Thursday, September 18, 2008

Endowment Effect

This comes from a fascinating article in the June 21st issue of The Economist about what drives attachment.

Simply put, endowment effect suggests that once someone owns something he places a higher value on it than he did when he acquired it.

In a ingenious experiment, students were reluctant to trade a coffee mug for a bar of chocolate even though they did not prefer mugs to chocolate when given a straight choice between the two.

The experiment was repeated with primates with similar results. When presented with a choice, 60% of chimps preferred peanut butter to frozen juice bars. However, when they were endowed with peanut butter, 80% of them chose to keep it instead of exchanging it for fruit bars.

Our evolutionary past may explain it. Giving things up, even when an apparently fair exchange seems to be on offer, was just too risky. These days there are contracts, rights and other ways of enforcing bargains. Animal societies have none of these mechanisms.

In a brain scanning study carried out recently (using functional MRIs) the pattern and location of activity observed suggests the endowment effect works by enhancing the salience of loss. If this is true, it suggests that a shrewd tendency persists even though we have evolved our culture and environment to where we no longer need to rely on it.

I can only imagine the searches that this posting will turn up in elsewhere, given the title it has, no doubt of disappointment to most readers.

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