Ownership, loss aversion, the endowment effect, and lava lamps

Do you ever see things for sale on eBay with prices that seem astonishingly unrealistic? I get daily emails of newly listed items containing my saved search terms and sometimes the prices are just ridiculously optimistic. Not only that, but the items turn up again and again and again, re-listed and re-listed and re-listed, often at the same price. I know that some of the items will be from consignment sellers who have probably agreed with a client on a set price and to re-list indefinitely until the item sells, but a lot of the listings are just from individuals clearing out their homes and offloading the things they don’t want any more. Just sometimes at prices so high that the items never sell.

What might be responsible for some of these crazy prices is the endowment effect, a psychological phenomenon in which people typically demand a lot more in order to relinquish an item they already own than they would be willing to pay for the item if they didn’t already own it.

In the classic study of the endowment effect by Daniel Kahneman and colleagues, research participants were given a mug and were then offered the opportunity to sell it or to trade it for something of equal monetary value. However, once the participants were given ownership of the mug and felt like it was theirs, they typically expected twice as much money in order to be willing to part with it than they were willing to pay for the mug when they didn’t own it. So when they don’t own the mug, maybe they think it’s worth $5, but when they do own the mug, they expect someone to pay them $10 for it.

One explanation for the endowment effect is loss aversion – owners of items expect the pain of relinquishing the items to be greater than the enjoyment of acquiring the items, so they need extra financial compensation to soften the blow of parting with the item. However, an alternative explanation is related simply to ownership and the possibility that owners might associate the items with themselves, so they are reluctant to part with an item because of this personal connection – not necessarily because they expect to feel any pain from the loss.

Morewedge and colleagues investigated the endowment effect in terms of the loss aversion account versus the ownership account, to see which was more likely to be the real explanation. The problem, of course, is the fact that sellers are usually owners, so even if you just want to look at whether loss aversion occurs when someone considers selling an item, you’re kind of incidentally looking at ownership to some extent too. You need to add some extra factors in to get a clear picture of what’s going on.

Firstly, what if you create a new type of person – someone who’s a buyer but also an owner? Does such a person, i.e. one who is selling a mug but also happens to own another identical mug that they aren’t selling, behave more like a owner-seller (because they are an owner too) or more like a non-owning-buyer (because they are a buyer as well)? The researchers found that owning a mug actually resulted in buyers valuing the mug as much as sellers, which suggests that the high value that sellers place on the mug isn’t because of loss aversion – for instance, a seller might think a mug is worth $10, but someone who wants to buy that mug and already owns an identical mug also thinks the mug is worth $10. It appears to be the ownership that increases the mug’s perceived value; it can’t be loss aversion, since the buyer isn’t losing the mug.

Another clever way to tease apart the issue of loss aversion vs. ownership is to introduce additional parties – brokers who do the bargaining and dealing on behalf of the buyers and sellers. The researchers got some of the research participants to act as brokers to do a deal (on mugs again) on behalf of clients, so these brokers were buying or selling a mug without owning it. The researchers also gave some of the brokers identical mugs to the ones they had to buy or sell, so some brokers were buying or selling a mug they didn’t own but they also happened to own an identical mug. If the loss aversion account of the endowment effect is true, then sellers’ brokers should value the mugs more than buyers’ brokers, since sellers’ brokers will see their client’s sale as a loss and buyers’ brokers will see their client’s sale as a gain. However, if the ownership account is true, then buyers’ brokers and sellers’ brokers should value the mug more when they themselves own identical mugs to the one being bought/sold, compared to if the brokers don’t themselves own identical mugs.

The results showed that, again, owning the mug was the key factor here, and that buyers’ and sellers’ brokers valued the mug that they were buying or selling more if they themselves owned an identical mug. Again, it looks like ownership is the key factor in how valued an item is, rather than loss aversion. So maybe when those items turn up on eBay with crazy prices attached, what we’re seeing is the price for someone to be willing to relinquish something they connect with themselves. You might say it’s a bit like severing a tiny part of their identity, hence the premium price placed on the act.

Also, I just want to congratulate the study’s authors for getting what is essentially an ode to lava lamps into their paper, questioning the very nature of the human connection to lava lamps in language so imbued with poetic imagery and faint melancholy:

“Because the people who own lava lamps demand more to give them up than the people who do not own lava lamps will pay to get them, deals go unmade and storage lockers remain filled with lava lamps that are destined never again to glow. [...] We do not know if people store their lava lamps because parting with them is such sweet sorrow, but we do know that they store them because they like them and that they like them because they’re theirs.”

