Wash Your Hands of the Endowment Effect

The “endowment effect” refers to people placing a higher value on objects they own than equivalent objects that they do not. Among other consumer behaviors, it helps explain why people resist selling used items at a price others will find attractive and why people hesitate tossing foods with an expiration date from last week when they wouldn’t eat the same food at a friend’s house if the expiration date had passed.
     The endowment effect is set off when the purchaser takes physical possession of the product. In a bricks-and-mortar store, this often occurs before the customer pays for the product, as she grasps the product to place it in the shopping cart or as he carries it to the cash/wrap.
     With ecommerce—and with phone and mail orders—the purchase occurs before physical possession. Researchers at California State University-Sacramento found that when a direct marketing customer has confirmation of payment and shipment, there are signs of the endowment effect, but it is not at its strongest until the customer is holding the product.
     It’s natural to think about the customer experiencing the endowment effect and about it applying to physical goods. What about the retailer experiencing it, and what about virtual goods, such as ebooks, ring tones, and online video games? What, if anything, should you charge the purchaser for the rights to loan that virtual good to someone else? What fee structure should you set for resale by the customer? Unlike with physical goods—such as a hardcover book—the physical characteristics of the goods don’t suffer from being a used item. In fact, if you’ve provided upgrades, the value may be even greater.
     Researchers at University of Vienna came across a novel method to ease bias from the endowment effect for both retailers and shoppers, for both physical goods and virtual goods. That method is hand washing.
     The researchers asked groups of study participants to consider exchanging an owned product for another item which was of objectively equivalent value. The endowment effect would cause the participants to overvalue the owned item, and so decline the opportunity to trade.
     Those who washed their hands were twice as likely to do the exchange as those who didn’t wash their hands.
     The researchers present this finding as another example of how attitudes of consumers and retailers are strongly influenced by mental representations of physical actions. Psychologists call it “embedded cognition.”

Click below for more: 
Reconfigure Your Own Endowment Effect 
Empathize to Ease the Endowment Effect 
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