The Endowment Effect: Why We Overvalue What We Own
In a famous experiment at Cornell University researchers handed coffee mugs to half a class and created an instant market. They asked the mug owners the lowest price they'd accept to sell and the non-owners the highest price they'd pay to buy. Standard economic theory says the prices should be roughly equal for a generic six dollar mug. But they were not. The median seller demanded more than five dollars while the median buyer offered only two dollars.
The moment the mug was placed in a student's hand its value in their mind more than doubled. It was no longer a mug. It was my mug. giving it up felt like a loss. This is the Endowment Effect. We unconsciously ascribe more value to things merely because we own them. This bias explains everything from hoarding useless junk to the incredible retention rates of reverse trial software.
Why does the Endowment Effect change the value of an object we touch?
The Endowment Effect changes the value because ownership integrates the object into our identity and giving it up triggers our biological aversion to loss.
The root of this bias lies in Loss Aversion. Psychologically the pain of losing something is about twice as powerful as the pleasure of gaining the same thing. When the student holds the mug the mug becomes part of their status quo. It is now part of their endowment. To sell it is to incur a loss. Because losses loom larger than gains they demand a premium to offset the emotional pain of the trade.
This instinct is ancient and territorial. My cave. My food. My tribe. Deep in our primate brain letting go of resources is a survival risk. This explains why you have a closet full of clothes you haven't worn since 2018. You look at that old jacket and think that you might need one day. You overvalue it because it is yours. If you saw that same jacket in a thrift store today for five dollars you would walk right past it. You wouldn't buy it. But you won't sell it for zero.
How does the Reverse Trial exploit the Endowment Effect?
The Reverse Trial exploits the Endowment Effect by giving users full access first which creates a sense of ownership that they will pay money to avoid losing.
In the world of B2B software smart companies use the Reverse Trial to drive conversion. Instead of starting with a free plan and asking for an upgrade they give the user the full Pro plan for 14 days. For two weeks the user uses the analytics and adds their team and configures the dashboard. They build an endowment. They settle into the house.
On day 15 the trial ends. You aren't asking them to buy the Pro plan. You are telling them that if they don't pay they will lose the Pro plan. You tell them to enter their credit card to keep their analytics. The psychology shifts entirely. If you ask someone to buy a feature they have never used it is a gain frame. If you ask someone to pay to keep a feature they are using it is a loss prevention frame. The Endowment Effect turns the purchase decision from a question of want to a question of loss.
How can we overcome the Endowment Effect in our personal lives?
We can overcome the Endowment Effect by applying the Overnight Test to view our assets as neutral observers rather than emotional owners.
Imagine you own a stock. You bought it at 100 dollars. It is now at 80 dollars. You are holding it and hoping it comes back. Ask yourself if you woke up tomorrow with 80 dollars cash would you buy this stock at this price. If the answer is no then you should sell. You are only holding it because you own it. You wouldn't acquire it today. Therefore it is not a rational investment.
When decluttering pick up an item and ask how much you would pay to buy it right now if you didn't own it. If you realize you wouldn't pay five dollars for that old sweater then it has no value. The Endowment Effect is lying to you. Bin it. As a marketer respect the power of ownership. Give your customers things. Let them hold the product. Once it is theirs they will fight to keep it. This relates to the IKEA Effect where we value what we build.
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