Wikipedia, also known as the most trustworthy site of all time, defines the endowment effect as “the finding that people are more likely to retain an object they own than acquire that same object when they do not own it.” Not going to lie, I feel instantly less credible quoting Wikipedia for my opening of an article, but it’s really just a definition – and a very fitting one at that.
I always knew that the endowment effect was real, but I never really knew that there was a definition and a term specifically applied to it.
Think about it – how many times will you refuse to sell something because it has some sort of perceived value to you that it doesn’t have to other people.
For instance, maybe someone doesn’t want to move out of their $200,000 house because it’s the first house they ever bought, raised a family there, and retired in that same house.
Now they need to sell the house to downsize, but the problem is that the house is worth $200,000 but they view it as a $300,000 because of all the memories that are tied up into that house. They’ve placed this incremental value on it, without knowing, due to their bias of the endowment effect.
Is there an issue with this perceived value? No – as long as you’re willing to never sell that house.
My favorite part about the endowment effect is that people don’t even realize it’s happening to them or that they’re experiencing it.
I’m Guilty of it too…
For instance, I used to have thousands of sports cards from my childhood. I mean, like 10,000 or more. When I was still in school, my mom was having garage sale. I was very into the value of the sports cards and even bought a book that told me the proper prices of the cards to make sure that I was pricing my cards properly.
My hockey and basketball cards I sold for a very cheap amount. In fact, my book that I bought didn’t even address those values. I just didn’t care how much I got, I just wanted some cash!
My football cards, I tried to price at face value. If I got a fair market price, I was happy. If not, I would prefer just to hold onto them.
Now my baseball cards…those suckers, those were all almost double the actual value. Why did I price them this way? I LOVED baseball cards. I used to sort them by league, then by team, then by player. My favorite team is the Cleveland Indians – I had my own binder with just the Indians in it. I mean, like over 60 cards of just Jim Thome (my personal hero). These Jim Thome cards were not even for sale.
So why did I price the baseball cards so high and not even try to sell any of my Thome cards?
Well, because they meant more to me than the dollar amount. And guess what – I was fine with that! They had a personal meaning to me.
I used to watch SportsCenter for hours on end (this was when it was the same episode that played back to back to back to back) as a kid and flip through pages of pages of sports cards in my binder, recite stats to my dad until he was too annoyed to listen anymore, and show them off to my friends in a bragging sense.
I placed a perceived value on them because it meant a lot to me that was higher than the actual dollar amount.
Academic Study on the Endowment Effect
One of the most common examples of the endowment effect is from a study that was completed by Professors Kahneman, Knetsch and Thaler, which is commonly referred to as the mug experiment.[continue reading…]