Bad riddance or good rubbish? Ownership and not loss aversion causes the endowment effect

People typically demand more to relinquish the goods they own than they would be willing to pay to acquire those goods if they did not already own them (the endowment effect). The standard economic explanation of this phenomenon is that people expect the pain of relinquishing a good to be greater than the pleasure of acquiring it (the loss aversion account). The standard psychological explanation is that people are reluctant to relinquish the goods they own simply because they associate those goods with themselves and not because they expect relinquishing them to be especially painful (the ownership account). Because sellers are usually owners, loss aversion and ownership have been confounded in previous studies of the endowment effect. In two experiments that deconfounded them, ownership produced an endowment effect but loss aversion did not. In Experiment 1, buyers were willing to pay just as much for a coffee mug as sellers demanded if the buyers already happened to own an identicalmug. In Experiment 2, buyers’ brokers and sellers’ brokers agreed on the price of a mug, but both brokers traded at higher prices when they happened to own mugs that were identical to the ones they were trading. In short, the endowment effect disappeared when buyers were owners and when sellers were not, suggesting that ownership and not loss aversion causes the endowment effect in the standard experimental paradigm. 2009 Elsevier Inc. All rights reserved. The amount of rentable self-storage space in the United States is roughly 2.2 billion square feet (Russell, 2008). That’s three times the size of Manhattan and large enough to hold every man, woman, and child in the nation. Why are cash-strapped Americans paying to store things they cannot use rather than selling them to people who can? One reason is that people value their possessions far more than others do. Dozens of studies in psychology and economics have shown that people typically demand higher prices to relinquish the goods they own than they would be willing to pay to acquire those goods if they did not already own them (Bateman, Munro, Rhodes, Starmer, & Sugden, 1997; Brown, 2005; Chapman, 1998; Franciosi, Kujal, Michelitsch, Smith, & Deng, 1996; Kahneman, Knetsch, & Thaler, 1990; Lerner, Small, & Loewenstein, 2004; List, 2004; Loewenstein & Adler, 1995; Mandel, 2002; Nayakankuppam & Mishra, 2005; Thaler, 1980; Tom, 2004; Tom, Lopez, & Demir, 2006; van Boven, Dunning, & Loewenstein, 2000; van de Ven, Zeelenberg, & van Dijk, 2005; van Dijk & van Knippenberg, 1998; Zhang & Fishbach, 2005). Because the people who own lava lamps demand more to give them up than the people who do ll rights reserved. chology, William James Hall, 02138, USA. Fax: +1 617 495 . Gilbert). not own lava lamps will pay to get them, deals go unmade and storage lockers remain filled with lava lamps that are destined never again to glow. The tendency for people to overvalue what they own is known as the endowment effect and it has been called ‘‘one of the most important and robust empirical regularities to emerge from the field” (Loewenstein & Issacharoff, 1994). Why does it occur? The standard economic explanation is given by Prospect Theory (Kahneman & Tversky, 1979) which states that value is a referencedependent function that decelerates in the domain of losses more quickly than it accelerates in the domain of gains. More simply said, people expect the pain of losing something to be greater than the pleasure of gaining it (a phenomenon known as loss aversion), and because sellers typically think of selling as a loss of something they own and buyers typically think of buying as a gain of something they do not own, sellers expect to suffer more than buyers expect to benefit. This leads sellers to demand more compensation than buyers are willing to provide (Kahneman, Knetsch, & Thaler, 1991). Early studies of the endowment effect found that when people were randomly assigned to receive or not receive a good, those who received the good demanded higher prices to sell it than those who did not receive the good were willing to pay to acquire it. These studies also found no differences in buyers’ and sellers’ ratings of the good’s attractiveness, and researchers interpreted these 1 Technically, buying prices are elicited by asking a person to choose between receiving a good and keeping money that is already theirs, whereas choice prices are elicited by asking a person to choose between receiving a good or money. The difference between buying prices and choices prices is simply whether the money that is relinquished to acquire the good is already in the person’s pocket. Previous 948 C.K. Morewedge et al. / Journal of Experimental Social Psychology 45 (2009) 947–951 results to mean that ‘‘the main effect of endowment is not to enhance the appeal of the good one owns, only the pain of giving it up” (Kahneman et al., 1991, p. 197). In other words, people store their lava lamps because the thought of losing them is especially painful and