26 Thoughts on “Ownership, loss aversion, the endowment effect, and lava lamps

  1. It is an incredibly interesting phenomenon how we value things much more when they’re ours, as opposed to when we’re acquiring them.
    Also I really never thought I’d see an existentialist ode to lava lamps, ever, but I like it :)

  2. This made me laugh so hard because I have been watching an APC sweater get relisted every 20 days for at least 2 years. The seller hasn’t tried to take better pictures or lower the price. At this point I keep that saved search just to see when they will give up!

    I love your blog, thanks for keeping it up.

  3. That’s so interesting that ownership rather than loss of an item makes it seem more valuable. I guess you can see this with collecters items or designer clothing, where people who buy it often already own similar items. Perhaps they’re willing to pay those high prices because they associate them with themselves, and therefor judge a premium price to be fair.

    • Yeah, it seems like that sense of self (and identifying something as reflecting one’s identity) is a hugely powerful driver of choice and consumption. I vaguely remember writing about it (or maybe I just thought about writing about it?) at some point – basically if there’s a threat to your identity, even if it’s as simple as someone saying something offensive to you, you react by doing something that reasserts your identity, which can include doing things like buying an item you think reflects your identity in some way. And I know one of the major drivers of consumption for me is when I see something and I think “Oh, that’s just so me” – identity and communicating identity through ownership of particular items is just hugely powerful. (My problem comes when I try to figure out how I ended up with such a heterogeneous, clashing, incoherent set of belongings if they’re all just “so me”, haha.)

  4. Funny how I’ve always E-bay was a good place to find certain clothing items, I’ve never actually gotten round to it. As a student of economics, I loved the way you explained the endowment effect in this context. It makes me want to blog about fashion again…almost! Btw, I’ve read your reply to the comment I made earlier and if you ever have the slightest inclination to revert back to your cooking blog, let me know anytime. I’d love to read anything you write.

  5. I’ve only bought 3 or 4 (disappointing) items of clothing on eBay before I gave up on that idea. Too weird, too small, smelled like perfume that didn’t wash out, etc.
    :-)

  6. Hello everyone !

    i don’t have any studies at hand, but i remember clearly reading about a side-effect of this phenomenon : anticipated ownership. When you imagine something being yours (or consider it somehow “belonging to you” or to your personal identity), the “ownership effect” already starts functionning, even before you actually own the thing ! Isn’t that bewildering..??

    This is one of the reasons why the more you think about an item, the readier you are to pay a higher price for it. In your head, it’s already yours, you deserve it. This, sadly, is a side-effect of over-thinking one’s purchases… And even trickier : buying it does not feel like an actual purchase, something you add to your possessions by paying for it, but as if this thing was already there the whole time and naturally belongs to you.

    Some situations where this could apply :
    - you are contemplating buying a certain item on internet, but it suddenly runs out of stock : you literally run to another website to buy it, immediately and at a higher price, and you feel less cheated than satisfied. Of course you generally don’t give up or re-think the purchase under these new terms…
    - if you are settled in your heart to buy something on eBay, you are likely to bid for it until it reaches a much higher price than you would have decided it was worth beforehand.
    - One of the reasons advertising campaigns often start long before the product is actually sold (Isabel Marant for H&M for example…) is to give time to the consumers to imagine themselves in these clothes, to imagine themselves possessing them. Once they feel attached to it, name a price and they’ll pay for it (sometimes grudgingly, but they will pay rather than “give up” the item). Also one of the reasons why some catalogs don’t have the prices on them.
    - After you have made a purchase mistake you tend to rationalize it. It’s espectially true with things bought on internet that arrive directly to your house, amongst all the things that you already own (sense of ownership increased !). If it’s too big you think “I can wear it loose”, or you think the shoes that don’t fit are too beautiful to let go, etc.
    - That feeling that you’re simply ENTITLED (haha !) to have something because it’s “so you”. At that stage the price is secondary.

    Have a good day everyone !

    ps : i don’t remember you writing about the “so me” effect. It would be extremely interesting… I’m a big victim of this trick too !

  7. second PS : sorry, my exitement has made me rude ! Congratulations on your PhD Jess (I’m just about to start one myself, gasp), and super-happy to see you back on this blog !

    • I think I must’ve been at the point of collecting research articles on the enormous role that identity plays in purchases, but never got around to actually writing about it. I’ll have to have a look to see where I might’ve saved my collection (it’ll be somewhere in the depths of my Gmail drafts!).

      As for anticipated ownership – wow, that is a strong effect. That has influenced my purchasing behaviour countless times, that’s for sure. It’s kind of ridiculous that we’re so incredibly good at imagining hypothetical scenarios in such detail that it creates a connection to an object before we even own it. I think humans have a rather impressive ability to create some connections against all odds (like feeling connected to an object you don’t own, or to a celebrity you’ll never meet, or whatever) and to purposefully not create any connections in other situations (like when thinking about sweatshop workers and choosing not to form an empathic connection to them in order to continue buying cheap clothing without feeling bad about how it was made). Conveniently self-serving selective empathy, I guess. Everything about human behaviour makes perfect sense if you just consider how conveniently self-serving all the cognitive biases are!

