Endowment Effects Joe Abittan

Endowment Effects

In his book Thinking Fast and Slow, Daniel Kahneman discusses an experiment he helped run to explore the endowment effect. The endowment effect is a cognitive fallacy that helps explain our attachment to things and our unwillingness to part with objects, even when we are offered something greater than the objective value of the the object itself. We endow the object with greater significance than is really warranted, and in his book, Kahneman shows that this has been studied with Super Bowl tickets, wine, and coffee mugs.

 

Kahneman helped run experiments at a few different universities where college students were randomly given coffee mugs with the university logo. The mugs were worth about $6 each, and were randomly distributed to about half of a classroom. Students were allowed to buy or sell the mugs, and the researchers saw a divergence in the value assigned to the mugs by the students who randomly obtained a mug and those who didn’t. Potential sellers were willing to part with the mug for about $7 dollars, a price above the actual value of the mug. Buyers, however, were generally only willing to purchase a mug for about $3, or half the value of the mug.

 

Kahneman suggests that the endowment effect has something to do with the unequal values assigned to the mug by those who received a mug and those who didn’t. He suggests that it is unlikely that those who received the mugs really wanted a university mug and particularly valued a mug relative to those who didn’t receive a mug. Those students should have been willing to trade the mug for $3 dollars which could be used to purchase something that they may have actually wanted, rather than a random mug. To explain why they didn’t sell their mugs, Kahneman suggests that the mugs became endowed with additional value by those who received them.

 

A further study showed similar effects. When all students in the class randomly received either a chocolate bar or a mug, researchers found that fewer students were willing to make a trade than the researchers predicted. Again, it is unlikely that a random distribution of mugs and candy perfectly matched the mug versus candy preferences of the students. There should have been plenty of students who could have used a sugar boost more than an extra mug (and vice versa), but little trading actually took place. It appears that once someone randomly receives a gift, even if the value of the gift was very small, they are not likely to give it up. The gift becomes endowed with some meaning beyond its pure utility and value.

 

Kahneman describes part of what takes place in our minds when the endowment effect is at work, “the shoes the merchant sells you and the money you spend from your budget for shoes are held for exchange. They are intended to be traded for other goods. Other goods, such as wine and Super Bowl tickets, are held for use to be consumed or otherwise enjoyed. Your leisure time and the standard of living that your income supports are also not intended for sale or exchange.”

 

The random mug or candy bar were not seen as objective items intended to be traded or bartered in exchange for something that we actually want. They were viewed as a windfall over the status quo, and thus their inherent value to the individual was greater than the actual value of the object. Kahneman suggests that this is why so few students traded candy for mugs, and why mug sellers asked far more than what mug buyers wanted to pay in his experiments. The endowment effect is another example of how our emotional valence and narrative surrounding an otherwise objectively unimportant object can shape our behaviors in ways that can seem irrational. Next spring when you are trying to de-clutter your house, remember this post and the endowment effect. Remember that you are imbuing objects with value simply because you happen to own it, and remember that you would only pay half price for it if it was actually offered to you for purchase now. Hopefully that helps you minimalize the number of mugs you own and declutter some of your cabinets.
Seeing Agents

Seeing Agents

As I got about half-way through my undergraduate degree, a key thought process in my brain began to change. It was an intentional change on my part, and one that took quite a lot of effort. After several years I was able to stop seeing agency in things that were not alive. I was able to get away from the mindset of everything happens for a reason and I started to accept that some things were random, some things were only imbued with meaning by me, and potentially everything in the universe is the result of physical laws of nature.

 

Today I don’t believe that the table at which I write has any emotional experience of me using it to type out a blog post. I don’t think my car actually knows if I drive it today, and I don’t think that it has some preference deep inside to be driven. I don’t believe that the house I am about to move out of will actually be sad (or happy) to see me leave. But there was a time in my life where a piece of me may have believed such things. I certainly knew the houses, stuffed animals, and cars were not alive, but somewhere deep inside I was assigning agency to inanimate objects, imbuing them with emotions, thoughts, and desires of their own.

