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Understanding the Endowment Effect

Wayne McMaster

6 February 2014

In the late 1970s economist Richard Thaler first considered, the 'Endowment Effect'– “goods [that] are included in the individual’s endowment will be more highly valued than those not held in the endowment, ceteris paribus.”

My precious

The endowment effect is a theory that people value a product more once their property right to it has been established. In other words, people place a higher value on objects they own relative to identical objects they do not. In one experiment in Duke University in America, students demanded a higher price for a coffee mug that had been given to them but put a lower price on one they did not yet own.

Image:  Anthropologie.eu

We're humans, not calculators, we tend to overvalue our possessions because they contribute to our identity and the identities of the groups we belong to. We don’t overvalue goods because we’re loss averse; we overvalue goods because they are part of who we are they mean more to us. We overvalue things just because we own them and we become illogically connected to those things. We equip our identity with them. A good example, of this would be many people's experience of the property market—often subject to the'endowment effect' – the seller’s asking price is quite often in excess of the consumers’ willingness to pay, we'll stay clear of making any comment on estate agents. When we have lived in a property for at a long time, it becomes our home and the value of our home, is much higher for us than the value of the house.

Feelings of ownership

Home-interest business need to capitalize on the power of the endowment effect, especially when they realize that the 'feeling of ownership' in consumers can increase how much consumers are willing to pay for a product. Let's consider how car salesmen are more than happy to take us on a test drive before we make our decision to purchase.

Image: jaguar.co.uk

Why do you think you’re almost always able to download ‘free trials’ before having to pay for the full version?

Now that you know this, you will start noticing strategic and effective use of the endowment effect in others businesses everywhere.  The next time you walk into an Apple store, you’ll realize why they allow you to spend hours using their products. The next time you’re offered a sample of anything, you’ll understand what’s happening on a very fundamental level.

Stimulating the feeling of ownership

  1. Get your products into the hands of key influencers in your industry (bloggers, social media celebrities). Once they own your product, once they equip it with meaning for themselves, they will be sure to advocate it.
  2. Try before you buy. Miele, the German premium domestic appliance manufacturer, has a state-of-the-art Experience Centre at its Abingdon headquarters which gives visitors the opportunity to ‘try before you buy’ on a range of domestic cooking, cleaning and laundry appliances.
  3. Always try to get your customers to take your product home and use it, where appropriate.
  4. The best way to do this is to always offer 100% full-refund if the customer is not satisfied – and emphasize that. Stress the fact that there is no harm in trying the product, and if they’re not satisfied, they can get a full refund no questions asked.

    Image: Miele.co.uk

 

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