      Ooh, what’s your PhD project going to be on, Clara?

      • “conveniently self-serving”…. yes, sadly, this sums it up quite well. Not much empathy with the Bengladeshi workers -and I’ve recently heard they are starting to build factories in Haiti where they can pay the workers less than their 3 meals a day costs them.

        I am indeed about to start a PhD in English literature ! My subject might be (I’m only at the very start) the figure of the rake in the XVIIIth century novel and its heritage in the Victorian novel -yey !!
        :)

  8. Hippocampe on December 28, 2013 at 5:00 pm said:

    I do find the fetishist aspect of consumerism poetic – objects imbued with ideas and personal identity instead of pure materialist, functional face value.
    On the other hand, well, vanity plays a big role in this too, doesn’t it ? Things acquiring value just because we chose them, because they belong to us ?
    So the whole process is endearingly stupid, I guess.

  9. I have watched a TED video on the endowment effect a few months ago and I find it fascinating. The price we give to objects is like a measurable proof of emotional attachment to material items.

    The other phenomenon they talked about was the value people give to what they make themselves. In this study, they had people make origami and sell them. The owner’s price was much higher than the buyer was ready to pay for. And even more interestingly, the harder the origami was to make, the higher the seller’s price was, although the origami got uglier as they were harder to complete. In this case, there might be the pride of having made something with their own hands. So I wonder, when people collect objects, maybe they take pride in their item curation – as if they created their collection – and therefore evaluate the price of their collection higher?

    The “this is so me” effect is interesting, and, on a marketing point of view, it is exactly what brands are trying to induce when creating a “brand identity” or “brand universe”. When we evil mustached marketers decide the messaging of our products and brands, it is always within the idea of this bigger “brand identity”. This brand identity can be created through advertisments (music, images, celebrities used as ambassadors (Clooney and coffee?)…) but also through the in-store decorations, website design etc. A certain universe, image, identity is created for the brand with values etc. and when the consumer feels in tune with these values and universe, they will buy more items because they want to be defined by this brand universe as well – “this is so me!”.

    • I wish I had some training in marketing just so I could look at it all more critically, in terms of interpreting and analysing what decisions are being made by the marketers to tune their brand image to particular demographics or whatever. But yeah, the power of getting your brand’s identity to click with someone’s personal identity must be just so incredibly influential. I think one situation that really sums that up for me is how I’ve seen photos on blogs of people’s homes and interiors and people have framed shopping bags from particular brands and have hung them on the wall for display. I’ve seen people do that for brands like Hermès and Chanel before, but now I’m seeing people frame shopping bags from brands like A.P.C. and Acne and adorn their walls with them. They’re just reasonably plain branded bags – so pink bags with the Acne branding in black and I think some embossing, or plain brown bags with the A.P.C. branding in black, no sort of additional artwork or anything – and people seem to connect so strongly with the brand that just the branding itself is attractive to them and they want to cherish it and display it in their personal living space. Wow. It just seems kind of amazing that it has so much power, especially when the A.P.C. branding is literally just some letters in Arial font, no less, haha!

      • I think A.P.C is a perfect example of creating a brand universe though. Even though the brand logo and aesthetics are very plain and simple, this is exactly what the brand is about. When you look at their blog (A.P.C journal) – they choose images, collections, music, that are in tune with a certain universe. Plain, simple, androgynous, a bit 60′s. A.P.C make me think of Bauhaus architecture, of Jane Birkin or Charlotte Gainsbourg, or Jeanne Moreau in Jules & Jim. A.P.C makes me think of old fashioned record players and vintage music. When you enter their store, you can see the promotion of certain music bands or art exhibits, they choose the playlist they display in their stores very carefully. How can a clothing brand conjure so many images, ideas? That’s because of branding and marketing tools. A.P.C guys are incredible marketers, and, even if I don’t really feeel in tune with their universe as a consumer, I am quite impressed as a marketing fellow.

        • Is the complexity of the brand image an important consideration when planning brand image development? I agree about the A.P.C. image and how it is basically an avatar that manages to represent an entire lifestyle and set of preferences – like if someone identifies with the A.P.C. image to the extent that they put a plain brown bag in a frame on their wall, you can subsequently make a pretty good educated guess about their preferences in music, film, literature, etc. But does such branding affect the customer base? Like if the branding is very detailed, you end up with a small group of strongly identifying customers rather than a larger group with more diffuse, less closely aligned preferences? I guess that either situation could be made to work – a small group of loyal customers who buy from you frequently vs. a large group of not-quite-so-loyal customers who buy from you occasionally could mean the same amount of product consumption in the end, maybe?

