The Frontal Cortex

The Endowment Effect

I went jean shopping this weekend. Actually, I went to the mall to return a t-shirt but ended buying a pair of expensive denim pants. What happened? I made the mistake of entering the fitting room. And then the endowment effect hijacked my brain. Let me explain.

The endowment effect is a well studied by-product of loss aversion, which is the fact that losing something hurts a disproportionate amount. (In other words, a loss hurts more than a gain feels good.) First diagnosed by Richard Thaler and Daniel Kahneman, the endowment effect stipulates that once people own something – they have an established or imagined “property right” to the object – that something dramatically increases in subjective value. Wikipedia has an excellent summary of an experiment documenting the endowment effect by Dan Ariely and Ziv Carmon:

Duke University has a very small basketball stadium and the number of available tickets is much smaller than the number of people who want them, so the university has developed a complicated selection process for these tickets that is now a tradition. Roughly one week before a game, fans begin pitching tents in the grass in front of the stadium. At random intervals a university official sounds an air-horn which requires that the fans check in with the basketball authority. Anyone who doesn’t check in within five minutes is cut from the waiting list. At certain more important games, even those who remain on the list until the bitter end aren’t guaranteed a ticket, only an entry in a raffle in which they may or may not receive a ticket. After a final four game, Carmon and Ariely called all the students on the list who had been in the raffle. Posing as ticket scalpers, they probed those who had not won a ticket for the highest amount they would pay to buy one and received an average answer of $170. When they probed the students who had won a ticket for the lowest amount they would sell, they received an average of about $2,400. This showed that students who had won the tickets placed a value on the same tickets roughly fourteen times as high as those who had not won the tickets.

What does this have to do with fitting rooms and jeans? Once I tried on the pants, I became an implicit owner of them. I stared at myself in the mirror and admired the fit, the wash, etc. I thought about how good they would look with my shoes. I contemplated wearing them to various upcoming events and all the strangers who would look at my pants and think “Those are nice pants!” In other words, I spent a few minutes imagining my life with these new jeans and, once that happened, the pants suddenly became much more valuable. I mentally endowed myself with the object and didn’t want to lose something that I didn’t even own. As a result, the ridiculous price tag ($170 for Levis!) no longer seemed so ridiculous. The lesson? Don’t try something on that you don’t want to buy.

Update: Via a reader (thanks Alon!) comes this study, which demonstrates that merely touching an item can trigger the endowment effect.

Comments

  1. #1 Mozglubov
    June 22, 2009

    That’s probably also part of the reason why it feels so horrible to have someone rob you.

  2. #2 Matt
    June 22, 2009

    I didn’t even know Levi’s made jeans that expensive. They must be super sharp!

    I had a very similar experience at my local bike shop. I went to swap saddles for my old bike and somehow test road a new one around the neighborhood–of course I wound up purchasing it because I felt inextricably connected to it.

  3. #3 theMaxx
    June 22, 2009

    If you’re throwing down that kind of serious cash, the fit on those jeans better highlight a different sort of endowment effect.

  4. #4 Lefty
    June 22, 2009

    Well, you could just get fat. Then you’ll have a much easier time finding clothes which don’t make you look good, and therefore you won’t want to keep after trying them on.

  5. #5 nick
    June 22, 2009

    Say you had discovered a flaw in the jeans while taking them off…do you think the endowment effect would have been ‘cancelled’ psychologically, or that you would still have been as interested in purchasing another pair without the flaw?

    I’m guessing probably the latter. It seems interesting that the ‘imagined property right’ needn’t exist in a particular object. But maybe it would be different if it were a unique object.

    I suppose it’s difficult to say where the ‘endowment effect’ blurs into other brain priorities which may overrule it.

  6. #6 Elizabeth
    June 22, 2009

    I wonder if it is that simple. I need to know if you took just one pair into the dressing room… if so, you already made a selection.

    If you had taken several pairs, all fitting quite well — would have purchased all of them?

    How does NEED {really need a pair today, now} versus WANT influence the choice?

  7. #7 Jeff D.
    June 22, 2009

    i was ready to agree that jeans which give the illusion that i have a large penis are likely to make me buy, but then i read the post.

  8. #8 Dacks
    June 22, 2009

    I’ve heard this line of reasoning before, but I must be an outlier. Recently went through the whole car buying,”you-need-to-ride-in-it-first” scene and was completely ready to walk out the door, not as a ploy but because I really didn’t care whether I bought that particular car. This caused them to unexpectedly meet my price, the joy of which was almost entirely offset by realizing that I would have to go through at least an hour more of paperwork.
    (But now that I have the car, I do really like it.)

