The fear of missing out — Part 2: The Endowment Effect
Continued from previous article …
Our aversion to loss also influences our behaviour in many subtler ways, two of which I would like to discuss here.
We overvalue what we own
We overvalue what we have. Imagine you are selling your car. You will almost always value that car more than a potential buyer. That is because we fall in love with what we already have. The cost of memories and feelings gets added to the car’s perceived value. Also because of loss aversion we focus on what we lose(in this case by selling the car) than focus on what we tend to gain. This effect is termed as Endowment Effect (coined by Richard Thaler) which can be summarised as
“people ascribe more value to things merely because they own them.”
Interestingly this effect applies even to ‘Virtual Ownership’, where we have not yet physically owned the item but have ‘felt’ the ownership. If you have booked a car and felt the upcoming enjoyment, that is enough for endowment effect to kick in. If for some reason the price of the car gets hiked, you are more likely to pay the additional amount, though your original decision at this increased price may have been different (Explained by Cognitive Dissonance about which you can read more here).
Product professionals realise this very well. If you carefully reflect you will see many behavioural engineering tricks like ‘free upgrade’ and ‘free trial’ attempted upon you.
We may think we can cancel the subscription anytime, but are less likely to do so after we have experienced the ownership of upgraded service.
Dan Ariely in the book Predictably Irrational says more the work we have put into something(or longer/stronger we have felt ownership of a physical or virtual good) stronger is the endowment effect, which he calls Ikea Effect. So longer someone had spent time on FarmVille game, more he saw himself going back to it.
This forms the psychological basis of ‘Investment’ phase in Nir Eyal’s hooked model for driving behavioural change.
Unfortunately this effect works on ideas as well. We find it hard to let go of ideas we are committed to, even when they are clearly not working. More the time and effort we have invested on it, tougher we find to let go of it.
This effect has been beautifully summarised in the book Sway by Ori Brafman.
“The deeper the hole they dig themselves into, the more then continue to dig.”
If you ask for the cure to this irrationality, I would say solution lies in spirituality, which can be topic for a conversation over coffee some day.
To be continued …
