There’s a delightful series of experiments about the power of owning something. One experiment goes like this:
* Students walk into an experiment and they are given a MUG.
* Other students walk into an experiment and they are given a PEN.
* Then a student gets the choice to switch his MUG for a PEN or a PEN for a MUG.
Almost nobody switches! They like the choice that’s been made for them.

Most behavioral economists explain this as the endowment effect – once you own something, just that owning it starts to make it more valuable to you.

I also think there’s a degree of automatic reaction and cognitive dissonance. What do I mean and why am I throwing around buzz words?
* Automatic reaction. Jon Haidt studies automatic reaction – the idea that sometimes you just react and later use your brain to rationalize why you may have reacted in that way. I believe the students just don’t want to give it away (whether because they don’t like change, whether because it’s more valuable to them now, or whether for no reason at all).
* Cognitive dissonance. “Well, I don’t want to give up my mug really. Maybe that means I like the mug more. Maybe that means the mug is more valuable to me.”
* Why buzz words? Because these two buzz word pairs signify EXACTLY the meanings of why people might be saying one thing but acting in another way. These words are like useful shortcuts right now.

So NO to “my MUG for your PEN.”

In another study (and this is from memory), some students were given a mug and then told that they could sell it. The mug cost about $5 at the campus bookstore, and all the students given the mug were willing to sell it – but at an average prce around $7!!! Other students were told they could buy a mug, and these students chose prices at which they would buy the mug – they chose about $3 per mug! So the value of the mug can depends on what eyes you look through.

Seth Godin makes this endowment effect very real and very immediate in his Loss vs. Gain story. In sum – he found “the perfect” domain name. He wanted it. He made a bid on it. The seller wouldn’t take $600 for it. The seller was very happy with his own endoment effect for that domain name. Seth was sad. It’s just this blasted endowmnet effect!

One of the best pieces by The Economist I’ve ever read on any topic is a blog post called Un-Endowing the Endowment Effect. The post states, “Now a new paper scheduled to appear in a forthcoming issue of the American Economic Review argues that this asymmetry might not be as formidable as it seems.” It looks like once you change a few things, the endowment effect may disappear. What would one need to change? Well, something that psychologists rarely like to hear in experimental settings … if the words used when handing the object to a student are different, that makes a difference. Also, if a student can be unobtrusively in signaling an interest to trade, that can make a difference. And if a student can inspect the other good before committing to the exchange, that can make a difference.

Please please please, go read this short Economist post, and especially the most delightful Economist words ever – the last line of this article!

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