Endowment effect: Junk and sentimental value mix well

Reylito A.H. Elbo

Reylito A.H. Elbo

A neighbor who is migrating to the States in three months offers you a 2010 Toyota Innova for P210,000, which is a good price by any standard in the used-car market. You know how your neighbor was religious in terms of regular maintenance works and tune-up at the Toyota service center.

You have the money to buy it, but your wife who likes to play the devil’s advocate, just like your mother-in-law, admonishes you: “You’ve to work hard than that so that we can buy a Fortuner instead of a second-hard car. What are we going to do with another Innova? We got the same car, except that it’s 2007 vintage and we’ve not encountered any problem with it. And besides, my mother likes the color of our car that serves us best since we got married.”

You see her wisdom and reject the offer, until your neighbor decides to lower the price to P190,000.

After a long-winded, second discussion with your junior mother-in-law, you decline the offer in favor of sprucing up your current model with modern accessories and replacing its worn-out parts for P75,000.

If you’re this person, then you must know that the “endowment effect” influences your logic. It’s one basic principle in behavioral economics that we place more value to things we already own, than things of the same value even if they’re sold at an attractive price by another person.

A study by three economic scientists Daniel Kahneman, Jack Knetsch, and Richard Thaler  ̶ shows that people tend to spend more or value more something to retain it than to acquire something owned by another person no matter how attractive the price may seem to be.

It’s not clear if the effects of a similar experiment would involve a consensus decision-making process among family members.

Still, some questions remain: Does it have something to do with the property’s sentimental value? OK. It probably matters. When you’ve been attached to a property, your decision often affects how you value it.

Is this the house where you started a family, including those days when you held birthday parties for your little kids who were entertained by Susie and Geno?

Is this the same house where you stash your old clothes that don’t fit anymore, as well as stained kindergarten books and notebooks with doodles that say, “I love Papa and Mama” written by cute, little hands and junk plastic kitchenware that is somehow difficult for us to throw away?

My point is that for some reason or another, including lack of time, we simply couldn’t throw away things because of sentimental value.

How about a garage sale? I can’t answer that question with total certainty until after downing a couple of Red Horse beer.

To understand the significance of emotional attachment to things, including the 30-year-old, unused water tank and junk ceramic toilet set in the backyard, know this: Presently, my Parañaque property is worth more than P300 million, and I will not sell even if someone makes an offer at P500 million.

You want to make an offer? Try us. Try quoting this amount to a certified real estate broker on LinkedIn and he’ll give you big smile. You may laugh, if you want, but I’m going to get rich by pricing my property way above everyone else’s imagination.

And then, I’m going to hire a mineral rights speculator. His job will be to drive my 2017 Lexus and trim the grass in my sprawling garden.

Kidding aside, I simply like to tell you that humor columnists are like politicians. Both are masters of lying, if not exaggeration. Depending on the composition and interest of its audience, they both emphasize on topics that are close to the people’s heart—its entertainment value—except that politicians make more money for obvious reasons.

What we master depends on how we practice it in real life. As a journalist and academician, trying to make a decent living after my retirement from the corporate world, I can tell you that management buzzwords are difficult to implement in real practice. It takes a lot of never-ending experiments to distill the lessons and interpret them in such a way that even elementary pupils will understand.

Rey Elbo is a business consultant specializing in human resources and total quality management as a combined interest. Send feedback to elbonomics@gmail.com or follow him on Facebook, LinkedIn, or Twitter for his random thoughts.


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