The endowment bias: to have and to hold
When was the last time you sold something? Would you really be willing to pay the price you listed for it? There’s a high chance that your answer is ‘no’. The irrational behaviour of overvaluing goods we own, regardless of their objective market value, is called the endowment effect. It was first identified by nobel prize winning economist, Richard Thaler, who sought to test this effect in the late 1980s. In a clever experiment by Thaler, Kahneman, and Knetsch, the social scientists distributed coffee mugs to half a class of undergrad students but left the other half empty handed. The former group estimated a selling price and the latter group estimated a buying price. It was found that the students in possession of coffee mugs did indeed ask for more. The undergrads with mugs were unwilling to sell for less than $5.25, while their less fortunate classmates were unwilling to pay more than $2.75.
Thaler explained the endowment effect by pointing out that humans are inherently loss averse. That is, losses hurt more than equivalent gains feel good. However, in the last few years, psychologists have pointed to a second theory to explain the endowment effect, also known as divestiture aversion. These psychologists, like Carey K. Morewedge, an Assistant Professor of Marketing at Carnegie Mellon, argue that the endowment effect is not due to loss aversion but rather caused by a sense of possession i.e. the feeling that an object is ‘mine’. Morewedge and a team of researchers sought to test this theory by conducting another experiment involving coffee mugs. In this experiment, the team found that buyers were willing to pay as much for a coffee mug as sellers demanded when the buyers already owned an identical mug. To date, their findings have been replicated in several other studies. Since the endowment effect disappeared when buyers owned what they were selling, Morewedge and his team concluded that ownership, and not loss aversion, causes the endowment effect in the standard experimental paradigm.
One implication of these findings by Morewedge and his team is pertinent for clothing stores. If ownership, or a sense of possession, increases how much a consumer is willing to pay for a good, it would be wise for store owners to simulate a feeling of ownership in the customer. Enter fitting rooms: research suggests that customers are more willing to purchase an item of clothing after they try it on. Other researchers have highlighted similar tactics, for example, free trials, sampling, and coupons. What is more, the endowment effect has been shown to increase with time, that is, the longer the individual owns an item, the more likely they are to feel a strong sense of ownership over it. The same can be said for goods that have a strong sentimental or emotional attachment. In others, the endowment effect explains why people have such a hard time letting go of old clothing or childhood toys.
The key takeaway here is obvious enough. We are humans and not perfect calculators. We do not only overvalue goods because we are loss averse, but because we feel that our goods contribute to our identities and form part of who we are. This means that if you are in the market for a mug, or perhaps a car or a house, it helps to be aware of the endowment effect and its influence on our behaviour. If you can take a step back and realise why an item is so meaningful to you, or to someone else, you may have an easier time negotiating a favourable outcome. So, the next time that you feel like your dog, cat, or even your child, is the best thing since sliced bread — go ahead — because there is nothing wrong with a little self-love.
Read more about the endowment effect here:
Thaler, Kahneman and Knetsch’s 1991 studies on the endowment effect
Morewedge and colleagues 2009 study on ownership and the endowment effect
