Rethinking the Endowment Effect: How Ownership Affects Our Valuations

The “endowment effect" explains our irrational tendency to overvalue something just because we own it.

In the late 1970s economist Richard Thaler considered two scenarios. In the first, a man owns a case of good wine he bought in the late 1950s for $5 a bottle. When a wine merchant offers to buy his wine for $100 a bottle the man refuses, even though he never paid more than $35 for a bottle of wine in his life. In the second scenario, a man who mows his own lawn receives an offer from his neighbor’s son to mow his lawn for $8. The man refuses, even though he wouldn’t mow his neighbor’s same-sized lawn for less than $20.

Why the inconsistencies? Both scenarios highlight what Thaler termed the “endowment effect,” and it explains our irrational tendency to overvalue something just because we own it. Or, as Thaler puts it, “goods [that] are included in the individual’s endowment will be more highly valued than those not held in the endowment, ceteris paribus.”

Research over the years confirms Thaler’s initial observation. In 1990 he teamed with Daniel Kahneman and Jack L. Knetsch to conduct a clever experiment involving Cornell undergrads and coffee cups. The social scientists distributed coffee cups to half of the students but left the other half empty handed. The former group estimated a selling price and the later group a buying price. Would the students with coffee cups ask for more? This is exactly what the all-star team of researchers found; the undergrads with cups were “unwilling to sell for less than $5.25,” while their less fortunate peers were “unwilling to pay more than $2.25-$2.75.”

The question is what causes the endowment effect. In the 1980s Kahneman and his late partner Amos Tversky pointed out that humans are inherently loss averse. That is, losses hurt more than equivalent gains feel good. This is why Thaler’s hypothetical wine connoisseur demanded so much. For the connoisseur, selling his wine meant losing something, and to reconcile his loss, he demanded more than he would pay if he were the buyer. Kahneman and Tversky’s idea eventually helped Kahneman earn a Noble Price, but when it comes to explaining the endowment effect there might be more to the story.

In the last few years some psychologists have pointed out that the endowment effect results not from loss aversion but from a sense of possession, a feeling that an object is “mine.” In 2009 Assistant Professor of Marketing at Carnegie Mellon Carey K. Morewedge and a team of researchers conducted two experiments also involving coffee mugs. In one experiment, they found that buyers were willing to pay as much for a coffee mug as sellers demanded when the buyers already owned an identical mug. In another, “buyers’ brokers and sellers’ brokers agreed on the price of a mug, but both brokers traded at higher prices when they happened to own mugs that were identical to the ones they were trading.” Since the endowment effect disappeared when buyers owned what they were selling, Morewedge and his team concluded that, “ownership and not loss aversion causes the endowment effect in the standard experimental paradigm.”

Similarly, in 2010 Associate Professor of Organizational Behavior William Maddux and his colleagues published a study suggesting that the endowment effect is stronger in western cultures than East Asian cultures. In one experiment, one group of participants wrote about how important a white ceramic Starbucks coffee mug was to them; the researchers incorporated this ripple to put them into an “object-associate” mindset. The other group – the no-object-associate condition – wrote about how the mug was unimportant to them. Maddux et al found that

when object associations were made salient, European Canadians showed a significant endowment effect, whereas Japanese showed a striking trend toward a reversal of the normally robust endowment effect… [The results from all three experiments in this study] are consistent with cultural differences in self-enhancement and self-criticism, and we believe they are unlikely to be due to loss aversion, as individuals from Eastern cultures tend to be more prevention focused and biased toward the status quo than Westerners are.

This brings me to a brand new study in the Journal of Consumer Research by Sara Loughran Dommer, Assistant Professor of Marketing at Georgia Institute of Technology, and her colleague Vanitha Swaminathan, Associate Professor of Business Administration at University of Pittsburgh. Riffing on the findings produced by Morewedge, Maddux and other researchers, Dommer and Swaminathan posit that, “loss aversion has typically accounted for the endowment effect, but an alternative explanation suggests ownership creates an association between the item and the self, and this possession-self link increases the value of the good.”

To see if this is true the researchers conducted several experiments, in which they subjected participants to social self-threats. If ownership creates an association between the item and the self, then, as a means to strengthen identity, participants should demand more for items when the self is threatened. In other words, “after a self-threat… people can use possessions to affirm their self, and endowment effects are likely to be exaggerated.”

