Endowment effect

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Reylito A.H. Elbo

Reylito A.H. Elbo

THERE was an old woman selling rice cakes in front of plush Makati office building. One time, a well-dressed office manager came out of the building, plunked down a P50 bill into the old woman’s basket, and then went on his way without taking anything.  This went on every day for three weeks.

Finally, the old woman  upon seeing the manager again tossing another P50  bill into her basket, stood up and said: “Sir, excuse me. May I have a word with you?” The manager said: “I know what you’re going to say. You’re going to ask me why I’m giving you P50 every day and don’t take the bibingka (rice cake).” The old woman said: “Not at all, Sir.” I just want to tell you that the price is now P60.”

Any business, regardless of size—from a sari-sari (small-time neighborhood convenience) store to a major conglomerate can use a lot of pricing strategies to fleece more money from its customers. When that old  woman justifies her behavior, would you tolerate her thinking it is better for her to sell bibingka rather than cocaine?

Now, here’s an assumption. Suppose, you’re moving to your newly-acquired house and lot in Taguig, and you’ve decided to sell your 10-year old residence in Paranaque. How much are you going to price it assuming there’s not much pressure of disposing it? Chances are you’ll tend to set a price higher than its market value.

After all, you don’t need the money and you’re looking at it as an investment.

In economics, this is called the “endowment effect” or the tendency of people to put more value to things because they own them. Of course, the exception to that rule is in the case of government officials who would normally put lower value to their property, if not hide them from the prying eyes of the general public.

The buzzword “endowment effect” is from Daniel Kahneman, Jack Knetsch, and Richard Thaler who published a 1991 paper entitled “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias.”

The three academics are saying: “A wine-loving economist we know purchased some nice Bordeaux wines years ago at low prices. The wines have greatly appreciated in value, so that a bottle that cost only $10 when purchased would now fetch $200 at auction. This economist now drinks some of this wine occasionally, but would neither be willing to sell the wine at the auction price nor buy an additional bottle at that price.

“Thaler (1980) called this pattern—the fact that people often demand much more to give up an object than they would be willing to pay to acquire it – the endowment effect. The example also illustrates what Samuelson and Zeckhauser (1988) call a status quo bias, a preference for the current state that biases the economist against both buying and selling his wine. These anomalies are a manifestation of an asymmetry of value that Kahneman and Tversky (1984) call loss aversion—the disutility of giving up an object is greater that the utility associated with acquiring it.”

The other terms for endowment effect are “loss aversion” and “status quo bias.” Now, if a meddlesome guy would ask you why you’re against selling your unused property via sulit.com, it’s best to say “because I don’t have to.” It is one simple statement that should stop the joker from asking more questions that pushes you to think of other plausible reasons.

Last December, I did a partial spring cleaning at home which resulted in the disposal of close to 20 garbage bags of yellowing newspaper clippings, research papers, training manuals, and old books that I acquired for the past 25 years.

After disposing them all, I moved on to dispose my old and unused clothes in three extra-large black plastic bags.  I told my wife to double check the bags before I finally give them away to the garbage man.

I was thinking, maybe she would be interested to give it away to the poor communities in our barangay where she’s a volunteer daycare teacher.  After close to six weeks now, still the old clothes remain untouched. I feel that my attempt to do spring cleaning for the New Year was going nowhere.

At least, that’s what I’m thinking because compulsive hoarding is not an intelligent management buzzword.

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

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1 Comment

  1. Sir, I sure like reading your article detailing what an endowment effects is all about. Filipinos are expert on that when it comes to make a living. Fruits and vegetables vendors are second to none when it comes to profiteering. A basket or sack of fruits they normally bought for a hundred pesos can easily sold for at least 150 pesos when sold by bunch.

    In the USA for example homeowners buying house from developers can easily make a hefty profit of $10,000 to $20,000 right after they moved in.

    So, if there’s anybody out there who would like to make profit for your money, this is the legal way to do it. If you are a business minded individual and would like to double your money, I can practically do the transaction anywhere in California, Nevada, Texas, Florids, or Virginia. Reinvesting is a good business. I’ve seen people buying a “Fixer-upper” house, do a simple make-over, add a touch of new furnishings, and Wham…3 or 4 months later, the house is a beauty.

    Maybe if I’m lucky enough to win a jackpot in the lottery, this is the kind of venture I might do to doble my money…guarantee!