Imagine you just bought a lottery ticket for a dollar. Someone comes and offers to buy it back. What would you say?
Almost everybody says... no! not even when they are offered twice its value. What is so special about your ticket? After all, all tickets have the same chances of winning. With two dollars you could buy two tickets and increase your chances of celebrating. But it doesn’t work like that. Your ticket is special, it's yours and you don’t want to get rid of it.
That’s called the endowment effect and it means our stuff is more valuable to us just because we own it.
In a famous experiment, half the people in one group were given mugs, the others were not. Then, the mug-holders were asked how much they would sell the mug for, and the buyers how much they would be willing to pay to get the mug. The owners demanded twice the money the buyers expected to pay.
The endowment effect generates a gap between two parties trying to sell and buy: the seller thinks his goods are more valuable than the buyer. Amazingly, having a cup around changes how the buyers appreciate its value. A variant of the experiment shows that if the buyers are given a cup (even when it’s not theirs to keep!) they are willing to pay a lot more for the cup (it’s the same cup!). Free trials, samples, fitting rooms… all of these are strategies that make it easier for buyers to pay the sellers price. On the other hand, if the sellers are said they own the mug, but the mug is not physically with them, they expect a lot less money to part with it. Just like that, instantaneously.
Why does that happen? There are 2 possible explanations. One holds that is about emotional bonding, that somehow we project ourselves into the objects we own. However, as the mug experiment shows, endowment happens without emotional bonding. So what is the other possible explanation? It points to loss aversion, the postulate that we hate losses a lot more than we appreciate similar gains. So the possibility of losing the mug generates pain, more pain than the prospect of getting money. Because, hey, it’s my mug!
Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). Experimental tests of the endowment effect and the Coase theorem. Journal of political Economy, 98(6), 1325-1348.
Reb, J., & Connolly, T. (2007). Possession, feelings of ownership, and the endowment effect. Judgment and Decision making, 2(2), 107.
Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior & Organization, 1(1), 39-60.
Wolf, J. R., Arkes, H. R., & Muhanna, W. A. (2008). The power of touch: An examination of the effect of duration of physical contact on the valuation of objects. Judgment and Decision Making, 3(6), 476.