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

3D printing might save your life one day. It's transforming medicine and health care.

What can 3D printing do for medicine? The "sky is the limit," says Northwell Health researcher Dr. Todd Goldstein.

Northwell Health
Sponsored by Northwell Health
  • Medical professionals are currently using 3D printers to create prosthetics and patient-specific organ models that doctors can use to prepare for surgery.
  • Eventually, scientists hope to print patient-specific organs that can be transplanted safely into the human body.
  • Northwell Health, New York State's largest health care provider, is pioneering 3D printing in medicine in three key ways.
Keep reading Show less

A map of America’s most famous – and infamous

The 'People Map of the United States' zooms in on America's obsession with celebrity

Image: The Pudding
Strange Maps
  • Replace city names with those of their most famous residents
  • And you get a peculiar map of America's obsession with celebrity
  • If you seek fame, become an actor, musician or athlete rather than a politician, entrepreneur or scientist

Chicagoland is Obamaland

Image: The Pudding

Chicagoland's celebrity constellation: dominated by Barack, but with plenty of room for the Belushis, Brandos and Capones of this world.

Seen from among the satellites, this map of the United States is populated by a remarkably diverse bunch of athletes, entertainers, entrepreneurs and other persons of repute (and disrepute).

The multitalented Dwayne Johnson, boxing legend Muhammad Ali and Apple co-founder Steve Jobs dominate the West Coast. Right down the middle, we find actors Chris Pratt and Jason Momoa, singer Elvis Presley and basketball player Shaquille O'Neal. The East Coast crew include wrestler John Cena, whistle-blower Edward Snowden, mass murderer Ted Bundy… and Dwayne Johnson, again.

The Rock pops up in both Hayward, CA and Southwest Ranches, FL, but he's not the only one to appear twice on the map. Wild West legend Wyatt Earp makes an appearance in both Deadwood, SD and Dodge City, KS.

How is that? This 'People's Map of the United States' replaces the names of cities with those of "their most Wikipedia'ed resident: people born in, lived in, or connected to a place."

‘Cincinnati, Birthplace of Charles Manson'

Image: The Pudding

Keys to the city, or lock 'em up and throw away the key? A city's most famous sons and daughters of a city aren't always the most favoured ones.

That definition allows people to appear in more than one locality. Dwayne Johnson was born in Hayward, has one of his houses in Southwest Ranches, and is famous enough to be the 'most Wikipedia'ed resident' for both localities.

Wyatt Earp was born in Monmouth, IL, but his reputation is closely associated with both Deadwood and Dodge City – although he's most famous for the Gunfight at the O.K. Corral, which took place in Tombstone, AZ. And yes, if you zoom in on that town in southern Arizona, there's Mr Earp again.

The data for this map was collected via the Wikipedia API (application programming interface) from the English-language Wikipedia for the period from July 2015 to May 2019.

The thousands of 'Notable People' sections in Wikipedia entries for cities and other places in the U.S. were scrubbed for the person with the most pageviews. No distinction was made between places of birth, residence or death. As the developers note, "people can 'be from' multiple places".

Pageviews are an impartial indicator of interest – it doesn't matter whether your claim to fame is horrific or honorific. As a result, this map provides a non-judgmental overview of America's obsession with celebrity.

Royals and (other) mortals

Image: The Pudding

There's also a UK version of the People Map – filled with last names like Neeson, Sheeran, Darwin and Churchill – and a few first names of monarchs.

Celebrity, it is often argued, is our age's version of the Greek pantheon, populated by dozens of major gods and thousands of minor ones, each an example of behaviours to emulate or avoid. This constellation of stars, famous and infamous, is more than a map of names. It's a window into America's soul.

But don't let that put you off. Zooming in on the map is entertaining enough: celebrities floating around in the ether are suddenly tied down to a pedestrian level, and to real geography. And it's fun to see the famous and the infamous rub shoulders, as it were.

Barack Obama owns Chicago, but the suburbs to the west of the city are dotted with a panoply of personalities, ranging from the criminal (Al Capone, Cicero) and the musical (John Prine, Maywood) to figures literary (Jonathan Franzen, Western Springs) and painterly (Ivan Albright, Warrenville), actorial (Harrison Ford, Park Ridge) and political (Eugene V. Debs, Elmhurst).

Freaks and angels

Image: Dorothy

The People Map of the U.S. was inspired by the U.S.A. Song Map, substituting song titles for place names.

It would be interesting to compare 'the most Wikipedia'ed' sons and daughters of America's cities with the ones advertised at the city limits. When you're entering Aberdeen, WA, a sign invites you to 'come as you are', in homage to its most famous son, Kurt Cobain. It's a safe bet that Indian Hill, OH will make sure you know Neil Armstrong, first man on the moon, was one of theirs. But it's highly unlikely that Cincinnati, a bit further south, will make any noise about Charles Manson, local boy done bad.

Inevitably, the map also reveals some bitterly ironic neighbours, such as Ishi, the last of the Yahi tribe, captured near Oroville, CA. He died in 1916 as "the last wild Indian in North America". The most 'pageviewed' resident of nearby Colusa, CA is Byron de la Beckwith, Jr., the white supremacist convicted for the murder of Civil Rights activist Medgar Evers.

As a sampling of America's interests, this map teaches that those aiming for fame would do better to become actors, musicians or athletes rather than politicians, entrepreneurs or scientists. But also that celebrity is not limited to the big city lights of LA or New York. Even in deepest Dakota or flattest Kansas, the footlights of fame will find you. Whether that's good or bad? The pageviews don't judge...

Keep reading Show less

Thumbs up? Map shows Europe’s hitchhiking landscape

Average waiting time for hitchhikers in Ireland: Less than 30 minutes. In southern Spain: More than 90 minutes.

Image: Abel Suyok
Strange Maps
  • A popular means of transportation from the 1920s to the 1980s, hitchhiking has since fallen in disrepute.
  • However, as this map shows, thumbing a ride still occupies a thriving niche – if at great geographic variance.
  • In some countries and areas, you'll be off the street in no time. In other places, it's much harder to thumb your way from A to B.
Keep reading Show less

Michio Kaku: Genetic and digital immortality are within reach

Technology may soon grant us immortality, in a sense. Here's how.

  • Through the Connectome Project we may soon be able to map the pathways of the entire human brain, including memories, and create computer programs that evoke the person the digitization is stemmed from.
  • We age because errors build up in our cells — mitochondria to be exact.
  • With CRISPR technology we may soon be able to edit out errors that build up as we age, and extend the human lifespan.
Keep reading Show less