Why you consistently overvalue your products and yourself- iWONDER

  29 May 2019    Read: 1059
  Why you consistently overvalue your products and yourself-  iWONDER

The endowment effect leads you to overvalue an object, simply because you own it. If you sell the object, you will most likely overprice it. However, the price you would pay for that object (if it was not yours already) is substantially lower. Your willingness-to-accept (WTA) price is significantly higher than your willingness-to-pay (WTP) for that item. Learn in this article how the endowment effect works, and how to use it in your workplace.

Here's an interesting twist to the endowment effect. It is called the IKEA effect. If you put energy into assembling or making something, you are likewise more likely to overvalue or overprice it. In fact, something created by an amateur (hobbyist) is likely to be priced at the same level as something created by an expert (professional). You also expect someone to value your self-made creation as much as you do. Also, if you disassemble or destroy the thing you have made, or leave it unfinished, the IKEA effect goes away.

The endowment effect is tied to the status quo effect. As humans, we tend to avoid change. It is uncomfortable for us. This leads to the status quo bias. We prefer that things stay the same. We will avoid making decisions or adamantly stick by a previous decision in order for things to not change. It also helps us avoid taking responsibility for making a choice that results in an unwanted change. The status quo effect happens even when a person's choice has a great deal of importance, but the actual change from that choice is small. For example, changing health insurance plans in the ACA marketplace. This is a decision that can greatly impact your out-of-pocket healthcare costs. Some of the plans differ by just twenty or thirty dollars — not a large increase when the newer plan covers a higher percentage of healthcare costs. People are still more likely to stick with their original plan regardless of the benefits of switching.

How does the status quo effect apply to politics? It may explain why incumbents are more likely to be reelected than challengers. Likewise, once the public accepts and gets used to a policy, they are less likely to vote to change it. However, the more predictable or chaotic your environment is, the less likely you will adhere to the status quo effect.

Here's an interesting twist to the endowment effect. It is called the IKEA effect. If you put energy into assembling or making something, you are likewise more likely to overvalue or overprice it. In fact, something created by an amateur (hobbyist) is likely to be priced at the same level as something created by an expert (professional). You also expect someone to value your self-made creation as much as you do. Also, if you disassemble or destroy the thing you have made, or leave it unfinished, the IKEA effect goes away.

In the workplace, employees are more likely to work harder for a bonus when it has been "provisionally" awarded to them, rather than for a bonus that has not yet been awarded. Also, when you give employees ownership of a solution to a problem, they are more likely to feel a sense of accomplishment and are more likely to view themselves as an effective employee. One way to do this is to frame the solution as something you know only that particular employee (or group of employees) can accomplish. Then solving that problem becomes the employees' solution, rather than the employer's solution.

How much the endowment effect impacts you also depends if you identify with an individualist or collectivist culture. If you identify with an individualist culture, where generally decisions are made only by considering the self (independent), you are more likely to experience the endowment effect. If you identify with a collectivist culture, where generally the family or group is considered in making decisions (interdependent), you are less likely to experience the endowment effect. One reason for this could be that in an individualist culture, people tend to place credit for their success more fully on themselves than on others or external factors, while in a collectivist culture, people tend to place credit for their success on others and external factors.

How do you counter the endowment effect or status quo effect? Experience in buying and selling leads to a significant decrease in the endowment effect. You will have a more realistic WTA and WTP. This is most likely to happen because you experienced not being able to sell your items because they were overpriced. Also, the more your environment fluctuates, such as your market, the less the status quo effect impacts you. In addition, the more that you remind yourself that any decision is simply that — a decision, and not a sign of your self-worth — the more likely you will make a change instead of tolerating what situation you are already in. Also admitting that you got to where you are through luck and the guidance and kindness of others, not just on your own merits, will help decrease the endowment effect.

 

Forbes


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