Endowment Effect

We value something more once we feel we own it

If told that they own it, people are less likely to trade a possession to obtain something owned by someone else. This is the case even when there is no cause for attachment, or even if the item was only obtained mere moments ago.

Kahneman, Knetsch & Thaler (2009). Experimental Tests of the Endowment Effect and the Coase Theorem.

A classic experiment was done by Kahneman, Knetsch & Thaler (1990) on the Endowment Effect. People were each given a coffee mug and then given the choice to sell or swap it for an equally-priced alternative which, in this case, was a pen. Fascinatingly, they found that people wanted to be paid twice the money for their coffee mug as they’d themselves be willing to pay for the pen.

Elsewhere, workers have been found to work harder to maintain a pre-awarded pay packet bonus than a separate potential bonus they don’t yet feel a sense of ownership over (Hossain and List, 2009). Also, contrary to thought regarding the Endowment Effect as a mistake diminishing as we mature, children (even unsophisticated ones) have been found to be susceptible (Harbaugh et al, 2001), as well as Great Apes, would you believe (Flemming et al, 2011)!?

Why is this? Well, a lot is down to our natural tendency as humans to be loss-averse - basically, the fact that once you own an item, forgoing it feels like a terrible loss. The best example right now is your mobile phone - we protect and personalise it with skins, covers and apps, and are highly unlikely to exchange it for an equivalent item. Do you remember the last time you lost your phone?

However, a curious bit of recent research carried out in northern Tanzania suggests that not everyone has this bias! Indeed, it may be an irrational habit of the minds of people living in market-orientated societies. Two groups from the Hadza tribe - one connected and trading with tourists, and another more remote and without trade - were both given biscuits. Each were then shown a lighter, and asked if they’d like to trade. The remote Hadza had a 50-50 chance of trading - i.e. they were rational, not preferring one product over the other. This is in stark contrast to the market-orientated Hadza, who had a 75% chance of keeping their biscuits. Remote Hadza therefore had no endowment effect.

It’s therefore important not to make too many generalisations about the human mind in general; we certainly need to factor in our WEIRD (Western, Educated, Industrial, Rich and Democratic) perspective on things. Nevertheless, the Endowment Effect is a very strong and highly consistent bias that affects the vast majority of people you interact with and sell to every day.

Takeaways for Decision-Makers

‍Allowing people to feel ownership of a product, even if they don’t yet own it, is a powerful way for them to attribute value and emotional connection to what you’re offering.
‍Personalisation of a product early on in the ordering process, free week-long test-drives of that car you always wanted, or even an architect / designer sketching a vision for how your new environment / product experience could look. These ideas are just some examples of how you can engender a deep sense of pre-ownership and a strong, unwavering attachment and desire to buy as a result.
‍If a customer adds something to their basket, but hasn’t yet checked out, do think about sending them a polite reminder that the product is “essentially theirs, but for a single, simple click”, or they’re “almost there”, emphasising the speed at which the product can be delivered (i.e. Next Day Delivery), specifying the exact date to create a more real connection with its arrival.
‍If you’re operating or designing a product / service trading system, be aware of and factor in the Endowment Effect into your pricing and communication strategy - it may well stifle trade opportunities for users if they’re not collectively encouraged to take a more rational approach as to their product’s value.

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Aspirational membership schemes and belonging The category size bias provides a credible explanation for why we human beings tend to associate with large groups that are viewed favourably by society. Being part of a large and “desirable” social group can make others believe that we also possess the many qualities of its members. For small businesses, it suggests that forming or being a part of a consortium or large and high quality networking group can dramatically elevate your brand image.
Communicating category sizes to nudge effectively Highlighting the differences between the large and small categories is highly likely to enhance the effect of the Category Size Bias. For instance, for software companies, stating that there are 10 features in the premium version versus 4 in the free version will help nudge a decision towards the premium version

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The findings from this braingem can nudge better healthcare choices, encourage consumption of a given product, and lead to more confident consumer decisions.
We mistakenly believe that items in larger categories have a higher probability of being picked than ones in smaller categories, despite all items having an equal chance of being picked.
We’ll spend or gamble more money on items put in larger categories.
We’re more likely to take action from tasks when they’re in a bigger list, over a smaller list.
We once we put something into a group, we perceive it to adopt all the characteristics of that group. This suggests that small companies should foster alliances with similarly-principled, more established companies.