Tell me this, how many pairs of clothes do you have in your wardrobe that you haven’t worn for a long time? The ones you keep, hoping that you will someday slim down to fit in? The ugly truth is that these clothes will hang there till you throw them out eventually. But, why do we make this decision most of the times?
Richard Thaler, a distinguished behavioural economist at the University of Chicago- Booth School of Business, termed this psychological pitfall as the endowment effect. He pointed out that ‘people often demand much more to give up an object than they would be willing to pay to acquire it’. It means people ascribe more value to things merely because they own them. This is the reason why we end up hoarding things that you think will be useful someday in future. (Also Read 5 Cognitive Biases That Influence Our Decision-Making)
The famous 1991 study conducted under the leadership of Daniel Kahneman (Psychologist who won Nobel Price for Economics) clearly demonstrates this. The study was conducted with 6 students with 3 of them given coffee mugs while other three were given 6 dollars each. The groups of buyers (ones who were given cash) and the sellers (ones with the mugs) were selected randomly. The economists who conducted the experiment assumed that some of them, who wanted cash, will trade the mugs to those who wanted a mug. To their surprise, no trade happened. The sellers kept asking an average price of over 5 dollars for their mugs, while the buyers were not willing to spend anything more than 2.50 dollars for a mug.
The experiment highlights the ownership of an object, for whatsoever short duration of time it may, makes you value it far higher than its real cost. This is one of the reasons why you find ridiculously high prices for used goods at e-commerce sites like eBay.
What is more interesting is how often we drop into this pitfall in daily life. The car dealers want you to have a test drive to give you a sense of temporary ownership because even imagined ownership can increase the value of something. Similarly, this explains why the biddings go so high on auctions, since as they are bidding they experience a premature sense of ownership making them bid more and more.
The best way to deal with it is to understand that we all are susceptible to falling for such pitfalls. One rule of thumb to avoid it is to ask yourself how much effort will it takes for you to buy a certain thing which you have been hoarding for some time. If the answer is very less, then throw it away- simple!
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