, art auctions, and project management—even affecting the estimation behaviors of professional practitioners. Hindsight bias manifests as an overestimation of the predictability of outcomes after they become known, subsequently influencing entrepreneurs’ reflections on failure, judgments of audit responsibility, and investors’ ability to learn from market dynamics. This paper employs a literature review methodology to systematically synthesize existing empirical research. It not only provides a theoretical foundation for understanding irrational factors in economic decision-making but also offers robust empirical support for policymakers, facilitating the development of more effective market mechanisms and behavioral intervention strategies.