Endowment Heuristic
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Overview

No, it's not just you — we all tend to overestimate the value of our possessions, and there's a name for it. 

The Endowment Heuristic explains your tendency to place a higher value on an item that you own, than a similar item that you might buy. 

IMPLICATIONS.

The heuristic has a number of implications, including your tendency to keep an existing possession even though, if you did not own it, you might not purchase the exact same item. It can also help to explain why sellers will place a higher price on items than buyers, or indeed the seller themselves, are prepared to pay for it. 

Understanding the Endowment Heuristic helps to interrupt your own bias and understand likely behaviour in negotiated sales, customer loyalty situations and investment choices. It might also shed some light on the tendency to hoard and keep possessions. 

IN YOUR LATTICEWORK. 

The Endowment Heuristic is part of behavioural economics, stemming from the Fast and Slow Thinking mental model and relating closely to Loss Aversion and Status Quo Bias.

It can also help to explain the Lock-In Effect. 

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Actionable takeaways
  • Be mindful of the endowment heuristic in sales conversations. 

When purchasing something, be aware of this heuristic and the emotional connection that someone might have with an item they are selling. Try to be objective about the object and interrupt bias by comparing it with similar items not owned by the seller. 

  • Interrupt the bias with this question. 

Interrupt the endowment heuristic acting as a bias by asking yourself or others, ‘ If I didn’t own this, how much would I pay to get it?’ 

  • Use collaborative and co-design techniques to increase ownership. 

Actively involve an intended audience so they can develop greater ownership for interventions or programs, and value it more as a result.  

  • When selling, encourage a ‘preview of ownership’. 

The endowment heuristic was shown to be apparent in ‘imagined scenarios’, so even when someone imagines ownership of an item they are more likely to perceive it with an increased value. 

  • Personalise products and services. 

Personalising a product or service can help a user to feel that it belongs to them and increase the value of it in their mind accordingly. 

  • Use free trial periods for products. 

A free trial subscription model provides a customer with the opportunity to ‘own’ the service and invoke both loss aversion and the endowment heuristic in remaining a customer.

Explore More
Endowment Heuristic is featured in these Playbooks:
In Practice

Mugs.

This 1991 paper by Daniel Kahneman, Jack Knetcsch and Richard Thaler describes the classic example of the endowment heuristic involving mugs. In it, participants were given a mug and then given the chance to trade it. They found that the value attributed to owned mugs was twice as high as they were actually willing to pay for such a mug that they did not own.

Limitations

There have been critics of the Endowment Heuristic, with some claiming it does not exist or at least is not as apparent in real life as in fixed experiments. For example, some argue that the results from the mug experiment (see the ‘In Practice’ section) was more due to artificial scarcity. 

Build your latticework
This model will help you to:

The endowment heuristic is part of behavioural economics, stemming from the fast and slow thinking mental model and relating closely to loss aversion. 

Use the following examples of connected and complementary models to weave availability heuristic into your broader latticework of mental models. Alternatively, discover your own connections by exploring the category list above. 

Connected models: 

  • Fast and slow thinking: providing broader context to the endowment effect. 
  • Loss aversion and opportunity cost: a closely linked heuristic and bias. 
  • Lock in effect: and challenge of customer loyalty. 

Complementary models: 

  • Design thinking: consider strategies to co-design and increase ownership of initiatives. 
  • Lean startup: iterating with minimum viable products, allowing audience groups to access and own quickly and cheaply. 
Origins & Resources

Aristotle noted the tendency towards the Endowment Effect in Ancient Greece, when he explained: “For most things are differently valued by those who have them and by those who wish to get them: what belongs to us, and what we give away, always seems very precious to us.”

However, the term itself was first coined by the behavioural economist Richard Thaler in his 1980 paper entitled Toward a Positive Theory of Consumer Choice.’ 

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