Why would one person value a ticket at $170 while another person would value the same ticket at worth $2,400?
Subject: The Endowment Effect - Tickets and Coffee Mugs
Event: Birthday of Ziv Carvon, 1961
Can the value of an object be objectively measured? Does emotion get in the way of the price tag we place on something or the price we are willing to pay? To test this, two psychologists, Ziv Carmon - who was born on this day in 1961 - and his colleague Dan Ariely, did an experiment with college basketball tickets. After students participated in a lottery where some got tickets and others didn’t, Carmon and Ariely surveyed the students to see what value each group would put on the tickets. The results revealed that the ticket-owners priced their tickets at a price fourteen times what the non-ticket owners were willing to pay ($2,400 versus $175). You might say that a bird in the hand is worth fourteen in the bush (1).
Psychologists and economists call this phenomenon the endowment effect. The moment we come in possession of something, it takes on more perceived value to us. And it doesn’t even necessarily have to be possession. Imagine, for example, you are bidding on an item at an auction. You make three bids on an item, but end up getting outbid. Even though you have spent nothing and lost nothing, you probably feel as though you lost something.
In one famous experiment, half of a group of students were given coffee mugs. The students in possession of the mugs were given the opportunity to sell the mugs to those without mugs. Not much business was done, however, because the mug buyers offered on average $2.25 per mug, while the mug-owners set their average price at $5.25. It makes you wonder how anything in an economy ever gets bought or sold (1).
Recall, Retrieve, Recite, Ruminate, Reflect, Reason: What is the endowment effect, and how does it relate to our feelings of ownership?
Challenge -The Price of Chocolate: Imagine the following experiment with two groups of participants:
Group A: Researchers place a chocolate bar on the desk of each of the study’s participants. They then instruct the participants to work on a 30-minute project without eating the chocolate bar. After the project is complete, the researchers then offer participants the following choice: they may keep the chocolate or sell it back for a price that they determined.
Group B: This group completed the same 30-minute task without the chocolate bar on their desk. When they finished the task, they were offered the chocolate bar as a reward; they were also offered the option of selling it back for a price that they determined.
Based on what you know about the endowment effect, for those who chose to sell their chocolate bar, which group valued it at a higher price? Explain your reasoning. (https://thedecisionlab.com/biases/endowment-effect/)
*Group A valued the chocolate bar at a price of $1.72 on average; Group B valued it at $1.35.
Sources:
1-Tennenbaum, Melanie. “Can you put a price on March Madness?” Scientific American 23 march 2013.
2-Dobelli, Rolf. The Art of Thinking Clearly. New York: HarperCollins, 2013.
3-“Why do we value items more if they belong to us?” The Decision Lab.
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