Friday, April 3, 2015

The Endowment Effect (Or: Why Nobody Cares About Your Baby Pictures)

Experiment participants were shown a mug. They were asked how much they would be willing to pay for that mug. Let's say they said $5.

Then they were given the mug (for free).

Then they were offered the chance to sell it.

How much do you think they asked for when they had the chance to sell their mug?

$10.

Another experiment showed a similar result: participants won basketball tickets. They were only willing to sell them for 14 times more than the price they were willing to pay for the same tickets.

Another experiment showed that employees worked harder to maintain a bonus they already had than they did to acquire a new bonus.

Interestingly, this same behavior is observed in children, apes, and monkeys.

This is the endowment effect. It is "the hypothesis that people ascribe more value to things merely because they own them."

This is why people share baby pictures on Facebook. They think those pictures are the greatest things in the world. They ascribe more value to them because it's their own child.

Of course, the rest of the world doesn't see them the same way.