An object feels more valuable when you own it, compared to when you don’t.
Surprisingly, research has found this true even if you owned the object for just a few minutes. That’s the Endowment Effect.
Multiple theories explain why it happens, but none are completely foolproof. “Loss Aversion” made some sense to me, but you can check Wikipedia for the complete list.
Regardless of why this happens, once you are aware of it, you will notice this is happening all around us all the time.
Obvious Example: Utilized for Sales Tactics
Sellers encourage psychological ownership of items so that we value them more.
The car dealership offers a test drive and the jewelry shop lets you try it on. While it’s a valid way to get a feel for a new item, it has the added benefit of making you feel ownership of it.
Another great example is “Free Returns”. Once you have the object in your hand at home, you are more likely to keep it, even if it doesn’t suit your needs properly.
Endowment Effect Beyond Physical Objects
A sense of ownership is a power thing.
It’s not just physical objects that we can own. We can “own” opinions, ideas, problems, solutions, and abstract concepts.
- At work, we are encouraged to “own” the problem. Think of the project as “yours” to deliver. “Your” project is more important than “others”.
- The effect can be extended to “belonging” and “identity”.
- A person may feel more attachment to their local football club than if he was born in another place.
- A person may identify as a Taylor Swift fan and that identity “ownership” will impact them when buying concert tickets.
- An opportunity we have now feels much more valuable than one that isn’t here yet.
I am stretching it a bit, but you get the idea.
How to avoid the Endowment effect?
Endowment Effect tends to skew our judgment of an item’s true value. When handling a tradeoff, you don’t want to overvalue or undervalue your options. To make accurate decisions, you need to factor in the Endowment Effect.
How?
Avoid Endowment Effect by pretending you don’t own the item yet.
Ask yourself:
- “If I didn’t own this item, how much would I pay to obtain it?”
- “If I didn’t have this opportunity, how much would I be willing to sacrifice to obtain it?”
- “If I wasn’t already involved in this project, how hard would I work to get on it?”
Try to get a clear picture of the item’s true worth and then make a decision.