 

It is more than just cartoons that made me think the way I did about inanimate objects, and that is why it took several years late in my undergraduate degree to begin changing the way I thought about the world. I was seeing agents where there were none, and it was hard to remove agency from things that I had animated in my own mind. Research presented in Daniel Kahneman’s book Thinking Fast and Slow helps explain what was happening inside my mind:

 

“The perception of intention and emotion is irresistible; only people afflicted by autism do not experience it. All this is entirely in your mind of course. Your mind is ready and even eager to identify agents, assign them personality traits and specific intentions, and view their actions as expressing individual propensities. Here again, the evidence is that we are born prepared to make intentional attributions…” 

 

Kahneman describes a study in which participants watch geometric shapes chase each other around on a screen. People see random shapes and assign meaning, intention, and agency to the two dimensional objects. We create a story that justifies the behavior we intuit from them and gives them life. Our mind is geared to see agents where there are none, probably to help us understand other people, to be able to reflect on our own emotions, and to become better social beings. Yuval Noah Harari in his book Sapiens discusses how the cognitive revolution may have brought about this ability in our minds, by giving us the capacity for imagination, and the capacity to create narratives and stories to foster social cohesion and shared meaning.

 

Ultimately, it doesn’t matter much if you name your car and view it as having agency, you might even treat it better if you do. However, this can spill over into other aspects of our lives in problematic ways. We can become too attached to material objects, unable to let go of clutter and stuff. As Kahneman continues, and as I’ll write about tomorrow, this is also likely part of why we see the world so often through religious eyes, and conflicting religious beliefs and values have certainly been at the root of much violence and death in human existence, even if religion has given us community and social mission. Seeing agents where they do not exist is an interesting part of our humanity, and it can help us gel together, or can serve as the base for out-casting others and bringing violence upon them. Its not easy to overcome, but I think it is necessary if we are to have accurate beliefs about the world and advance as a global community.

On Our Relationship With Things

I have written quite a bit about minimalism in the way that The Minimalists approach the idea of having less stuff. The more things you have, the more time you have to spend organizing, maintaining, and working with your stuff. It takes time to earn enough money to make purchases, to afford the storage space for items, and to fix parts of things that break, or to keep them clean and up to date. Once we have lots of things, we have to think about where we are going put them, we have to move them around if we need something else at any given time, and we need to pack them up and move them if we ever need to move where we live in the future, and we may have to pay to have someone else store them for us.

 

Despite the difficulties that can come from having lots of stuff, it is hard to get out of the mindset that says you should buy more things and always try to acquire bigger and better things. Sometimes, we need some clear thinking to help us remember what is important and what is not when it comes to our stuff. Seneca writes, “understand that a man is sheltered just as well by a thatch as by a roof of gold. Despise everything that useless toil creates as an ornament and an object of beauty. And reflect that nothing except the soul is worthy of wonder; for to the soul, if it be great, naught is great.”

 

In Seneca’s quote we find the idea that what makes us great people, what makes us interesting, and what drives us in interesting and meaningful ways comes from within us. It is our mindset, our worldview, and our goals that determine what value we see and pursue in the world. Effort to obtain lots of things and to have impressive shiny stuff for showing off amount to nothing more than useless toil. The time we spend working so that we can have the bigger and better thing is time that is effectively wasted.

 

The more we feel compelled to have a newer and more expensive car, the more we feel we need a bigger house which will bring a bigger mortgage payment, and the more we feel that we need expensive things in general, the more we will have to work and potentially spend our time doing things we don’t enjoy. We make a trade off, our time (and sometimes our well being, stress, anxiety, and healthy) in exchange for a thing that we think will make us impressive. Sometimes we obtain so many of those things that we end up in a continual cycle of anxiety and stress from the work that we take something more important away from our lives. We risk a point where the things we own occupy all our mental energy and it is fair to question whether we own our stuff or whether it owns us. We may find that life can be more simple and all our needs can be provided without the material possessions we seek, which gives us back time and energy to focus on things that we enjoy and that interest us.

All of Our Stuff

The Most Good You Can Do is a book written by Peter Singer about a philosophy known as effective altruism.  Those who follow the philosophy are characterized by making large donations and directing greater than 10% of their income to charities and organizations that make meaningful changes in the lives of those who are the most disadvantaged.  Effective altruists are focused on making sure that the good they do by making financial donations is maximized. In this pursuit, they look for new ways to save their money for donations, and for charities that direct almost 100% of the donations they receive toward their cause as opposed to administration, fundraising, or lobbying.

