What is the endowment effect?

The endowment effect is a psychological phenomenon that It can be highlighted in buying and selling situations. For example, when a person places a value above fairness on one of his possessions, or when someone devalues ​​a certain object so as not to own it.

This is a bias that makes it difficult to objectively assess the cost of things. This situation occurs frequently in commercial transactions, but can also be encountered in other scenarios of daily life. In this article, we look at some common examples.

What is the endowment effect?

As we commented, The endowment effect is a bias in which owners value their assets at a higher price than they actually are. In exchange, People who don’t own any property yet tend to irrationally devalue it.

If we appeal to an image, it would be that moment when a person wants to buy a used product. In general, this type of transaction seeks to obtain a lower cost than the original one; however, the seller will want to sell it for what he considers a “fair” price, even if it’s more than it’s worth.

Now, this phenomenon goes beyond buying and selling. It also occurs in relations. Some say they are not happy with their relationships, but when the other person threatens to leave, he adopts a different attitude and tries hard to keep it.

What is the endowment effect?
The endowment effect is associated with the sentimental value attributed to some goods. Hence, many price them well above the real thing.

Causes of the endowment effect

The main causes of this psychological phenomenon they are related to feelings. In other words, people develop affection towards objects and, therefore, attribute more value to them. For example, the owner of a used car who intends to sell it for a disproportionate amount because he has grown fond of the car.

Having memories related to material possessions significantly influences the value we place on these objects. Indeed, Some people hoard things they no longer use just because they have sentimental value.

While it is true that we cannot avoid generating links to objects or people, it is not healthy to generate attachment. The ideal is to try to make objective assessments. In cases where the parties cannot reach an agreement, the intervention of a manager is required.

Examples of endowment effect

Some everyday situations in which this effect occurs can go unnoticed. Below we look at 2 scenarios in detail. The goal is to raise awareness of how common this bias is and to acknowledge it. We will see.

1. Online shopping

Often while shopping on line people have access to product photos. Indeed, seeing the images of the object you want to buy causes prejudice. So if we want to buy a cell phone and see photos of the device, our mind assumes that we already have it.

2. Trial Periods

Some sellers use the trial period feature to get people to adapt to a product. The goal is to increase the likelihood of completing the sale. When the potential customer has the experience of trying the product, he perceives it as his own.

Importance of the endowment effect

In terms of marketing, it is important to consider the effects of endowment bias. If companies don’t objectively assess the value of their assets, they could lose a lot of money. In business, there should be no emotional obstacles when selling an asset.

Even people’s individual economy suffers from attachment to and overvaluation of possessions. For example him holding company It is a strategy in which cryptocurrency accumulates, even when its market value has declined. Care must be taken that affections do not distort market strategies.

Influence on decision making

The decisions we make when we get rid of something are based on emotions. Endowment bias prevents those involved in business transactions from being efficient. It is a case of insisting on selling a commodity at an exorbitant price instead of accepting a reasonable exchange.

In another order of ideas, some people insist on relationships that are harmful to their well-being. Toxic relationships are sustained on the basis of idealizations and prejudices. The influence of a sense of belonging has pros and cons.

Sometimes it’s good to have affection for things, but other times it’s better to know how to let go. The same premise applies to friendships and relationships. And it is that, when it comes to family and romantic relationships, it is difficult to set healthy limits. However, it is possible to learn to make good decisions.

Influence on decision making
The endowment effect often interferes with the economy and finances. However, it can also occur in other social spheres.

Areas of greatest impact

By now it is clear that the endowment effect focuses on decision making regarding what we perceive as ours. In specific terms, the areas of greatest impact are sales, the economy and personal finance.

However, it is important to note that the impact is not always negative. People who value their possessions are careful when doing business. The key is not to mix affectivity with work and well-being.

The post What is the endowment effect? first appeared on research-school



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