Do you have things at home that you haven't used for a long time but wouldn't sell for any money, even though their nominal value isn't that high? Has it ever happened to you that, after trying on some clothes in a store, you felt like you grew attached to them? And do you have the feeling that you have a good understanding of some beggarly artist who would never sell his favorite painting, even though he was starving?
This is normal, and this mild cognitive distortion has a scientific name: the possession effect. So what is the possession effect and why is it good for us to know about it?
What is the possession effect?
In a nutshell, the possession effect is a psychological phenomenon in which a person values things and objects that he/she owns more than those that he/she could own.
The concept was introduced into science in the 1970s by the economic scientist Richard Thaler. He won the Nobel Prize in Economics in 2017.
Thaler identified the components of this phenomenon and found that it is based on several cognitive distortions that are common to varying degrees to almost all people.
Cognitive distortions that form the basis of the possession effect:
- Limited rationality - applying different criteria of rationality to different areas of life, including different items of expenditure.
- Perceptions of fairness - a person may set a disadvantageous price for a good or service if he or she considers such a concession to the buyer to be fair, and may overprice a good or service if it appears to the buyer to be "not impoverished".
- Lack of self-control - a tendency to give in to momentary temptation, often to the detriment of long-term goals.
- A tendency to "leave things as they are" simply because it is more familiar, and most people are afraid of change.
In describing the effect of ownership, Robert Thaler pointed out that economic decision-making cannot be reduced to economic components and financial gain. Thaler explained that, in addition to considerations of benefit, people are driven by other, less obvious and non-monetary factors, but they directly influence the purchase decision.
Therefore, an analysis of financial decisions with psychology in mind is far more comprehensive than one without psychological factors. These findings are reflected in Thaler's Toward a positive theory of consumer choice, which to some extent summarized the interim results of the research on the topic.
A detailed study and description of the phenomenon later became a joint scientific work of Robert Thaler and Daniel Kahneman, one of the founders of behavioral economics. For reference: the subject of behavioral economics is the influence of emotional, cognitive and social factors on financial decision-making. Kahneman, by the way, is also a 2002 Nobel Prize winner for introducing psychological research methods into economic analysis.
Illustrating the effect of ownership, Kahneman gives the following example: a fan of a music group buys a concert ticket for $200, while the maximum he could spend on a ticket for his favorite band is $500. After the purchase, the fan is offered to sell the ticket for $3,000 and earn $2,800 this way, but the true fan will refuse such a deal because it is more important for him to get to the band's concert.
To understand what the ownership effect is, the example is quite vivid. Kahneman gives it in his book "Think Slowly... Decide Fast", which has been translated into many languages and has been reprinted extensively. There, by the way, there are many such examples, and they were able to collect them during specially organized research - observations and surveys - with a sufficiently large number of participants.
A large number of participants is needed to eliminate the element of chance. Only then we can conclude that this or that model of behavior is logical for most people. Note, by the way, that this approach has allowed researchers to identify many other manifestations of the ownership effect, which should be taken into account when planning to buy or sell.
What is Mere Ownership Effect | Time Management and Productivity
How the ownership effect plays out in economics and everyday life
Above we already gave the example of concert tickets, which captures the essence of the ownership effect in action. And this example may have seemed unconvincing to some because in a fan environment it is ridiculous to talk about any kind of rationality at all. Even those who never heard about the endowment effect, but saw the crowds of fans near the artists' make-up rooms or at least read about the mega extravagant tricks of these very fans, understand, that such emotions cannot be exchanged for any profit in principle.
However, the effect of possession can also be seen in more minor domestic manifestations. In this regard, a joint experiment by Richard Thaler, Daniel Kahneman, and their colleague, the economist Jack Knetsch, conducted with students at Cornell University, is revealing. During the experiment, one of the "experimental" groups received a gift of cups worth $6, while the second group of participants in the experiment did not receive such a gift. Then deprived students were offered to buy these mugs from their fellow students and, as they say, "close the issue.
As a result, it turned out that the happy owners of mugs, which they got, as the hero of the famous cartoon said, "gratuitously, ie for nothing", were ready to part with the gift of an average of $5.25. But consumers were willing to pay for such a souvenir at about $2.25-2.75.
Thus, the price for the product, which the owner is asking for, is much higher than what he himself is ready to layout for this product. The experiment and the scientists' findings are described in detail in their final paper Experimental Tests of the Endowment Effect and the Coase Theorem.
