Endowment effect

The endowment effect is the extra value a thing gains the moment it becomes yours. In theory, the most you would pay for a coffee mug and the least you would accept to give it up should be about the same. In practice, owners ask far more than buyers will pay, and the gap appears almost instantly. That is why returning something you liked in the store can feel like a loss, and why the old lamp you never use is still in the closet.

The mugs

The economist Richard Thaler named the effect in 1980, in a paper arguing that real consumers depart from the textbook in predictable ways. He used the word endowment because the extra value attaches to whatever a person already holds. Ten years later Thaler, Daniel Kahneman and Jack Knetsch tested the idea in a classroom market.

The first group was 44 students in an advanced undergraduate law and economics class at Cornell University. To make sure they understood how the market worked, the students first traded tokens that could be cashed in for set amounts, and those markets ran just as economic theory predicts. Then every other student was handed a Cornell coffee mug, which sold for $6.00 at the campus bookstore. Owners were invited to sell, and the others to buy, over four rounds of trading.

Since the mugs had been handed out at random, about half of them, 11 of the 22, should have changed hands. Over the four rounds, the number of trades was 4, 1, 2 and 2. The median owner would not sell for less than $5.25, while the median buyer would pay only $2.25 to $2.75. The students had owned their mugs for a few minutes.

A later version at Simon Fraser University, with 77 students, added a third group. Sellers were given a mug and asked at what prices they would sell it. Buyers were asked what they would pay. Choosers were given nothing and asked, at each price, whether they would rather have the mug or the cash. Sellers valued the mug at $7.12, buyers at $2.87 and choosers at $3.12. Choosers and sellers faced the same choice, mug or money, and the only difference was that the sellers had been handed the mug first. That one step more than doubled its value.

Why owning changes value

The authors’ explanation was loss aversion. Once the mug is yours, selling it is a loss, and losses weigh more than gains of the same size, so you need more money to make up for it. Buyers, by contrast, were valuing a gain. The choosers, who were in the same position as the buyers in all but name, show that people were not unusually reluctant to spend money. They were reluctant to give something up.

Attachment adds to the pull. Things we own become part of how we see ourselves, and a thing we have used, chosen or arranged carries traces of that effort. The IKEA effect is the version of this that comes from building something yourself.

How it runs a chain

The endowment effect rarely causes the first purchase. It keeps purchases from being undone, and it keeps old things from leaving when new ones arrive. Take a mattress bought with a 100-night trial. You fully intended to return it if it was not perfect, but by night 60 it is your mattress, and boxing it up feels like a loss. So you keep it, buy new sheets in its deeper size and a protector to look after it. The old mattress, which you would never buy today, goes to the guest room because giving it away seems wasteful. The household now owns more, and the next purchase starts from a fuller house.

How sellers make you an owner first

• Free trials and try-at-home. Sixty nights on a mattress, a month of a premium subscription, five pairs of glasses to try at home. Each one makes you an owner before you are a buyer.
• Test drives and handling. Getting the product into your hands, or onto your wrist, is a step toward feeling it is already yours.
• Generous returns. A long return window lowers the risk of buying, and it also gives the endowment effect time to work, so many returns never happen.
• Personalization. Choosing the color, adding a monogram or saving a configuration all attach your choices to the product before you have paid.

How to keep ownership from deciding

1. Set the return date on day one. When a trial starts, put the last return day in your calendar along with a question: would I buy this today, at full price, if it were still in the store?
2. Ask the stranger’s price. For things you already own, look up what they actually sell for. If you would not buy the item back for that amount, you are keeping it for the endowment effect, not for its use.
3. Let the old one leave first. When something is replaced, decide where the old one is going before the new one arrives. A gap between arrival and departure is where duplicates settle in.
4. Be careful with free. Trials of things you had not planned to buy are an invitation to start owning. Decline them, or treat the trial as the purchase decision it really is.

Where it meets the Diderot effect

Diderot’s essay opens with the endowment effect pointing in two directions. He mourns the old calamanco gown he let go, which had shaped itself to him over the years, and he stands guard over the new scarlet one, which arrived as a gift and at once became his to protect. The Diderot effect adds things to a set, and the endowment effect makes it hard for the old pieces to leave, so a chain tends to grow instead of simply replacing. Our seven rules for stopping a chain include one in, one out for exactly that reason, and a personal uniform keeps a wardrobe from collecting near-duplicates.