Endowment Effect

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Endowment Effect

The endowment effect, which is also known as loss aversion, is a very robust effect in psychology, and one that has very important practical implications for ecommerce. This effect was first investigated in the early 1990s by two psychologists who we’ve come across before in this video series: Richard Thaler and Daniel Kahneman.

What happened in their original and most famous study is that participants were given a fancy coffee mug – and they had to choose whether to keep it or sell it back to the experimenters. On average, they wanted around $7 before they were prepared to part with it. Another group of participants weren’t given the mug to start with. They were just offered a straight up choice – you can have this mug, or you can have $3.50. When they were given this choice, most of them took the money. But remember that the people who already HAD the mug wanted TWICE that before they were prepared to give it up. In other words, something that you already have feels roughly twice as valuable to you as something that you don’t yet have. Later they did a follow up study with tickets to a very popular sold-out basketball game. People who had tickets were put in touch with people who were prepared to buy them. But almost none of the sales went through. Just like with the mugs, the people who already had the tickets would only sell them for around double the amount that the people without them were prepared to pay.

What causes the endowment effect? The answer comes from a study done at the University of Basel where participants were either given lottery tickets and had to decide whether or not to sell them; or were not given tickets and had to decide whether or not to buy them. The people who had the tickets started out by looking for reasons to keep them – i.e., they looked for evidence that they had a good chance of winning the jackpot. The people who didn’t have the tickets started out looking for reasons NOT to buy them – i.e., they looked for evidence of how unlikely the jackpot is.

Putting the endowment effect into practice is obviously more difficult in ecommerce than in a real-life experiment, where you can physically put a coffee mug or basketball tickets into people’s hands. But it can be done. For example, sites which give you a free trial of product before you have to pay come close to simulating that experience of having a product in your hands.

Depending on the nature of your particular site, you might need to think creatively as to how best to do this – but if you can figure out a way to get your customers to feel as though they have something great in their basket that they don’t want to lose, you can make the endowment effect principle work for you and your site.

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