Let us explain that, according to the Coase theorem, at zero transaction costs the market can cope with any external effects, i.e. externalities. External effects, i.e. externalities, are a topic for a separate large article, so we will limit ourselves to explanations in the context of the experiment in question. According to Coase, if a transaction does not require additional resources and costs, is not controlled by the state, and is not taxed, there is nothing to prevent its participants from agreeing. As the experiment has shown, this is not entirely true, and certainly not always so.
Detailed explanations of Ronald Coase's scientific conclusions can be found in the author's work "The Firm, the Market and the Law". His discussion of the irrationality of human nature as such is interesting, among other things.
According to the scholar, problems are no less often the goal of human aspirations than are goods, and man often shows more ingenuity to get trouble than to get goods. People who have all material problems solved immediately invent for themselves some other kind - extreme sports, predator hunting, or at least new love. I think everyone reading this article will be able to add to Coase's list for themselves.
Next, a group of scientists continued their research. So, in the course of one of the experiments, the participants were asked to fill in a questionnaire in exchange for a gift, which they were shown at once and were kept insight during the whole period, which was working on the questionnaire. When the questionnaire was ready, the person was offered to exchange the gift for a more valuable one, but only every tenth participant agreed to such an exchange.
The gifts were ballpoint pens of different values, chocolates of different sizes, and other similar, in general, trifles. And here we were not talking about a simple sale, as in the first case, i.e., the participant would have been left with the gift in any case at the end of the experiment. However, most of them did not want to part with an object that they had already considered their own. In general, this is the same effect of possession in action, and there is also not much rationality in such behavior.
Thus, the irrationality of human nature is quite obvious and, since man is one in all his manifestations, it would be naive to expect that this quality will manifest only in certain spheres of life and will not cover the sphere of economy and finance. The question then arises: how can the effect of ownership be taken into account in one's daily life? And how to use the ownership effect in managerial decision-making, for example? Let's talk about that next!
The ownership effect in managerial decision-making and business
The term "ownership effect" though comes from America. And it would be surprising if businesses did not try to put this psychological phenomenon to their advantage. So how do businesses manage their profits by incorporating the ownership effect into their marketing policies?
"Make it feel like it belongs to you."
We have already found out that the price a person asks for a product is much higher than the price he is willing to pay for it. And vice versa, if a thing already belongs to a person, he estimates it much more expensive than the same, but someone else's or conditionally "nobody's", standing on the shelf in the store.
Perhaps this was the reason why perfumers were the first to offer samplers as an opportunity to give customers a taste of the fragrance, to get used to it and no longer wish to part with it. Today it is hardly possible to find out the exact date of birth of the first sampler. And the primacy in this invention is disputed by at least two famous perfumers of the 20th century: the Frenchman Francois Coty (1874-1934) and the American Esther Lauder (1908-2004).
But the real breakthrough in marketing came when the idea of "giving it a try" began to be adopted en masse by other businesses. A classic of the genre is Ikea furniture stores, offering visitors to sit on chairs and even lie on beds. After such close contact, many buyers consider the bed almost theirs and agree to purchase more quickly than without such a "test drive".
In principle, test drives organized by car dealerships are the same attempt to put the effect of ownership at their service and manage the flow of sales with it. Any motorist knows very well that just a good car is one thing, and the one that you like and on which you have already driven is quite another.
The same approach is practiced by sellers not only of goods but also of services. For example, a free demo version of a computer program that you can download now, but you will already have to pay for extended functionality.
A free trial lesson in drawing, crafts, vocals, a free introductory workout at a fitness club - it's the same thing. If you or your child enjoyed the creative process, if you had time to feel part of the community of the chosen, who by the next beach season will smite everyone with a view of pumped biceps and abs "six" (well, okay, at least "B"), you will pay for the next classes with a probability of more than 90%.
Thus, it is possible to exploit the effect of ownership not only in the purely material sphere. We began our conversation about the endowment effect with cognitive distortions and limited rationality. However, positive emotions and a sense of belonging to the chosen ones are the same endowment effect, but not with material assets.
Giving a permanent discount.
Another technique for controlling customer behavior through the ownership effect is discount cards that entitle you to a permanent discount. The keyword - permanent, i.e. at a discount of 5% any product in the store is already 5% yours, at a discount of 10% any product is almost yours, the only thing left is to pay some 90%.
In the same way "saving" cards operate, where, say, every 6th or 8th cup of coffee (tea, cocoa, hot chocolate) is free. The client simply shows such a card with each purchase, and he put a mark, clearly demonstrating how it comes to the coveted "6th cup of coffee for free. In other words, the prize cup of coffee is already 20% his, and nothing can stop the process of getting closer to the prize, because the card is termless, and the person can decide for himself when he wants to use the gift.
