Question: How do you make something instantly twice as expensive?
Answer: By thinking about giving it away.
This might sound like a nonsensical riddle, but if you've ever felt overly possessive about your regular parking space, your pen, or your Star Wars box sets, then you're experiencing some elements behind the psychology of ownership. Our brains tell us that we value something merely because it is a thing we have.
This riddle actually describes a phenomenon called the Endowment Effect. The parking space, the pen and the DVDs are probably the same as many others, but they're special to you. Special because in some way they are yours.
You can see how the endowment effect escalates – how else can you explain the boxes of cassette tapes, shoes or mobile phones that fill several shelves of your room… or even several rooms?
To put a scientific lens on what's going on here, a team led by psychologist Daniel Kahneman carried out a simple experiment. They took a class of ordinary University students and gave half of them a University-crested mug, the other half received $6 – the nominal cost of the mug.
Classic economics states that the students should begin to trade with each other. The people who were given cash but liked mugs should swop some of their cash a mug, and some of the people who were given mugs should swop their mugs for some cash. This, economic theory says, is how prices emerge – the interactions of all buyers and sellers finds the ideal price of goods. The price – in this case, of mugs – will be a perfect balance between the desires of people who want a mug and have cash, and the people who want cash and have a mug.
But economic theory lost out to psychology. Hardly any students traded. Those with mugs tended to keep them, asking on average for more than $5 to give up their mug. Those without mugs didn't want to trade at this price, being only willing to spend an average of around $2.50 to purchase a mug.
Remember that the mugs were distributed at random. It would be weird if, by chance, all the “mug-lovers” ended up with mugs, and the “mug-haters” ended up without. Something else must be going on to explain the lack of trading. It seems the only way to understand the high-value placed on the mugs by people who were given one at random is if the simple act of being given a mug makes you value it twice as highly as before.
This is the endowment effect, and it is the reason why things reach a higher price at auctions – because people become attached to the thing they're bidding for, experiencing a premature sense of ownership that pushes them to bid more than they would otherwise. It is also why car dealers want you to test drive the car, encouraging you in everyway to think about what it would be like to possess the car. The endowment effect is so strong that even imagined ownership can increase the value of something.
The endowment effect is a reflection of a general bias in human psychology to favour the way things are, rather than the way they could be. I call this status quo bias, and we can see reflections of it in the strength of habits that guide our behaviour, in the preference we have for the familiar over the strange or the advantage the incumbent politician has over a challenger.
Knowing the powerful influence that possession has on our psychology, I take a simple step to counteract it. I try to use my knowledge of the endowment effect to help me de-clutter my life. Perhaps this can be useful to you too.