It’s Thursday night and you and a few friends are out having a drink. Your good friend Jay walks into the bar and you quickly embrace him with a pound and a hug. As you two are catching up he gets a phone call and promptly answers, it’s his girlfriend Megan. “Ok…ok…agh ok” he says as you watch the muscles in his face lower and lower almost to a frown. He hangs up and is clearly disappointed. “What’s going on?” you ask. “Megan just bailed on me for tomorrow night, I got us tickets to see Taylor Swift.” “Bummer” you respond. He proceeds to tell you that he waited in an online que for over an hour to buy those tickets at retail price. You quickly text your girlfriend, “Hey, do you like Taylor Swift?” While waiting for a response you offer to buy the tickets from him if your girlfriend is down to go. A quick vibrate interrupts you and you read your girlfriends response “Yea, she is ok.” You give Jay $100 for both tickets and he sends you them via email. You aren’t truly a fan of Taylor Swift and your girlfriend doesn’t seem to be too crazy about her either but it seems like a fun date and you are helping out your friend by buying the tickets from him. After googling Taylor Swift song lyrics and streaming her latest album on Apple Music the entire following day, you notice an advertisement on the side of your Facebook page. It’s a StubHub advertisement for the Taylor Swift concert you have tickets for. You curiously click on the advertisement and notice that tickets are selling for $300 a piece. “Wow!!” you exclaim. You suddenly have a dilemma on your hands. Do you go to the concert or do you take your girlfriend out for a great date night? You could sell your tickets for $600 and make a $500 profit, but something inside of you dismissed that idea and you are all of a sudden very excited about this concert. You mention the prices to your girlfriend as well and she seems equally excited. Suddenly you are shamelessly singing along to Shake It Off while your girlfriend texts all of her friends to rub in the news.
Hold up, what is going on here? You went from being indifferent about going to the concert to all of a sudden a member of Taylor Swift’s fan club. Your girlfriend might as well buy you two matching 1989 shirts. It is seemingly logical to resale the tickets and make a $500 profit, but instead the pride of ownership sets in and alters your decision making process. As hypothesized in William Samuelson and Richard Zeckhauser’s study Status Quo Bias in Decision Making,
“Faced with new options, decision makers often stick with the status quo alternative, for example, to follow customary company policy, to elect an incumbent to still another year in office, to purchase the same product brands, or to stay in the same job.”
In deciding not to sell your concert tickets for a $500 profit, you are opting to stay with the status quo of going to the concert with your girlfriend. However, if Jay would have known of the increased resale prices of the tickets and offered you them for $300, you would have declined. Thus sticking with the status quo of not going to the concert. So why is it you would not be willing to pay $300 for these tickets that you seem to value yet not accept $600 to sell them? In Samuelson and Zeckhauser’s study that contained multiple tests with various framing, the decision makers all possessed a significant status quo bias. Status quo bias directly correlates with the Endowment Effect. The Endowment Effect states that people add more value to things merely because they own them.
The endowment effect was described in an example told by behavior economics pioneer, Richard H. Thaler. Thaler recalled his late colleague and chairman of the economics department at the University of Rochester, Richard Rosett. Rosett was a wine enthusiast and collected bottles of wine over the years. One afternoon Rosett informed Thaler that he had several bottles of wine in his cellar that he had bought years ago for $10 each and that the bottles were now worth $100 each. Rosett continued on about how he would drink one only on special occasions but refused to sell them. He also said while he enjoyed his wine with a $100 price tag, he would never pay that much for a bottle. Rosett as an economist even admitted to his irrational behavior but couldn’t help himself.
We as humans overvalue almost everything we own, especially our vehicles. As soon as you buy that brand new car and drive it off of the lot, the value of the vehicle depreciates on average 11%. This depreciation continues and after owning the car for only one year the depreciation averages a whopping 19% of the original price. In 5 years of owning the vehicle it will depreciate by about 60%, and this is about the time you look to sell the vehicle and buy a new one. Say you bought a new Nissan Maxima for $30,000 and have owned it for 5 years and you are looking to sell it for about $15,000. You go to the dealership and they appraise your car at a value of $10,000. Immediately you become frustrated and storm out of the dealership. While the value of the car will stand to be $12,000 and a dealer needs room for profit, $10,000 is a realistic selling price. However, that car has been your pride and joy for 5 years. You have made countless memories and have had minimal problems with the car. You aren’t going to get a better offer anywhere else and you stubbornly decide not to sell the car.
This is known as the mere ownership effect and is the theory that people who own a product tend to value it more than people who do not own it. The observation got its name off of researchers results stating that by merely touching an object peoples perceived ownership dramatically increases. In fact, in 2003 the attorney general’s office in Illinois issued a warning to Christmas shoppers to be aware of retailers who try to get them to hold or touch their products. This is why those pushy salesmen in the mall kiosks want you to try on their lotion or retail stores want you to try on their clothes. Ever been inside of a Footlocker and been pestered with a sales rep insisting that you try on that shoe you’ve been glancing at? That is because they know that the chances of you buying the shoe after you have tried it on dramatically increases.
So why do you believe that we tend to overvalue items in our possession? Is it the emotional bonds that we have formed with the items? If so, how do you explain mere ownership and the endowment effect for products that we have only owned for less than 5 minutes? By acknowledging your tendency to overvaulue your belongings, it should become easier to let them go and to move on to new opportunities. By failing to acknowledge the tendency, you are forming an unrealistic opportunity cost when evaluating alternatives, thus increasing your cost of ownership.
Share your thoughts and experiences in the comments below and be sure to share this article with a friend who you feel is unknowingly increasing their cost of ownership.