  9. #9 glow owl
    June 22, 2009

    i wonder, do you know?, if there are any similar correlates with mate-pairing? does one feel more “ownership” of a mate after s/he has “tried the other on”? (so to speak.)

  10. #10 Kathleen Schaub
    June 22, 2009

    Sales and marketing people try to discover the inflection point in the buying process where a prospective customer switches from being a looker to being a “buyer” in their own mind.

    High end stores like Nordstrom know that this happens in the fitting room. That’s why the sales people don’t ask “Can I help you?” (the answer is almost always no). Rather they’ll ask “Can I start a room for you?” If you can get someone into the fitting room, you’ve got a solid chance at a purchase.

    There are similar inflection points in the purchase of any product. The prospective customer starts to ask “buying questions” that pertain to the how of buying rather than the why.

    I hadn’t considered how loss aversion might play a role, although I read Ariely’s book. Thanks for the idea, Jonah.

  11. #11 heather sf
    June 22, 2009

    I must also be an outlier to this effect. I can easily try on twenty items and only buy one or, for real, none at all. But I have a shopping guilt complex (I feel guilty buying stuff I don’t need), so this hugely helps.

    Oh my god, there’s a giant spider, got to go.

  12. #12 Danny
    June 23, 2009

    As with the certain sections of book* (which I started reading yesterday and am really enjoying) I find myself questioning if there might be another explanation for some of these things. For instance, the Duke University Basketball tickets situation: couldn’t it be possible that, instead of placing more value on the tickets because they owned them, the lucky ticket holders were just spending someone else’s imaginary cash?? If you ask someone how much they would spend on an item, that pertains to their own budgeting but if you ask what they would sell an item for, they are putting a value on the item in the currency of someone else’s cash. It adds an extra layer of abstraction from the actual valuation process, perhaps.

    Interesting stuff though, as always.

    *”How We Decide”

  13. #13 JJ
    June 23, 2009

    Insurance Agents have known this for years. It is common practice, in the sales pitch, to “put the client in the picture” and “develop the need” — the way it is done varies (there are some horror stories about agents describing terrible circumstances happening to the family in order to put them in the picture and “need” life insurance).

    jj

  14. #14 fiftycent
    June 23, 2009

    the logic in the duke basketball study is flawed and doesn’t necessarily document the endowment effect. there is spurious correlation between the prices set by the two parties. the bid ask spread is wide in this case because the seller knows he can sell his ticket to a ticket broker who will then unload it to someone much wealthier than the average college student. for instance, a broker/banker would have no qualms paying 2400 to take a hedge fund client to the final four (this is pre financial crisis we’re talking). the kid with the 170 bid probably doesn’t have any more money than that, so that’s his limit. the market may appear inefficient here, but one has to realize that the market for duke basketball tickets especially in the ncaa tournament is much larger than just students. i think it comes down to basic economics.

  15. #15 Matthew
    June 24, 2009

    I have experienced this while shopping for my first home. Once you decide to make an offer on a place it starts to feel like it is yours. It hurts to “lose” it when a better offer beats yours or some other detail interferes. I have to stop myself from making counter offers to get what felt like MY new house back into MY hands.

    I also think this is how short-sales work. They get a buyer on the hook at a low price and then let the property go to auction after the buyer has personal interest vested in what feels to them like their new house.

  16. #16 Nick
    July 8, 2009

    First of all I agree with theMax. I think there were a lot of interesting comments made by others which point to some other motivations for buying the jeans then it hurts too much to lose it. First of all what was your motivation going into the changing room? I like what someone was saying (sorry too lazy to figure out who said it) about getting a customer to go from being a “looker” to being a “buyer”. You went in into the store to return a shirt, so what got you to pick up some jeans and go into the dressing room? Whatever that was probably played a larger role in purchasing the jeans then the idea of losing of the jeans.

    Secondly, maybe it’s just me but i wasnt completely convinced by that Duke survey. Nothing specific really just seemed pretty unscientific and there seemed to be many other things at play then increased value upon ownership. The people who got tickets were excited about the game and the people outside were probably resigned to loss, planning on going home, ect. I don’t know much about scalping, but if people really try to buy tickets from people who have them (and not forge them) and sell them to people who want them, how could they make a profit? I would have preferred a study with some control.

    Anyway interesting article. It got me thinking.

  17. #17 Jasmine Kwong
    August 22, 2009

    In fact, don’t even touch anything that you don’t want to buy.

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