I’ve always thought that my blog is good. You’d have to pay me a lot to shut it down. Just how much? Probably a few thousands dollars at least. Of course, it probably isn’t worth more than a few cents, but I’m only human, and it’s natural for me to overvalue items or services that I own. This tendency is referred to as the endowment effect, and the Wendy’s commercial sums it up nicely. The man on the left is more willing to give up a dollar than his equally valued Double Stacker because he owns the Double Stacker.
The endowment effect is well established in psychologyand behavioral economics. It initially appeared in psych literature when Richard Thaler published Toward a Positive Theory of Consumer Choice in 1980, and its effects have been reproduced in a number of experiments.
In one, researchers divided Cornell undergrads into two groups, one that was given coffee cups and the other that was given nothing. Then, they asked the former group to estimate how much they would sell the cups for and the later group how much they would buy the cups for (they were being sold for 6$ at the Cornell bookstore). Their findings clearly illustrate the endowment effect: those with the cups were “unwilling to sell for less than $5.25,” while those without the cups were “unwilling to pay more than $2.25-$2.75.”
Another experiment by Dan Ariely, Michael Norton, and Daniel Mochon illustrates our tendency to overvalue items that we are emotionally attached to – another version of the endowment effect. In it, they set up a booth at the Harvard University Student Center and offered students a chance to create origami frogs. Ariely, Norton, and Mochon, wanted to see if the student who created origami frogs valued them higher than the students who did not. To do this, they asked half of the students to construct origami frogs and estimate their value, and the other half to estimate their value but not to construct the frogs. Their findings confirmed previous examinations of the endowment effect: the students who made the origami frog valued them about 18 cents higher than subjects who did not. (Ariely calls this “The IKEA Effect,” after assembling an IKEA toy chest and noticing how much more he valued it compared to his family members).
Here is the interest part of the endowment effect: for the most part, it has only been studied in contrast to neoclassical economic theory, which holds that consumers are rational actors. And because the endowment effect breaks an axiom of neoclassical theory – that the price of a good is objective – it has been labeled as an irrational behavior.
But I think this is only half the story.
I was reading Richard Dawkins’ book Greatest Show on Earth the other day when I came across an interesting passage. Dawkins was explaining that the reason we think babies are so cute is because early humans who evolved to find their babies cute were more likely to nurture them, care for them, play with them, and raise them to be healthy than those who did not. In other words, it is evolutionarily advantageous to think our babies are cute – one way (of many) our genes make sure they get passed on to the next generation.
I bring this up to say that we are endowed to find our children adorable in the same way that we are endowed to overvalue our possessions. That is, the endowment effect is a survival technique handed to us through natural selection – it exists because it is evolutionarily advantageous to overvalue possessions that are important for survival. Think about it. If you were a prehistoric person, and you possessed a tool that helped you hunt, make fires, and built shelters, wouldn’t it be wise for you to overvalue this possession? I am not the first person to make this argument, and I don’t think that it is that controversial. But things do get contentious when you try to qualify the endowment effect as being rational or not.
Whereas psychologists and economists see the endowment effect as irrational, evolutionary biologists gives us a strong case for it being entirely rational; Ariely and his colleagues suggest that it is irrational relative to economic theory, but Dawkins says the opposite on evolutionary terms. I am afraid that this debate might be one of words, clearly, the qualifications for rational behavior are not absolute, they are relative. As such, it is impossible to objectively say what is or isn’t rational. Perhaps this is an innocuous claim, but as anyone involved in psychology or behavioral economics will tell you, the qualifications of rational behavior are not so easily agreed to.
At any rate, we should stop thinking about the endowment effect only in the context of the reasoning, decision-making, or economics. As Dawkins’ example illustrates, it could also be understood in terms of evolutionary biology.