Endowment Effect

The area outside Duke University's Cameron Indoor Stadium is called “Krzyzewskiville,” named for the legendary coach Mike Krzyzewski. It's ritual for Duke undergraduate students to camp out and eagerly wait in line in hopes of getting tickets to watch the men's basketball team play. As winter begins in January and the quality of games improves, the number of campouts increases even though tents are not allowed to have heaters. Students must brave the elements by dressing appropriately and using blankets to stay warm. It’s a huge sacrifice to become a “Cameron Crazy” and to see a game live in-person when the majority of games are available to view on television. The value to gain access is unmeasurable. When students win entry, they rarely sell off their prized possession.

Professors Ziv Carmon and Dan Ariely decided to test the basketball fans’ decision making when it came to something they own. After one of the lotteries, Carmon and Ariely asked the recipients who received game tickets how much they would sell them for, and the students who did not get tickets how much they would purchase them for. The results revealed that the selling price point was almost fourteen times more than the buying one! Amazing right? The lottery winners wanted $2,400 on average to give up their tickets, while the lottery losers who did not have tickets were willing to buy them for only $175.

The moment the lottery winners got the tickets, they valued them to a higher degree, and giving them up became much harder. In contrast, the lottery losers did not value them as much. When the researchers asked the winners the reason for charging $2,400, most of them mentioned how important this specific game was for them and that they didn’t want to miss it (loss aversion). On the other hand, the lottery losers talked about the money, the actual cost of something they can see on television; and why pay a premium?

The above experiment is referred to in psychology and economic circles as the “Endowment Effect,” which means people are more likely to love an object they acquired. We self inflate the importance only because we allow our egos to take over as if our ownership and selection equate to increased value. Real estate agents have to continually deal with the Endowment Effect as every new home seller, believes their home is unique and does not accurately reflect the market. Agents have two negotiations, one with the seller on the listing price, and then with the seller on closing the deal. Most agents will complain more about the seller’s unrealistic goals, then the buyers trying to steal a deal.

We love what we have. We love what we build. We love our ideas and decisions. However, we cannot love them so much that we lose sensibility and reality. We must guard against our confirmation bias as well as our proneness to adhere to the Endowment Effect.

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