In general, here works the same mechanism as in the technology "to make you feel own". Only when receiving a discount card, the potential buyer feels that he owns not a particular product, but a group of products and the ability to choose any. And hoarding cards engage the effect of ownership as if in "installments", when the prize is already yours, but to get some more action is needed.
Writing in the present tense
Advertising texts in the present tense are a type of "make it feel like yours" move. That's why numerous guidelines for writing promotional texts recommend more active use of the present tense in describing the benefits of a product or service.
Agree, the upbeat "you're buying an apartment in a prime location" sounds more convincing than the vague "if you buy an apartment in our building. The statement "we lose weight together" is perceived more optimistically than the commonplace truth that it takes time to lose weight, and you will be rewarded for your efforts in the future.
In other words, you need to make the client feel successful now, even if it is self-evident that additional effort will be required of them.
Asking for an appraisal of a potential purchase
And finally, to return to the statement that the price the owner is asking for a product is much higher than what he is willing to pay for it. You can add value to a good or service and ask to evaluate not the product or service in its pure form, but the value it carries. This method has long been used in sales of all kinds of masterclasses and online training. What do you mean?
Let's say you are invited to take an online course on Internet marketing or social media management. In itself, the happiness of sitting all your life at a computer is very doubtful, so this sale is always "kitted out" with additional values: a free schedule, financial independence, the ability to devote more attention to family, children, your hobbies. And then they ask you to answer: how much would you value the knowledge that would give you financial independence, freedom to manage your own time, etc.?
Financial independence is worth more than just an Internet marketing course. Therefore, the effect of owning such a value will be an order of magnitude higher, such a purchase will be made much more willingly, and the average check of such a sale will also be higher.
Or another option. For example, the offer of creative orientation courses: drawing, photography, macrame, singing, etc. It is unlikely that these skills are so necessary for mature adults who have already made a choice of their life path. That's why course developers appeal to the finer points of the soul: childhood dreams, unrealized desires, the desire to get their share of popularity, and yes - even change lives for the better!
Just compare what's cooler: learning to take pictures or fulfilling your childhood dream of becoming a photographer? Just to sing for the soul or to find your voice in the literal and figurative sense in this life? When a recruitment ad offers to value in monetary terms the chance to realize your childhood dream, there is no doubt that in such a "package" the offer will be valued much more than just another online training course. This is the same endowment effect, because your dream is there, and to make it come true, you have (only!) to pay for a course in photography, singing, fine arts, etc.
So, to recap. How the ownership effect is used in business:
- "Make it feel like you own it."
- Give a permanent discount.
- Write in the present tense.
- Asking for an evaluation of a potential acquisition.
For a more global understanding of how the ownership effect is used in managerial decision-making, take Herbert Hovenkamp's book Legal Policy and the Endowment Effect as an example, where he explains how this phenomenon affects the policy economy, human rights, securities markets, and various macroeconomic indicators. You will see that the basic laws of economics remain unchanged, regardless of time or era.
And, of course, an overview would be incomplete if we did not say that Richard Thaler and Daniel Kahneman's views have not only supporters but also opponents.
A Critique of the Ownership Effect
Perhaps the harshest critic of the ownership effect is the American economist Michael Hahnemann. He believes that there is no endowment effect. In his opinion, classical economic theory is quite capable of explaining the behavioral patterns of buyers, and such things as health, resources, emotions cannot be evaluated in the category of "purchase and sale". He explains his position in "Willingness To Pay and Willingness To Accept: How Much Can They Differ?"
A less radical critique of Richard Thaler and Daniel Kahneman's views is offered by a group of researchers from Iowa State University. According to them, the endowment effect as such can only exist under conditions of scarcity. When they set up experiments similar to the Thaler-Kahneman-Knetsch experiments, but in which mugs, pens, and chocolates were not in short supply, their results differed from those obtained by Thaler-Kahneman-Knetsch. The Iowa researchers substantiated their findings in Resolving Differences in Willingness to Pay and Willingness to Accept.
So now you have an idea of how to use the effect of ownership to your advantage, and you can apply it to your business. Or you can minimize the damage from firms and brands trying to exploit your irrational impulses.
BIO: Karen J. Frost was marketing manager before, but now she is into essay writing at Essayup.com. She is happy to meet such a plot twist that her life offers to her. She is an educated person ready to share her thoughts and ideas with other people.