      • It kind of reminds me of those species of animals (crows, raccoons I think, etc.) which adorn their dens/nests with bits and pieces of shiny found objects. Are we really just the same, except with opposable thumbs and iPhones?

      • “But yeah, the power of getting your brand’s identity to click with someone’s personal identity must be just so incredibly influential.”

        I think this is also what resonates with me about certain fashion bloggers, such as people like Dead Fleurette, Kali, Assembled Hazardly, Tomboy Style, Out of the Bag, etc. It’s a perceived set of values that imbues their consumer choices, and which resonate with my own values, and which makes me (rationally or not) think, “Hey, I like that sweater too!” way more than having walked past the sweater sitting on a table in, say, Macy’s. In fact, some of the fashion choices presented without that subtext I would have passed over without them appealing to me, I think (not to knock your style, ladies, I love it!). Maybe that’s what fashion is, all about the subtext? Certainly, that’s what branding is. Am I just now finally figuring this out and everyone else reading this commenting is face-palming right now? Okay……going to go slink off into a corner now….

        • I totally agree, I feel like even when we read blogs that are about thoughtful consumption and carefully chosen, high quality items, we still end up buying things we maybe otherwise wouldn’t because of the imagery that surrounds those blogs. It’s a pretty consistent image (you know, the A.P.C. jeans and the Saint James breton tops and the Céline trios and the Ray-Ban Wayfarers or Clubmasters, and all the other things that fit in with that overall aesthetic) which ends up making the whole thing more influential and makes you think “I’ve never needed a kitschy Fairisle sweater but suddenly I feel compelled to buy one”. For all of the good intentions, the subtext is still there and influencing your choices, and there’s just no way around it except to never ever read those interesting blogs, haha.

          • The power of brand image and universe is deeply linked to our human tendency to imitate/inspire ourselves from other people, I believe. To come back to the A.P.C example, I’m not sure how their marketing team has worked, but to my professional experience, establishing a brand identity depends a lot on the potential consumer base we want to reach indeed. In bigger companies, there are market research teams who order surveys, among other tools, to segment the market and predict sales for our products. Once we choose our target among the market, we refine the brand image to cater to these people. Of course, the real results are much less scientific and predictable than that – after all we are dealing with human behaviour. All this to say – the brand image is calculated to reach a certain amount of consumers. The core base will be very specific as they are exposed to the full complexity of the message, but then the consumer base can be extended by reaching other populations with a simpler version of that same brand universe. If it makes any sense – it’s quite difficult to summarize the concept of brand image and identity in one comment.

            Then, to go back on the link with inspiration and like-minded bloggers – yes, I believe we are influenced by people we seem to share values and ideas with. And maybe we tend to like what they are wearing or using more because we subconsciously identify with part of the image they send out. I do think there is a way around it though – and that is to know ourselves better. When I started style-searching in 2011, I bought some A.P.C stuff, a Saint James breton shirt and more. Three years later, I have found out which of these items I really like, and balanced with my own details, and I feel much less influenced by the consumer choice of the bloggers I follow, even though I still like reading them a lot and agree with a lot of their values. But imitation, inspiration and carving one’s own identity is a whole other debate. I feel this comment is too long.

  10. I wish I had something well-educated and profound to add to this discussion, but everything I know about this I have learned through watching reality TV (about real estate agents and pawn shops, respectively). It is completely spot-on though. For example, I know that I should sell off a few of my handbags, but because I know intellectually that I’d have to sell them at an uncomfortably low price they remain in my closet, collecting dust. “Endearingly stupid”, indeed.

    • The number of times I’ve taken photos of items so that I can list them on eBay, then I feel this strange, vague twinge of reluctance as I log onto eBay, and the items go back into bags and boxes under the bed…

  11. Is it possible that some of these sellers just have a set profit margin that they are pursuing? Like “I’d rather just store the item for free for 3 years, and take the chance that sometime during those 3 years a similarly-delusional person will stumble along, make the purchase, and I’ll get that profit I was hoping for.” Or perhaps it’s the whole setting-the-profit bit which is determined by these psychological phenomena.

    On a related note, growing up with my parents, I saw these two otherwise-normal people who had a number of belongings dubbed “antiques,” which somehow never managed to sell during garage sales for the inflated prices my parents believed them to command. Until the early, heady days of Ebay, when my parents listed all the McCoy pottery, etc. and sold their “antiques” for the high prices they set. To this day, I am glad there is an international marketplace where people like my parents can meet other people who have such insane ideas about junk. Ok, off my soapbox now and back to my delusional beliefs about the value of designer purses and Hermes scarves. Maybe it’s hereditary?

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