Bias & Design: The Endowment Effect

Iris
Iris
Jan 10, 2018 · 6 min read

Part 1 of 4 for Rhode Island School of Design’s Winter Session 2018 Industrial Design Course: Irrational Design.

Humans go about their daily lives operating with cognitive biases. These are a systematic pattern of irrational behaviors that skew human judgement and decision making, which many remain unaware is happening.

Many companies have leveraged this psychology to increase conversion rates, and being aware of such biases allows us to “nudge” others toward certain decisions without taking away their freedom to choose. This design challenge explores design examples that target the Endowment Effect and proposes ways we can ethically leverage this bias.

Brief

Draw a comic/illustration to define the assigned cognitive bias, and explain at least 3 design examples that leverage this cognitive bias or could be improved by leveraging this cognitive bias.

The Endowment Effect

In behavioral economics, the Endowment Effect is the hypothesis that people ascribe more value to things simply because they own them. This effect can begin before you even begin to own something, applying to items that are close enough to grasp that you feel like it is already yours. It becomes difficult to change to an objectively better option, because we find it difficult to evaluate what we own in an objective manner, often over valuing it.

Comparative cognitive biases are the Loss Aversion Effect, the Status Quo Effect, and the Ownership Effect and so I mapped out the distinction between the three so best understand how to illustrate the Endowment Effect.

Endowment Effect: people ascribe more value to things simply because they own them

Loss Aversion Effect: pain of losing is psychologically about twice as powerful as the pleasure of gaining

Status Quo Effect: people do not like change and prefer things to remain the same, either by doing nothing or by sticking with a previous decision

Breaking Down the Endowment Effect:

  1. The effect of mere ownership (owning something for even 1 minute)
  2. Attachment of value/uniqueness of possession(memories, experiences, gift from someone)

Comic Iterations and Final

The drafts I created focused on (2) the transfer of value memories and experiences bring, but I wonder if focusing on (1) would illustrate the Endowment Effect even more clearly.

Storyboarding Drafts

Draft 1: A woman buys s $10 hat which she wears while experiencing significant moments in her life (proposal, amusement park with parents etc.).

Feedback 1: The story is too random and isn’t compelling enough. Could be simplified to get the point clearly across.

Draft 2: Woman sees $15 hat in store window that she likes until she looks at the price, and decides the hat isn’t worth it. A friend gifts it to her for Christmas and the woman then decides it looks much more expensive and chic. (Endowment Effect is in play because a hat she deemed unworthy of the price before suddenly gains more value now that she is gifted it and owns it. Clearly, the value of the hat hasn’t changed — her ownership of it did).

Feedback 2: Unclear whether hat gains value because of how she styled it, or whether it is merely due to new ownership. The implication of Endowment Effect isn’t strong enough.

*Draft 3: A woman attempts selling her grandfather’s WWII Pilot Wings for $500 at a pawn shop, but the pawn shop owner is only willing to pay $30 for it because of its condition. Woman does not want to sell it for that price. (Endowment Effect is in play as the memories associated with her grandfather, as well as her ownership of the product made her overvalue it extravagantly.)

Feedback 3: Clearest use of endowment effect at play.

* Chosen for final.

Draft 4: A couple is trying to buy a house and sets a maximum budget of $200,000. They place a bid on a house thinking they are going to close it because it’s been on the market for a while. The agent comes back and says another family offered $300,000 for it. The couple agrees to pay a price for it that far exceeds their proposed budget earlier. (The Endowment Effect comes into play .

Feedback 4: Showcases endowment effect well, but as for illustrative purposes to teach someone what it is, a clearer example could be used.

Final Illustration showing example of Endowment Effect at a Pawn shop.

Feedback from class:

The comic illustrates clearly that while the pilot wings are obviously defective, the woman’s valuation of it is far from realistic. The reason for this is the memories attached to the object that remain significant to her. An unwillingness to let something go because of attached memories is a common experience many have, and I think this is what made the comic so understandable to the audience.

Looking back, I think it places too much importance on the idea of memory and attachment as builders of value, when the Endowment Effect doesn’t need any of that to take effect. It is purely because an item comes into your possession that it increases in value, even if it is for a second. Although the comic teaches readers what the Endowment Effect is in a clear way, I don’t think it fully captures the immediate effect ownership has on an item’s perceived value.

IRL Applications of the Endowment Effect

The Endowment Effect can be leveraged to nudge the behavior of users, as exemplified by the examples below.

League of Legends (Free Champion Rotation)

League of Legends Weekly Free Champion Rotation Weekly Post

League of Legends Champion selection uses the Endowment Effect to convince players to pay to use a certain champion (character). Every Monday, 10 out of 115 champions are released for free play. This means that players will be able to play this champions without having purchasing them beforehand.

When a player finds a champion he or she likes, it becomes difficult to give that champion up once that week is up and the free champions rotate. By allowing the players to “own” the champion for a week, the Endowment Effect comes into play and the decision to pay for a champion is reframed as a much more worthwhile transaction, nudging players to pay to “keep” what was originally theirs.

Comic illustrating Endowment Effect in League of Legends Champion Purchase

Stamp Cards and the Endowed Progress Effect

The endowment effect here is framed in terms of progress than object value. The value of a free boba doesn’t change, but you value the “effort” shown in the two free stamps, and thus, are more invested in completing the task.

Tasks framed as incomplete, rather than uninitiated creates the illusion of lower barrier to entry, and as people sense progression is occurring, the time it takes them to complete the task will also decrease, positively influencing the speed of use of your design.

Create a sense of ownership when a bid is lost to persuade user to bid more.

Reflection

I appreciate the pragmatic approaches to behavior change as tools to influence consumer decisions, but there is a fine line between manipulating the user and nudging the user. It then becomes important to identify an ethical code for using these tools to influence their behavior and decisions. I would like to explore further the avenues designers can take to building and maintain a strict code of ethics to maximize the value for both the consumer and the organization.

Iris

Written by

Iris

MDes Interior Architecture @ RISD

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