The Endowment Effect
Written by Matthew Narcisse
Matthew Narcisse is a junior at the University of Florida studying psychology and business. He is interested in a career as a market researcher and plans on continuing his learning after undergrad to become a psychologist. In his spare time, he serves as president of the Southern Scholars Foundation and volunteers in his community.
Photo by DS Stories
In my senior year of high school, my dad promised me that if I got into the University of Florida, he would buy me a blue car. Fortunately, I was accepted, and my father proudly kept his promise! Although the car price was $3000, I saw it as priceless because I had earned it.
In sales, everything has value. Whether it’s cheap or expensive, any existing product can gain value without modifications. In relation to psychology, increased customer satisfaction can occur simply by setting the product’s price above the market value.
WHAT IS THE ENDOWMENT EFFECT?
The endowment effect is a bias that influences people to value a product more than its market value due to ownership. For example, one values their coffee mug at $5 even though the market value equals $2. The mug is valued at a higher price to produce increased customer satisfaction. The owner feels like the purchase is a good decision and valuable.
The feeling of ownership plays a role in the value of an item. Ownership creates an abstract connection between the product and the buyer, which increases the product’s value. Simply touching the product creates the link that compels customers to buy it.
WHAT IS ITS ROLE IN SALES Jobs?
Most people in sales jobs exploit the endowment effect to sell products at a higher price. If we feel a sense of ownership, we’ll be willing to pay more for something. Many fall victim to this manipulation tactic and find themselves overspending. Instead of using this bias to trap people, the endowment effect can benefit customers and increase customer satisfaction. A car salesperson can offer a test drive and allow the driver to adjust the seating to their liking. Additionally, they can compliment how the car’s color and structure complement the prospect while sticking with the appropriate market value. This approach will leave the customer satisfied and leave a good reputation for the salesperson and the company.
In the form of non-material products such as services and subscriptions, the endowment effect is used by offering free trials, free returns, and haptic imagery. Therefore, allowing temporary possession of the product and building a sense of ownership. This possession allows the buyer to compare how life was without it. Usually, buyers are reluctant to make a return or unsubscribe due to loss aversion.
Having the right effect
In many instances, there is controversy regarding ethical use of the endowment effect by businesses. Most people in sales jobs are selling their products by exploiting the fears and anxiety of customers. Instead, people in sales jobs should build a relationship based on the trust and reliability of their products or services. Providing a genuine product or service that will benefit customers is the right way to use the endowment effect.
