(featured image credit: Les Chatfield CC BY)
Value is in the eye of the holder, even more than in the eye of the beholder
Something terrible happened to me last weekend. Well, that is what it felt like, anyway. My email had dried up. Not even spam came through. At first, I didn’t even realize there was something amiss: perhaps it was just a temporary lull, and normal service would be resumed. But towards Saturday evening I started getting a little worried – even more so when I started getting messages via other channels from people who reported mail they had been trying to send had bounced.
Thankfully, after a bit of sleuthing, I discovered the reason why no mails were coming through, and fixed the problem. Technically, it was a doddle, but that was only part of the whole story. It was not the fact that I had missed a few emails over the course of maybe 12 hours that was so terrible.
A time machine
The trouble was a Gmail account through which all the incoming mail of my multiple primary work and private mailboxes passes. It has a capacity of 15GB. That is a huge but abstract number which, so I discovered, corresponds with more than 170,000 mails (some with large attachments). For more than 7 years since I created it, it needed no attention at all. But eventually, last weekend, it had filled up and refused to let any more mails pass through.
I do routinely manage my primary mailboxes, regularly deleting the oldest mail after archiving the important messages. But here I was suddenly confronted with emails going back all the way to 2011. It was like stepping into a time machine. I could see an email exchange with an old friend I’ve not heard from for years. The agenda of a management meeting at a previous employer. A purchase I’d made on eBay. A joke from one of my children. All these emails, my emails, contained so many traces of my past I did not even realize I still had.
Here were many messages that, for sure, I would not have archived, and the mere discovery of them all made me very reluctant to delete them. I almost felt physical pain as I dispatched 30,000 of them to the bin to make space and restore my email service. I had a bad case of the endowment effect.
This is the name given to the propensity most of us exhibit to attribute more value to things we possess. The stacks of old magazines, boxes of nuts, bolts, bits of wire and plugs, offcuts of wood or other items of detritus that populate lofts, cellars and garden sheds are tangible evidence of this phenomenon. We often rationalize holding on to all this stuff by claiming that “it might come in handy one day”. Sometimes we can even prove that we once located just the right screw for some odd job among the jumble. But the real reason we keep it all is simply that we already possess it.
Imagine how little you’d be willing to pay for a box containing someone else’s random collection of old odds and ends. And imagine how much you would require to agree to throw out your own box of bits and pieces. This difference between Willingness to Pay and Willingness to Accept is a way of quantifying the endowment effect.
A mugs’ game
One of many experiments demonstrating this is described in a classic paper by Daniel Kahneman, Jack Knetsch and Richard Thaler. They gave half of the students in a Cornell university lecture room a mug which was sold for $6 in the local store, and then established how much those who received one would sell it for, and how much those who didn’t get a mug would pay for one. The median asking price was $5.25, while the median offer price varied between $4.25 and $4.75 over four rounds.
We typically see the endowment effect play out for physical objects. But it also applies to the realm of the intangible as I experienced – and not for the first time. My computer’s drive is full of old files which I keep “just in case”, much like miscellaneous bits of hardware. I’d sooner upgrade to a larger drive than to have to weed out my ancient documents and folders. They’re mine!
Perhaps even more striking is the situation with recorded TV programmes. I have dozens of them on the TiVo recorder, and on stacks of DVDs and indeed old VHS tapes. Would I record these programmes if they were broadcast today? For many of them, most likely not. And yet, I strongly resist throwing away these old tapes and DVDs, or deleting the unwatched programmes that have been taking up space on the TiVo (permanently 95% full) for two years and more. Somehow, the mere fact that I recorded these programmes has given them value – so much value that I cannot let them go.
Ownership not required
It turns out we don’t even need to technically own something to value it more. Canadian researchers Charan Bagga, Neil Bendle and June Cotte investigated how people perceive objects they rented or borrowed, or that are not in their possession. One of their studies took place at an ice skating trail, where most visitors brought their own skates, but every day 20-30 people still rented them from the establishment for $6 (payable in advance). Over a period of 10 days, they divided skaters who came without their own equipment into three conditions. In the rental condition, skaters paid for the use of the skates as normal, while in the borrowing condition, skaters were told the establishment ran a special promotion, and they could borrow the skates free of charge. In both conditions, when the skaters came to return the skates, they were asked how much they’d be prepared to pay for them. In the final condition, non-possession, skaters were asked how much they’d be prepared to pay for the skates after they had chosen them, but before they paid for the rental.
The researchers found that people who had rented the skates were willing to pay significantly more for them (nearly $39) than people who had borrowed them ($26.60) or those in the non-possession condition (just over $30). The difference between the latter two conditions was not significant. Subsequent studies, using tea mugs, pens and beer mugs in similar conditions explored this further, confirming that renting objects activates the endowment effect, while borrowing doesn’t.
It is not surprising that such a powerful and common effect can be observed widely – and not just in bulging email inboxes, lofts and garden sheds, or computer drives. We overvalue what we own, and that may cause investors to hang on to stocks even if they are inappropriate or no longer profitable. House sellers demand too high a price compared to what the market will bear, and take much longer to complete a sale. Car salespeople invite prospective customers to sit in the vehicle in the showroom and ask them to imagine where they’d drive to – or indeed insist that they take it for a test drive, perhaps even a whole weekend – to increase the chance of a sale. We are offered free trials, or the chance to return items if we don’t like them.
But we can also use it to make better choices. Say you’re booking a holiday, and you’re offered an upgrade to a flat with a sea view for £100 extra. Is that a good bargain? Is two weeks of looking out over the sea rather than the car park worth that amount of money? That may be hard to establish. In that case, imagine you already have paid for it, and they’re offering you a downgrade: pay £100 less if you don’t want a sea view. If the endowment effect is strong enough, you won’t regret paying £100 for the view, and if you’d happily downgrade, keep the standard room.
A final thought. Could it be that the endowment effect, that so strongly illustrates our attachment to things we possess explain why private property is such an important cornerstone of most societies in the world – and perhaps why societies based on collective ownership tend to have so much difficulty in establishing themselves and persisting?