Have you ever attended a yard sale, looked at the prices and wondered what on earth the sellers were thinking? Offering items like a repaired garden hose for $10 or a used toaster for $20 certainly spares them the trauma of surrendering their precious household goods, but it rather defeats the purpose of a sale.
It happens for a reason, though – and you might do something similar (or at least have to struggle against it).
The “endowment effect” is the psychological term for our tendency to value something more highly once we own it. Richard Thaler first used the expression in a 1980 paper and noted that it is closely related to “loss aversion” (as explained in a previous post, we’re more sensitive to losses than gains).
It’s fascinating to watch it in action. In one study, half the participating students were given a mug bearing their university’s crest and asked how much they would be willing to sell it for. The rest of the students, who didn’t receive mugs, were asked how much they would pay to get one. Even though the students became ‘sellers’ or ‘buyers’ at random, it altered their value perceptions: the sellers wouldn’t give up their mugs for less than $5.78 (on average), while the ‘buyers’ were only willing to pay $2.21.
Another study, reported in Dan Ariely’s book Predictably Irrational (and discussed by Ariely in a video here), found even more of a disparity. Students who won particularly hard-to-obtain sports tickets in a lottery demanded more than 10 times as much to give up their tickets as non-ticket-winners were willing to pay to get them.
That’s all very well, I hear you thinking, but how does it help me change the world? Good question.
The equally good answer comes from a paper just published in the Journal of Consumer Psychology. Gabriele Paolacci, Katherine Burson and Scott Rick asked their study participants to decide whether to trade hypothetical concert tickets for other tickets that were better in some ways (for example, close to the stage) but worse in others (for example, separated so that friends couldn’t sit together). As expected, no matter which tickets the participants received first (closer to the stage or closer to each other), they were unlikely to make the switch: fewer than 30% chose to trade. The endowment effect was working.
Paolacci and her colleagues then offered another group of participants the same situation but with the option to trade their original tickets for an “intermediate” set of tickets whose characteristics were halfway between their own tickets and those offered as a trade (not too far from the stage, not too far from each other). Whether they accepted this offer or not, they were then given the chance to make the same trade as the first group. This time, nearly 50% chose to trade – about as many as would be expected if the endowment effect didn’t exist.
The endowment effect doesn’t just apply to things: once we ‘own’ them, we cling (sometimes unreasonably) to our habits, opinions, behaviours and preferences. If we want people to make a change, it appears that offering a halfway point might be the way to keep endowment issues from blinding them to the possibilities.
(And does understanding this make me more rational about my own possessions? Not on your life, buster. Everything I own is magnificent and worth its weight in rubies. Just ask me.)