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A key prediction of behavioral economics is that the ownership of something increases its value in the owner’s eyes. This phenomenon is called the endowment effect. When we own something (car, dog, home, idea) we begin to value it more than other people do. If you have ever shopped at a garage sale for used items (e.g., furniture), the endowment effect can explain why some owners tend to overprice (overvalue) what they have to sell.
People tend to become extremely attracted to objects in their possession, and feel anxious to giving them up. This explains why unemployed people are reluctant taking up another line of work, because they would have to give up the friends, family, and home to which they have become attached. Even our views of mate value change the more time we spend together. The longer we spend with our mates, the harder will be to simply let go, regardless of how unhappy we are. Why? Three psychological factors about human nature explain this bias.
1. The emotion of ownership
We develop attachment, and we don’t like to lose things that we own. Even touching an object increases feelings of ownership. As soon as you feel something you become a partial owner of that item. And it becomes difficult to let go, regardless of whether you need or can afford the item. This partly explains why car dealers want you to test drive the car, encouraging you in everyway to imagine what it would be like to own the car.
Ownership is not limited to material things, it also apply to ideas. Once we take ownership of an ideology (about politics or sport) we tend to value it more than it is worth. However, we run the risk of dismissing others’ idea that might simply be better than ours. As a teacher (and a parent), I have learned that a good strategy to help students adopt a new idea would be to provide opportunities for them to come up with the ideas on their own. People generally have positive attitudes toward themselves, and they enhance the value of their choices and devalue the road not taken.
2. Loss aversion
We focus on what we may lose, rather than what we may gain. Our aversion to loss is a strong emotion. Roughly speaking, losses hurt about twice as much as gains make you feel good. Tennis player, Andre Agassi in his autobiography reveals that “A win doesn’t feel as good as a loss feels bad, the good feeling doesn’t last as long as the bad. Not even close.” As Charles Darwin once said, “Everyone feels blame more acutely than praise.” This is why in marital interactions, it generally takes at least five kind comments to offset for one critical comment.
The idea of loss aversion is shown in consumer behavior. For example, consumers are more responsive to price increase than to decrease: from July 1981 to July 1983, a 10 percent increase in the price of eggs led to a 7.8 percent decrease in demand, whereas a 10 percent decrease in the price led to a 3.3 percent increase in demand. In another study, consumers were asked to either build up a basic pizza by adding ingredients (e.g., sausage and pepperoni), or scale down from a fully loaded pizza by removing ingredients. Consistent with loss aversion, consumers in the subtractive condition ended up with pizzas that had significantly more ingredients than those in the additive condition.
The principle of loss aversion also applies to the emotional pain of scaling back. While we indulge in buying things (larger home, new car) and think that we can always downsize if we could not afford. But in reality downgrading to a smaller home is psychologically painful. Being wealthy doesn’t help. Having accumulated wealth implies that we have more to lose than to gain. For rich people, the pain of losing his or her fortune exceeds the emotional gain of getting additional wealth, so the rich becomes vulnerable and anxious.
We may interpret this tendency as greed as opposed to the loss aversion. When we don’t own the object, we underestimate what would be our reactions. We underestimate how much we will become attached to objects once those objects become part of our endowment. But, if we change roles, we would be doing the same.
3. Perspective taking
We assume other people see the transaction from the same perspective as we do. It is difficult to imagine that the person on the other side of the transaction (buyer) is not seeing the world as we see it.
In a nutshell, the endowment effect is an important aspect of everyday economic life. The idea suggests that people have a tendency to stick with what they have unless there is a good reason to switch. The endowment effect is a reflection of a general bias in human psychology (status quo bias) that make people resistant to change. So when we think about change we focus more on what we might lose rather than on what we might get.
What is the cure? Being aware of it might help (forewarned is forearmed). For example, suppose you are de-cluttering your home. Using this knowledge, you can view each item as if you were nonowner (not yet owned it) and apply a simple test: If you didn’t have the item, how much would you be willing to pay to acquire it? Just by changing your perspective, you can gain clarity and have the emotional space to make your less vulnerable.
Stoic philosophy teaches that if you have lost someone or something precious, you can try to value her/him or it differently by imagining that you never knew that person, or never owned that object. In the case of boredom, if you feel tired of everything you possess, pretend that you have lost all these things and are missing them desperately. Doing so will make us value what we already have, and possibly prevent “the grass is always greener” syndrome.
