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Rethinking the Endowment Effect: How Ownership Affects Our Valuations

In the 80s the endowment effect was explained because we are loss averse (losses hurt more than gains). This was part of the idea that led to Daniel Kahneman and Amos Tversky's Nobel Prize.

But, as Sam McNerney uncovers, there might be more to the story.

What causes the endowment effect?

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.”

The endowment effect is 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.

The implications?

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.