What Is The Endowment Effect And Why Does It Happen?

endowment effect in the workplace

The endowment effect is a physiological behaviour based on the concepts of loss aversion and ownership bias. It’s what causes you to think that the item you own should cost more than what people are normally willing to pay for it. Brands that are smart will use this concept to their advantage and try to convince you to buy by using techniques that make you feel like you already own their products. 

Key Takeaways

  • Thinking that what you own should cost more than what people are willing to pay is because of the endowment effect.
  • Brands use the endowment effect on their prospective customers to convince them to shop their product.
  • You can prevent yourself from falling for the endowment effect if you do proper market research on the cost of the item before you shop or sell.

What is the endowment effect?

Have you ever decided to move one day only to discover you have a lot more stuff than you thought you did? So you decide that you’re going to sell some furniture that doesn’t work for you anymore. You write up the ad, price the piece, and upload it thinking someone will bite in no time. But a day goes by, then another, and another, and not a single person responds with interest. 

What happened? Well, you probably priced it too high. We know – this is a one-of-a-kind chair, manufactured by a very expensive brand, and the price you set was extremely fair. But, was it actually? You might be experiencing the endowment effect. 

The endowment effect is a psychological behaviour that makes us believe something has more value than it actually does just because it belongs to us. For example, that same chair being resold at a consignment store might cost $50, but in your mind you think it’s worth more because it’s yours. So you end up asking for $100. Buyers don’t have that same endowment effect with your items so they’re less likely to want to purchase them.

So, is the endowment effect a bad thing?

Well, it depends on what side of the sales process you’re on (seller vs buyer). As a seller, the endowment effects tends to mean you have to work twice as hard to sell something to your customer. Buyers start out already thinking your product isn’t worth what you’re asking for it.

How can I use the endowment effect to my advantage in business? 4 examples

As we mentioned above, the endowment effect stems from a sense of ownership. What we believe is ours is worth more than what isn’t ours. When it comes to business, if you can figure out a way to make your prospect or clients feel like they’re already “owners” of your product or brand then it’s possible to increase conversions. 

That said, it’s not an easy thing to achieve. It requires strategic marketing and psychology knowledge to do it right. To give you some ideas on how to achieve that, we’re sharing 4 of our favorite techniques that can help you use the endowment effect to your advantage. 

Doing a giveaway

If ownership will make prospects more likely to see the product price as acceptable, then actually giving them the product for free is genius. Because a giveaway gives them instant ownership but forces them to convert in order to make use of it you’re getting double the benefit. For example, if you’re offering one free accessory when they spend a certain dollar amount, they do get the free item but they actually have to buy to reach it.  

Offer a free trial

We said that the concept of the endowment effect is that you’re likely to be against getting something new, but more likely to not give up what you already have because you see it as more valuable. The free trial technique is a perfect example of that. While they don’t actually “have” the product just yet, getting to use it unrestricted for a while will make them feel like they do. By the time the trial runs out that ownership feeling will have set in. 

Temporary premium access

Similar to the free trial, but with added temptations of accessing the premium features for free. The secret to this technique is to offer the right premium features – not all of them. If you’re strategic about it and choose them based on your target consumer then you’ll be making a good case in convincing them to upgrade their account. 

Make them your designer

This will work both with service, SaaS, and tangible products. Have prospects (and existing clients) help choose a new limited edition shoe color, or decide what the subject of your next TV show will be. You can even have them vote for what new software feature you should design next. Non-tangible assets are a perfect way to make the endowment effect work for you.  

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Why does the endowment effect happen?

In order to understand why the endowment effect happens we first need to talk about loss aversion. Our human brain loves gaining new things, but it hates even more losing something it already has. This means that when a choice is presented to us we’re likely to focus more on what we would potentially be losing than what we would be gaining.  

Another reason why the endowment effect happens is ownership bias. When something is officially ours we tend to attach emotional value to it which prevents us from being objective. While the true, market value of the thing never changes the second it belongs to us we feel like it’s worth more just because it’s ours. We cared for it, kept it in good condition, and built memories around it. But none of these things have any value on its potential next owner. 

How can I avoid the endowment effect?

The easiest way to prevent yourself from falling for the endowment effect is to be aware of the opposite thing it’s trying to accomplish. Do proper research into the market value of things before you list them for sale, and try to not base the choice on what you think they should be worth.

When it comes to shopping from a company or brand and not an independent seller, keep an eye out for marketing. Check for anything that seems like a physiological trigger of the endowment effect. That way you can make an informed decision when it comes to purchasing what they’re selling.  

Related Readings

Getting People Right (GPR) is an educational website providing professionals from all types of businesses with practical education in entrepreneurial leadership. To keep evolving your leadership toolkit, additional GPR resources below will be useful:

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