A Bird in the hand: Why we overvalue what we have and undervalue what we want

11/14/05

It is widely known that individuals often require more money to part with an item than they would pay to acquire the same item. But the psychological underpinnings of the "endowment effect" have never been fully explained.

"When exposed to the same information about an item and having their memory tested, sellers make more errors in recognizing negative features and fewer errors in recognizing positive features. Thus, the endowment effect is not a motivated shift in response language (e.g., sellers should quote high and buyers should quote low) but appears to reflect biased information processing," explain researchers from the University of Iowa in the December 2005 issue of the Journal of Consumer Research.

In particular, this difference in valuation by buyers and sellers has implications for marketing. The authors suggest that sales strategies such as allowing a car buyer to take a vehicle home and park it her or his garage overnight can affect the buyer's point-of-view once seeing the car in its future home.

"Specifically, it appears that sellers, in comparison to buyers, focus on and over-represent the positive features, and under-represent the negative features, associated with the item. This results in reliably different reservation prices on the part of buyers and sellers, leading to the endowment effect," conclude Dhananjay Nayakankuppam and Himanshu Mishra.

Source: Eurekalert & others

Last reviewed: By John M. Grohol, Psy.D. on 21 Feb 2009
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There was never a genius without a tincture of madness.
-- Aristotle