The Endowment Effect: Why Mine Is Better Than Yours

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The ego doesn’t exist in our mind alone.  We extend the ego to everything we touch.  Even to the things we can’t “touch.”  This psychological quirk comes in various forms with various names.  But for this article, it is called the endowment effect. 

The Endowment Effect

The endowment effect is the hypothesis that people ascribe more value to things merely because they own them. 

It’s Mine and Therefore Valuable

In a 1990 paper, the famous psychologists Richard Thaler, Daniel Kahneman, and Jack Knetsch performed an experiment.  They gave coffee mugs to a group of people (called the Sellers) and asked at what price point—from 25 cents to $9.25—they would be willing to sell it. A second group (called the Choosers) didn’t have mugs, but had to indicate at what price they would rather have the mug or the money instead.  A third group (called the Buyers) had choose at what price they would buy the mug. 

Simple market situation, right?  Wrong!  In one trial of this experiment, the Sellers wanted an average of $7.12 for the mug.  But on average, the Buyers were willing to pay only $2.87.  The Choosers magic number was $3.12.  In another trial, the Sellers and the Choosers valued the mug at $7.00 and $3.50, respectively. Sellers usually want twice as much as Choosers were willing to pay. 

Now mind you, the Sellers were given the mugs for free.  They could have sold the mug for 25 cents!  But no.  The moment the Sellers thought that the mug was theirs, their estimation of its value skyrocketed.

It’s Mine and I Don’t Like Change

In a 1989 paper, economist Jack Knetsch performed his own endowment effect experiment.  Knetsch asked one group of students to choose between a coffee mug and a chocolate bar. Of these students, 44 percent wanted the chocolate bar, 56 percent wanted mug.  In other words, the students thought the items were roughly equal in value. 

Knetsch gave a second group only coffee mugs, but later gave them the option to exchange for chocolate bar later if they wanted.  He gave a third group nothing but chocolate bars, but they could exchange for mugs later, if they wanted. 

About half of the students should have traded the items, right?  No!  Only 11 percent of the mug-owning students wanted to trade, and only 10 percent of chocolate bar-owning students wanted to exchange for mugs. The vast majority of students didn’t want to part with what they had now that they had (“owned”) it! 

Mine Is Good, Yours Not So Much

You can own objects.  But you can also “own” beliefs.  Once anybody threatens your “object,” you feel threatened.

The mere ownership effect is the hypothesis that people who own a good tend to evaluate it more positively than people who do not.  Sometimes we associate the value of the object highly just because we own it…and we value ourselves (associative ownership).  James Beggan examines this in closer detail.

Conclusion

We see the endowment effect (and ownership effect) around us every day.  We see it in that pile of useless junk that your dad refuses to sell.  We see it in mothers who insist that their children are “geniuses.”  We see it in people who rabidly dislike those who disagree with them.  

The ego is a tricky thing.  If we don’t learn to control it, the ego could end up “owning” us. 

Sources:
Beggan, James K. "On the social nature of nonsocial perception: The mere ownership effect." Journal of Personality and Social Psychology. 62 (2): 229–237.
 
Kahneman, Daniel, Jack L. Knetsch,and Richard Thaler, "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, December 1990, 98, 1325-1348.
 
Knetsch, Jack L., "The Endowment Effect and Evidence of Nonreversible Indifference Curves," American Economic Review, 1989, 79, 1277-1284.
 
 
 
 

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