Imagine you have just bought a lottery ticket for Rs100. You walk to the pub to meet a friend, all the while imagining how you would spend the Rs100-crore prize if you win. Your friend offers to buy the ticket from you for Rs100, saying you could always buy yourself another ticket from the store on the corner of the street where you live. How willing would you be to sell your ticket for the Rs100 you paid for it? If you were asked to name your price for the ticket, how much would it be?
Even though logic would dictate that you should be willing to sell your lottery for Rs100, research shows that most people would not do so because of a phenomenon called the “endowment effect”. People ask for more money to sell an item that they own, than they’re willing to pay to buy the same. The mere ownership of a product adds value to it that goes beyond the paid price. You won’t be willing to buy an old, rusty car for Rs50,000, but if you owned that car and wanted to sell it, you’d expect to get a much higher price for it.
In other words, once you own an item, you want more to part with it than you would be willing to pay to acquire it.
This basic bias results in a variety of mistakes that actually cost people money. It is a result of this mental bias that people are unwilling to sell stock they own even though they wouldn’t buy it at its current market price. Just owning the stock is enough for them to imbue it with some psychological value that, in reality, doesn’t exist.
Businesses often use this principle to create an impression of endowment to enhance their sales. Why do you think companies offer free take-home trials? As people try out the offered product, they develop a sense of ownership or endowment that later works against their desire to return the product (assuming, of course, that the product performs satisfactorily). Temporarily owning a product exposes you to the joys of using it, and this is what makes it hard for you to return it. Take, for example, the case of a family surviving Delhi’s brutal summers with nothing but ceiling fans for cooling. If exposed to the comforts of air conditioning for a few days, this family would have a tough time giving up this “endowment”. Going back to the non-AC environment would seem like a huge setback and the pain that the family members will experience on giving up air conditioners would be far greater than the pleasure they got.
Consider another example—a cable service operator who offers two levels of subscription, a base package of 30 channels and a premium package of 60 channels. By offering the premium package on a free-trial basis for a couple of months, the operator can make it very difficult for the subscribers to go back to the base package because now they will have to give up “their” channels. You were perfectly happy with the 30 channels that you had access to before the free-trial offer came your way, but now that you have been “endowed” with the 60-channel option, giving it up becomes a source of major discomfort.
You need to guard against other, more subtle ways in which businesses create the feeling of ownership among potential customers. Simple things, such as setting aside a product for you to pick up later can be a significant motivator for you to return to their store. Instead of creating ownership in the product, marketers can also create ownership in the deal being offered. For example, a furniture retailer wanting to invite former customers to a big sale may offer them Rs10,000 discount on purchases of Rs1 lakh or more. The retailer can either send out a mailer announcing the discount or send out cheques for Rs10,000 cashable on the purchase of furniture. The second option will work better as some customers will view the cheque as something that now belongs to them and will think that if they don’t make the purchase, they will have to give up the discount amount.
People have a greater sensitivity to losses than they do to gains of the same amount. When we acquire something, it is viewed as a gain, whereas when we give up something, it is viewed as a loss. Thus, giving up something that you are already endowed with hurts more and, therefore, you are either reluctant to give it up or expect a bigger payout to endure the pain of “separation”.
So, watch out before you become a victim of the trappings of endowment. Be aware of this natural bias and compare the attractiveness of your options independent of whether you own any of the options or not. Do not let the marketers fool you into attaching more value to an offering than what the marketplace warrants.
Praveen Aggarwal and Rajiv Vaidyanathan are marketing professors at the University of Minnesota in Duluth who want to put consumers in control of marketing campaigns. They can be reached at driversseat @livemint.com