Endowment effect

What is it?

People are willing to pay less to buy something they don’t own than they are willing to accept payment for an identical item that they own.

In an experiment by Kahneman, people were each given a coffee mug and then given the choice to sell or swap it for an equally-priced alternative which, in this case, was a pen. It was found that people wanted to be paid twice the money for their coffee mug as they’d themselves be willing to pay for the pen.

“Possessing” something makes it more valuable. Consumers value items they own, which they have an emotional attachment to, more than a similar item owned by someone else.

How can I use it in my favour ?

Allowing people to feel ownership of a product, even if they don’t yet own it, is a powerful way for them to attribute value and increase emotional attachment, and this is often achieved by customization.

Personalization of a product early on in the ordering process, test drives by automobile retailers, other free trials, are examples of how one can engender a sense of pre-ownership and thus enhance desire to buy the product.