The High Price of Ownership

The endowment effect — the documented tendency for people to value things they own at substantially more than identical things they do not own — is the chapter's subject. The effect is consistent, well-replicated, and contradicts the rational-agent assumption that the value of an item is independent of who owns it.

The classic experiment, conducted by Daniel Kahneman and colleagues and replicated many times since, gives one group of participants coffee mugs and asks them what price they would sell at. Another group, who does not receive mugs, is asked what price they would pay to buy one. The sellers' average asking price is consistently about twice the buyers' average offer. The same mug, valued by the same population, is worth twice as much to its current owner as to a prospective buyer.

The chapter explores why ownership produces this attachment. Owning something for even a short time creates a relationship with it that the prospect of owning does not. The relationship adds value that the buyer does not have access to. The pattern is so consistent that it has practical implications: free trials work in part because once you have used a product, giving it up feels like a loss, and the loss aversion exceeds the original gain from acquiring it.

The defense is to evaluate ownership decisions from the perspective of whether you would buy the item today at its current market value, not from the perspective of how much you would have to be paid to give it up. The two perspectives produce very different answers for the same situation. The first is the closer approximation to what the item is actually worth; the second is what your loss-aversion psychology will defend regardless. The chapter is a useful tool for any decision involving disposing of, replacing, or upgrading items you currently own.