BEWARE OF THE ENDOWMENT EFFECT!
Before explaining the term endowment effect, let me first ask you one question
Do you find it difficult to let go of items even though you are fully aware you no longer need or want them?
Have you ever noticed that your wardrobe becomes cluttered with clothes that you will rarely wear, as you don’t want to throw them away?
It happens to all of us. Many of us find it difficult, even painful, to let some items go. When this happens with too many things in our lives, clutter can easily build up.
Letting Go Is Hard to Do
It’s all because of our tendency to undervalue things that aren’t ours and to overvalue things that we already own. This is one of the concepts of psychological behavior called an Endowment effect
What is the endowment effect?
The endowment effect is an emotional bias that says that once you own something (or have a feeling of ownership) you are more likely to become attached to them and overvalue their worth than the market value. It also means that people who don’t own the product are willing to pay less than people who owned it.
Because of endowment effect bias, you fall into the trap of investing your time, money & effort in non-essential activities or items.
If it’s mine, it’s worth more; if it’s yours; it’s worthless
The two main psychological reasons causing the endowment effect are:
- Ownership — Once you have the feeling of ownership you value that more than a similar item you do not own as ownership creates satisfaction i.e. you fall in love with what you already have. It also means that you are unwilling to trade something that you already own in exchange for something of equal value.
There is an old proverb –“A bird in the hand is worth two in the bush” which means that it’s better to hold onto something you have rather than take the risk of getting something better which may come to nothing.
2. Loss aversion — You hate losses more than love winning as fear of loss is twice as powerful than gain and cause a greater emotional impact on us.
Scientific proof — Endowment Effect
Scientific research has been done by Noble Prize-winning Pros. Kahneman, Knetsch & Thaler to demonstrate the power of the endowment effect plays an important role in influencing our decision making.
Dividend the groups into two — A & B and handed over coffee mug as gifts to the first Group A and nothing to Group B, then given the opportunity to Group A to sell their mugs.
They found out that Group A, who owned the mugs placed a significantly higher value on the mugs than Group B who didn’t own it. Why so? Because once people had accepted the mugs they get attached to them and established ownership.
In your own life, you can think of items that seem to be more valuable the moment you think about giving them away. Think of clothes that you have in your wardrobe that you never wore or think of some gadget that you have in your home sitting in the box.
Whether or not you use them, subconsciously, the very fact that they are yours makes you value them more highly than you would if they didn’t belong to you.
People value things more once it becomes theirs
Let me take you through some real-life examples of endowment effects:
1. Endowment effect in Stock Market:
When you buy a stock at $40, and expecting to sell it at $100 but the stock stabilizes at $80. So what will you do? You are not going to sell until the stock reaches its full expected value. The fear of losing the stock’s total value fools you into investing too much capital in “dead money” when they would be far better off finding a new stock to buy.
Their valuation of an owned object will often be higher than its true fair market value.
2. Endowment effect in Marketing:
• Have you ever wondered why companies offered a free sample of products, test drives, trail subscriptions for 1 month, or 14-day free trial?
Many brands use money-back guarantee, free day trial strategy to pull the customer into the product, they used this kind of tactics to make you feel like an owner, you’re more likely to overvalue it and pay more for what they’re selling. When they put the expiry date on the availability of your freebies, it also triggers loss aversion and creates a sense of urgency for added potency.
a. Dormeo Mattresses is one of the examples that use a 60-day money-back guarantee and let the customer buy and enjoy a product for 60 days, during that trial period you feel like the owners, and chances of you returning the product are very low.
b. Netflix offers a Free 30 day Trial to the users gives them the chance to fall in love with their services without any risk. By the time the free trial period ends, their aversion to loss makes it difficult to turn back and then they fall into the trap of purchasing the subscription.
c. Lots of audiobook and podcast apps offering free trial but once you get to hang on it you feel the desire to purchase the subscription.
d. Many e-commerce companies like Myntra, Amazon, Ajio, Flipkart, etc. use the endowment effect strategy to let customers order multiple dresses or any products with a promise that they can return the items that they don’t like for free of cost.
Image & datasource: Google, canva, slidemodel.com, blog.crobox.com, invertedpassion.com, psychreg.org
• Haptic Imagery — “Haptic” means anything relating to the sense of touch to create a perception of physical control of having or holding it which increases the feeling of ownership that produces the endowment effect.
a. From sofas and lamps to rugs and tables, all of the products in IKEA Place are 3D, they use haptic imagery concept to lets you see how products fit within your personal space. IKEA’s Place app lets you see how a product might look at your personal office or home, giving a sense of ownership.
b. Another example is Wayfair, they also use augmented reality allowing customers to create an interactive 3D room, view it from different angles, and experiment with styles and layouts.
Thus, the product subconsciously becomes endowed as you perceive it to be yours. The more vivid the haptic image, the greater the perception of control and the feeling of ownership.
c. Lenskart uses free eye check-up; trails of frames at home, trying frames online making it easier to turn curious online shoppers into buyers.
• Free test drive
You can see how many brands like Jaguar, Hyundai, SUV, Nexa, Nissan India and many more offering free tests drive service to customers. They do so to encourage you in every way to think about what it would be like to possess the car and to kick-start the endowment effect. The endowment effect is so strong that even imagined ownership can increase the value of something.
There are various mobile showroom stores like Apple stores that let people play around with devices for as long as they like. The longer people spend interacting with these products, the greater the sense of ownership becomes.
Many online and offline clothing stores are using the endowment effect too by offering the customer to pay only after delivery.
| Endowment Effect’ affects our decision making
If you are having a tough time making a decision on something you want to declutter,i.e., shifting yourself from non-essentialist to essentialist activities, Greg Mckeown in his book “Essentialism” said that you need to pretend that you don’t own it yet.
Instead of asking, “How much do I value this item? Ask yourself, “If I did not own this item, how much would I pay to obtain it?” This is one of the simple antidotes to the endowment effect described by Tom Stafford. This can weaken the ties you have to it.
Next time you face difficulties making decisions always ask yourself is the endowment effect holding you back from letting go of the clutter.
Thank you for reading, hope you find it useful!
Do share more such examples of the endowment effect and leave your valuable feedback.