In the first experiment they manipulated social self-treat by asking half of the 46 participants to imagine themselves in a past relationship in which they felt rejected and write about thoughts and feelings associated with the relationship (self-threat condition); the other half wrote about an average day (control condition). Next, participants in the endowed condition received a good, in this case a ballpoint pen, and indicated if they preferred to keep it or exchange it for a cash amount ranging from ¢25 to $10. Their peers in the nonendowed condition picked between receiving the pen or the cash amount for each of the 40 prices.

In the second experiment 253 students from the University of Pittsburgh completed the same social self-threat manipulation featured the first experiment. But this experiment included a clever addition: the good was a reusable tote bag with the logo of either their university (Pitt) or their university’s rival (Penn State) prominently printed on it. The purpose of this addition was to test if participants valued in-group goods differently than out-group goods. Finally, an experimenter randomly determined the price of the tote bags and asked buyers and sellers if they wanted either the bag or the amount of money it was worth.

The first thing Dommer and Swaminathan found was that social-self threat indeed affected how people valued the ballpoint pen in the first experiment:

As expected… a social self-threat increased selling prices but had no effect on buying prices. These results support our hypothesis that a social self-threat increases selling prices, thus moderating the endowment effect. After a social self-threat, individuals likely have strong possession-self links because possessions can enhance the self and help individuals cope with the threat… our findings, therefore, are consistent with the ownership account.

Similar results surfaced in the second experiment, which in addition to supporting the ownership account highlighted differences between how men and women valued in-group goods and out-group goods.

The results from [the second experiment] demonstrate that social identity plays a moderating role in the endowment effect by affecting selling prices, thus providing further support for the ownership account. We find that sellers experiencing a social self-threat have higher valuations of in-group goods than of generic goods, thus exacerbating the endowment effect. Regarding out-group goods, after a social self-threat, in the selling condition men had lower valuations of such possessions than of generic goods, while female sellers exhibited no such change in valuations. Therefore, the endowment effect for an out-group good was not present for men but remained for women.

Dommer and Swaminathan conducted two additional experiments that also examined how social self-threat and associations with the totes bag affected the endowment effect. They confirmed that when it comes to valuating identity-linked goods, “men… [are] more likely to perceive the self as separate from others [and] more likely to devalue out-group goods… [Whereas] women [are] less likely to attend to out-group differences, unless the intergroup comparison are made salient.” The main conclusion, however, is that we should understand the endowment effect as a function of ownership, and not loss aversion:

The loss aversion account would predict that sellers are equally attracted to a good as are buyers, regardless of the good’s social identity associations… We find, however, that social identity associations affect selling prices, which suggests that such associations have a stronger effect on owner’s evaluations. The ownership account would attribute this result to the social identity association changing the strength of the possession-self link… [In addition to other research, this implies] that motivational factors can often override the impact of loss aversion in influencing valuations for goods.

One implication of these findings is pertinent for clothing stores. If ownership increases how much a consumer is willing to pay for a good, it would be wise for storeowners to simulate a feeling of ownership in the customer. Enter fitting rooms: research suggests that customers are more willing to purchase an item of clothing after they try it on. Dommer and Swaminathan highlight similar tactics: free trials, sampling, and coupons, for example.

Previous research hints at this. A 2004 paper by Professor of Marketing Gail Tom “[demonstrated] that the endowment effect is higher for goods that are associated with self.” In a 1998 paper Professor of Marketing Michal Strahilevitz and the Economist-Psychologist George Loewenstein showed that the endowment effect is higher “for goods that sellers have owned for a long time.”

The takeaway is obvious enough. We humans are not perfect calculators. Instead, we overvalue our possessions because they contribute to our identity and the identities of the groups we belong to. We don’t overvalue goods because we’re loss averse; we overvalue goods because they are part of who we are.

Image via shuttershock

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Homo sapiens have been on earth for 200,000 years — give or take a few ten-thousand-year stretches. Much of that time is shrouded in the fog of prehistory. What we do know has been pieced together by deciphering the fossil record through the principles of evolutionary theory. Yet new discoveries contain the potential to refashion that knowledge and lead scientists to new, previously unconsidered conclusions.

