Feb 22, 2018

Exploit Explained: The Endowment Effect

{This post is part of the Archive of Human Exploits}

Two founders of behavioral economics, Nobel Laureates Daniel Kahneman and Richard Thaler, coined the term endowment effect to explain why we tend to value things more if we own them.

Wikipedia neatly summarize their research backing up the claim as well as some other studies that have done the same:
[P]articipants were given a mug and then offered the chance to sell it or trade it for an equally valued alternative (pens). They found that the amount participants required as compensation for the mug once their ownership of the mug had been established ("willingness to accept") was approximately twice as high as the amount they were willing to pay to acquire the mug ("willingness to pay"). 
Other examples of the endowment effect include work by Ziv Carmon and Dan Ariely, who found that participants' hypothetical selling price (willingness to accept or WTA) for NCAA final four tournament tickets were 14 times higher than their hypothetical buying price (willingness to pay or WTP).  
Also, work by Hossain and List, discussed in The Economist in 2010, showed that workers worked harder to maintain ownership of a provisional awarded bonus than they did for a bonus framed as a potential yet-to-be-awarded gain. In addition to these examples, the endowment effect has been observed using different goods in a wide range of different populations, including children, great apes, and new world monkeys.
While we should always be cautious of things "proved" with artificial lab experiments, experience supports the existence of this effect. For example, imagine haggling at a garage sale. If you're the seller, the stuff on the table is yours, so your perceived value for these items will be relatively high. If you're the buyer, the stuff on the table is someone else's, which clearly changes its perceived value.

This reminded me of a routine by the late, great George Carlin (here and below) that could be dubbed "the endowment effect bit." Warning: It's Carlin, so the language is not safe for work (NSFW) or family friendly.

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