Endowment effect

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Most people value what they own than the value of the same good that they do not own. There are many practical examples. Home sellers think their houses are worth more than most buyers do. As a result, many homes sit on market for a long period of time without being sold. Sellers also believe their used cars are more valuable than most buyers do.

Objectively thinking, the valuation of commodity should based on its true worth. However, the value that seller place on a commodity often includes not only its intrinsic worth but also the value that is based on her attachment to the item.

Experiment

Kahneman, Knetch and Thaler (1990) conducted an experiment with mugs. 1/3 of the participants – “sellers” who were told that they owned the mug and had the option of selling it if a price to be determined was acceptable to them. 1/3 of the participants – “buyers” were told that they would be given a sum of money which they could keep or use to buy the mug. 1/3 of the participants – “choosers” were given a questionnaire indicating that they would be given a choice between either a mug or sum of money. The price range they could place on a value was between $0.50 and $9.5.

Results showed that buyer and seller relationship affect decision makers’ value assessments. “Sellers” required $7.12, “buyers” were willing to pay $2.87 and “choosers” placed a value of $3.12. “Buyers” and “choosers” placed a similar evaluation of worth. However, mug ownership made the item 50% more valuable for the sellers.

Implications

People tend to overvalue what they own. The frame of ownership creates value that is inconsistent with a rational analysis of the worth that commodity brings to the individual. Understanding endowment effect is critical to making wise assessments of the value of you commodities.

Rebate and bonus framing

People associate “bonus” with spending, having an image of surplus cash in their minds. In contrast, they see “rebate” as saving, seeing an image of money that simply returns you to the appropriate status quo.

“Rebate” limits “energising” economy effectiveness because it leads people to save. On the other hand, “bonus” gives a higher chance that more citizens would immediately spent the money instead of saving i.e. it is a greater stimulus for the economy.

The wording effects are dramatic. “Rebate” and “bonus create different mental states in consumer minds (Epley et. al., 2006).

Bazerman, M.H. and Moore, D.A., 1994. Judgment in managerial decision making (p. 226). New York: Wiley.

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