not because the lamps themselves are especially appealing. Although recent work has greatly expanded the psychological foundations of the endowment effect (Birnbaum & Stegner, 1979; Carmon & Ariely, 2000; Johnson, Haubl, & Keinan, 2007; Nayakankuppam & Mishra, 2005; Zhang & Fishbach, 2005), it has retained the central idea that the endowment effect occurs because sellers are contemplating a powerful loss and buyers are contemplating a tepid gain. The endowment effect is typically described as ‘‘the purest and most robust instantiation of loss aversion” (Rozin & Royzman, 2001) which ‘‘does not require a change in preference for the good once it becomes part of an individual’s endowment” (Brown, 2005, p. 337). But research in psychology suggests that the ownership explanation may have been too quickly dismissed. Decades of work on cognitive dissonance theory (Cooper, 2007) has shown that people value what they choose simply because they chose it (Brehm, 1956), and indeed, when people choose Alternative X but are led via a clever experimental technique to believe they chose Alternative Y, it is Alternative Y—and not Alternative X—that increases in value (Johansson, Hall, Sikström, & Olsson, 2005). This increase in the value of chosen items (and decrease in the value of unchosen items) occurs in part because people are motivated to justify their choices, and in part because owning an item creates an association between the item and the self. As Gawronski, Bodenhausen, and Becker (2007, p. 221) have noted, ‘‘Choosing an object results in the creation of an association between the chosen object and the self. By virtue of this association, implicit evaluations of the self tend to transfer to the chosen object” (see also Greenwald & Banaji, 1995). The effects of such associations are so powerful that people prefer neutral stimuli that were subliminally paired with their names to neutral stimuli that were not (Jones, Pelham, Carvallo, & Mirenberg, 2004) and they consider items they own to be especially attractive even when they had no role in choosing them (Beggan, 1992; Beggan & Scott, 1997). In short, research in psychology suggests that there is a robust tendency for people to value items that are associated with the self, which suggests that ownership may play a role in producing the endowment effect. People may demand a lot for their lava lamps because they actually like them, and they may like them simply because they are theirs. So which of these explanations of the endowment effect is correct? In the real world, people who sell goods typically own them and people who buy goods typically do not, which is to say that loss aversion and ownership are typically confounded. Unfortunately, they have typically been confounded in experiments as well. In the standard experimental paradigm, some participants are given a good and are asked how much they would require to relinquish it and other participants are not given a good and are asked how much they would pay to acquire it. In such studies the sellers are owners and the buyers are nonowners, and thus it is impossible to tell from the results whether ownership or loss aversion produced the endowment effect. We conducted two experiments that for the first time de-confounded these factors and thus put the ownership and loss aversion accounts into direct competition. studies of the endowment effect have elicited both buying prices and choice prices, and the difference appears to be inconsequential (Kahneman et al., 1990). We used choice prices because, as Lerner et al. (2004) noted, ‘‘a choice price has three advantages over a buying price: (a) It does not require participants to give up money, and hence is not limited by the amount of money participants bring to a study; (b) it confronts participants with a choice that is formally identical to, but framed differently from, selling; and (c) it holds constant the money side of the equation— both selling and choice involve choices between receiving or not receiving money”. Although we elicited choice prices and not buying prices, we refer to participants as ‘‘buyers” rather than ‘‘choosers” for the ease of exposition. Experiment 1: when buyers are owners In Experiment 1, we studied sellers who owned a coffee mug (owner–sellers) and buyers who did not own a coffee mug (nonowner-buyers), as has been done in previous studies of the endowment effect. But we also studied buyers who already owned the same coffee mug (owner–buyers) (see Corrigan & Rousu, 2006). We reasoned that if loss aversion drives the endowment effect, then sellers should value the mug more than buyers do regardless of whether those buyers do or do not already own a mug. On the other hand, if ownership drives the endowment effect, then owners should value the mug more than nonowners do regardless of whether they are selling or buying. In other words, we sought to determine whether the valuations of owner–buyers were more like those of nonowner–buyers (which would support the loss aversion account) or more like those of owner–sellers (which would support the ownership account).