A set of 8-million-year-old teeth may have done just that. Researchers recently inspected the upper and lower jaw of an ancient European ape. Their conclusions suggest that humanity's forebearers may have arisen in Europe before migrating to Africa, potentially upending a scientific consensus that has stood since Darwin's day.

Rethinking humanity's origin story

The frontispiece of Thomas Huxley's Evidence as to Man's Place in Nature (1863) sketched by natural history artist Benjamin Waterhouse Hawkins. (Photo: Wikimedia Commons)

As reported in New Scientist, the 8- to 9-million-year-old hominin jaw bones were found at Nikiti, northern Greece, in the '90s. Scientists originally pegged the chompers as belonging to a member of Ouranopithecus, an genus of extinct Eurasian ape.

David Begun, an anthropologist at the University of Toronto, and his team recently reexamined the jaw bones. They argue that the original identification was incorrect. Based on the fossil's hominin-like canines and premolar roots, they identify that the ape belongs to a previously unknown proto-hominin.

The researchers hypothesize that these proto-hominins were the evolutionary ancestors of another European great ape Graecopithecus, which the same team tentatively identified as an early hominin in 2017. Graecopithecus lived in south-east Europe 7.2 million years ago. If the premise is correct, these hominins would have migrated to Africa 7 million years ago, after undergoing much of their evolutionary development in Europe.

Begun points out that south-east Europe was once occupied by the ancestors of animals like the giraffe and rhino, too. "It's widely agreed that this was the found fauna of most of what we see in Africa today," he told New Scientists. "If the antelopes and giraffes could get into Africa 7 million years ago, why not the apes?"

He recently outlined this idea at a conference of the American Association of Physical Anthropologists.

It's worth noting that Begun has made similar hypotheses before. Writing for the Journal of Human Evolution in 2002, Begun and Elmar Heizmann of the Natural history Museum of Stuttgart discussed a great ape fossil found in Germany that they argued could be the ancestor (broadly speaking) of all living great apes and humans.

"Found in Germany 20 years ago, this specimen is about 16.5 million years old, some 1.5 million years older than similar species from East Africa," Begun said in a statement then. "It suggests that the great ape and human lineage first appeared in Eurasia and not Africa."

Migrating out of Africa

In the Descent of Man, Charles Darwin proposed that hominins descended out of Africa. Considering the relatively few fossils available at the time, it is a testament to Darwin's astuteness that his hypothesis remains the leading theory.

Since Darwin's time, we have unearthed many more fossils and discovered new evidence in genetics. As such, our African-origin story has undergone many updates and revisions since 1871. Today, it has splintered into two theories: the "out of Africa" theory and the "multi-regional" theory.

The out of Africa theory suggests that the cradle of all humanity was Africa. Homo sapiens evolved exclusively and recently on that continent. At some point in prehistory, our ancestors migrated from Africa to Eurasia and replaced other subspecies of the genus Homo, such as Neanderthals. This is the dominant theory among scientists, and current evidence seems to support it best — though, say that in some circles and be prepared for a late-night debate that goes well past last call.

The multi-regional theory suggests that humans evolved in parallel across various regions. According to this model, the hominins Homo erectus left Africa to settle across Eurasia and (maybe) Australia. These disparate populations eventually evolved into modern humans thanks to a helping dollop of gene flow.

Of course, there are the broad strokes of very nuanced models, and we're leaving a lot of discussion out. There is, for example, a debate as to whether African Homo erectus fossils should be considered alongside Asian ones or should be labeled as a different subspecies, Homo ergaster.

Proponents of the out-of-Africa model aren't sure whether non-African humans descended from a single migration out of Africa or at least two major waves of migration followed by a lot of interbreeding.

Did we head east or south of Eden?

Not all anthropologists agree with Begun and his team's conclusions. As noted by New Scientist, it is possible that the Nikiti ape is not related to hominins at all. It may have evolved similar features independently, developing teeth to eat similar foods or chew in a similar manner as early hominins.

Ultimately, Nikiti ape alone doesn't offer enough evidence to upend the out of Africa model, which is supported by a more robust fossil record and DNA evidence. But additional evidence may be uncovered to lend further credence to Begun's hypothesis or lead us to yet unconsidered ideas about humanity's evolution.