Endowment Effect

What is the Endowment Effect?

The Endowment Effect describes how possessing something increases its perceived value. The amount a person would demand in order to relinquish a possession generally exceeds the amount they would be willing to pay to acquire it. In some experiments, this asymmetry is substantial.

Examples

An experiment conducted by Richard Thaler and Daniel Kahneman in 1990 measured the value participants placed on mugs in two conditions. Those who were given possession of the mugs required twice as much compensation to give them up as participants who were simply asked to value the objects. Thaler and Kahneman explained the difference in valuation through a combination of loss aversion, status-quo bias and attentional bias. 

In a different experimental scenario, researchers from the Universities of Vienna and Salzburg found that participants placed a higher value on lottery tickets that had been given to them. When asked if they would be willing to exchange the endowed ticket for another one, most participants refused. This demonstration suggests that the enhanced value of an endowed object is more complicated than a simple quantitative increase.

The Endowment Effect in Marketing

The increased value of an endowed object has important consequences for marketers. A free trial or sample allows a consumer to experience owning a product, making it more likely that they will purchase it. This effect is enhanced if the free trial is associated with a personalised account. 

When displaying an item, either in a physical setting or on a product page, it is important to allow consumers to interact with it. Encouraging a sense of ownership, even if this is simply visualised, will increase the number of browsers who convert.

The Endowment Effect

Combining immersive experiences, visual depiction and trial-based conversion funnels can have a dramatic effect on a business website’s conversion rate. It can also be used to encourage customer loyalty and subscription renewals.