Endowment Effect definition

The Endowment Effect is the way in which people attribute a greater value to something when it is already in their possession. This is explained by the fact that our manner of evaluating items changes once we have them because we become psychologically attached and accustomed to having them and no longer want to be without them. Therefore they become more valuable in our eyes than those things that we don’t own. This can lead to someone being willing to pay more to keep something they already own than they would be to buy something new, or to being particularly reticent to throw something away.

Kahneman, Knetsch & Thaler (1990) proved the Endowment Effect with the following experiment: they divided some students in to three groups, Group A were given mugs, Group B chocolate bars, and Group C weren’t given anything but had to say whether they would have preferred a mug or a chocolate bar. Afterwards, Groups A and B were asked if they wanted to swap over their respective “gifts”. Whilst Group C didn’t appear to have a particular preference for one or the other of these “gifts” (with 56% having chosen a mug, 44% a bar of chocolate), the other two groups were unwilling to exchange their items, having already attributed a value to them. Whilst Group C hadn’t attached any real value to either item and would have been happy to have either, 89% of Group A wanted to keep their mug and 90% of Group B wanted to keep their chocolate bar. This clearly shows how once a human is in possession of an item (whether it be a mug, a chocolate bar, or something else entirely), a superior value is attributed to that thing than something that isn’t in their possession.

The Endowment Effect is utilised in certain sales and marketing techniques such as “free trials”, which are an effective way of allowing a customer to become accustomed to a product in the hopes that once their free trial has ended they will already have become attached to the product, attributing the value of ownership to it, and no longer want to be without it.

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