Endowment Effect

What does HGTV’s Buying and Selling, Hoarders, and business all have in common?  Some where the endowment effect is clouding someone’s judgement.  Someone is overvaluing and holding on far too long. 

What is the endowment effect?

Part of behavioral finance, the endowment effect explains a situation in which a person places higher value on something that they already own than if they did not already own it.  Maybe this happens to you or someone you know.  The value placed on an object is full of emotional or sentimental feelings.  At the end, the owner often places the value above market price or reasonable expectations. 

Turn on HGTV and watch an episode of Buying and Selling with Jonathan and Drew Scott AKA the Property Brothers.  You can see the endowment effect occur in real estate.  The person or family selling their home is increasing the value of their home based upon all their memories rather than strictly looking at the market, location, comparable homes in the area that are either on the market or recently sold, number of bedrooms, number of bathrooms, condition, etc.  When Drew Scott appraises the house, the homeowner(s) are general in shock.  Have you seen it?

The endowment effect occurs in your personal and professional life with material possessions and, I argue, your ideas.  Think about something that you personally created.  You likely place a higher value on your own personal creations rather that the creations of others.  It is your creation.  You know about all the blood, sweat, and tears that went into your creation.  The value on your creation matches your effort, which not always is close to the market value. 

How does the Endowment Effect apply to your personal life?

Have you ever looked at your closet and realize that you only wear 20% of your clothes about 80% of the time but cannot bear to donate the 80% of your clothes you rarely wear?  Have you ever posted something on Craigslist at the price you originally paid for that item only to hear crickets?  Have you ever watched Hoarders the TV shows and saw people with an emotional attachment to broken junk? 

If you answered yes to any of those questions, you have witnessed the endowment effect.  You own that pair of pants that no longer fit your body or your image but there is no way you are selling them for anything less than what you paid for them originally. 

How does it apply to your professional life?

Years ago, I heard an executive tell me how their built this one particular department.  It was their “baby.”   Their department started with this executive as the single employee and now look at it.  That department has 10 people working within it!  You can sense the executive’s pride in what they have achieved.  Honestly, they should be proud of their hard work.  However, after getting to know this executive a little more I noticed a trend.  If anyone recommended changing a process to gain efficiencies, that executive became visibly upset and shut down regardless of the reasons given by their employees and/or source of the recommendations.  This executive took it personally rather than seeing that if their team gained efficiencies that same team could perform more work. 

At times, a  manager or leader cannot grasp that if they delegated word to their staff, they would have more time to complete other work or new work.  Instead the manager or leader gets burned out trying to do it all.  Or when they delegate, they find a reason why they needed to redo the work of their staff.  This just frustrates the staff even more. 

Is this really the Endowment Effect?  I argue that it is the Endowment Effect.  We are placing a higher than reasonable expected value on our work. 

How to minimize the affect of the Endowment Effect? 

  • Self-awareness.  Knowing that the Endowment Effect could be causing your behavior and choices allows you to recognize this pattern. 
  • Decide the item or work no longer belongs to you.  If that pair of pants or report you built, not longer belonged to you, is the power or spark gone?
  • Determine how much would you pay today.  Think about how much you would pay for this item or work you are holding on to right now. 

Resources:

  • Article:  Endowment Effect: A Guide to The Emotional Trigger That Influences Your Customers’ Minds by Tomer Hochma
  • ArticleHere’s the psychological reason most people overvalue things they already own by Shana Lebowitz
  • Podcast:  Beware the “Endowment Effect” When Clearing Clutter and a Deep Dive into One-Word Themes.

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