 

Singer argues that more Americans should move toward the lifestyle of effective altruism even though it would mean we would have more people moving away from the standard focus of capitalism which is buying more goods with the money we have for our own happiness.  Throughout his book he shares the stories of effective altruists who make large scale donations despite having modest or average incomes.  He shows that a life focused on helping others builds a sense of purpose that is greater than the joy we receive by owning things.  He advocates that Americans should better budget their money and make more stringent decisions about what they choose to purchase if they want to live happier and more fulfilling lives.

 

“An in-depth study of thirty-two families in Los Angeles found that three-quarters of them could not park their cars in their garages because the garages were too full of stuff. The volume of possessions was so great that managing them elevated levels of stress hormones in mothers.  Despite the fact that the growth in size of the typical American home means that americans today have three times the amount of space, per person, that they had in 1950, they still pay a total of $22 billion a year to rent extra storage space.”

 

Singer uses this example to show that our spending and purchasing is getting in the way of our true happiness.  By having so much stuff we are building more stress in our lives, and repurposing space to better accommodate all of our possessions. Rather than enjoying our space and having leisure time, many Americans are crammed into cluttered spaces and must spend a large amount of time organizing, cleaning, and managing their stuff.

 

“Perhaps we imagine that money is important to our well-being because we need money to buy consumer goods, and buying things has become an obsession that beckons us away from what really advances our well-being.” Singer writes this passage to explain that our purchasing power and habits have not helped us have richer lives, even though our lifestyles may be richer.  What he would advocate for, I believe, is a better use of our financial resources, stricter uses of our money, and a refocused interest in helping others.
Preparing for Life's Challenges

Preparing for Life’s Challenges

In James Harmon’s collection of letters published in his book Take My Advice, he includes a letter written by philosopher Martha Nussbaum. In her letter Nussbaum writes about our connection and dependence on others, and what we should focus on to build meaningful and successful lives. Nussbaum writes, “We are all going to encounter illness, loss, and aging, and we’re not well prepared for these inevitable events by a culture that directs us to think of externals only, and to measure ourselves in terms of our possessions of externals.” This quote reminds me of a topic that I have written about before in regards to social media. With our digital lives we spend a lot of time focusing on the lives of other people, and we compare ourselves to our friends and judge ourselves relative to what we see of others online.

I believe that Nussbaum would find our social media comparisons to be a dangerous thing for each individual because we will begin to judge ourselves based on the things we have in our lives relative to others. When we see people taking exciting trips, buying new things, or just being fully happy with some situation, we inevitably build a small block of envey towards others. On the other end of the equation when all of our actions relate back to impressing other people and finding encouragement through social media, we fail to live a life that has a deep meaning. When our happiness is dependent on the approval of other people we do not have the support system necessary to help us through rough patches.

Nussbaum in her quote is advocating for a society that focuses more on the reality of life and not the fantasies of material possessions. When our entire focus is on outside rewards, buying things, and receiving praise for monetary success, we become trapped in a box where our lives are defined by materialism. Without achieving a certain level of financial success or without purchasing certain cars or clothes a person who judges the world by outward displays of material success will feel like a failure. The quote above shows that this lifestyle may be sustainable when things are going well, but once a promotion does not occur or an illness presents itself, the individual does not have a strong moral foundation to stand upon. When we base all of our actions and lives around achieving more, we lose a focus on building real relationships and risk forcing ourselves down paths that will not benefit us in the long run.

If we shift our focus and ideas of success then we can eliminate the little voice in our heads that tells us we need to achieve a certain job to impress our friends, family, or the strangers in line at the grocery store. We can begin to work towards things that truly excite and interest us rather than striving to pursue what advertisements and society has told us to work towards. This helps our lives have a deeper meaning, and can create a greater sense of self confidence so when we do reach points of struggle, we can focus on the important aspects of life, and overcome our challenges.

Exploration

For his book Take My Advice, James Harmon collected letters from creative professionals who had carved our an independent career through art, writing, music, and other crafts. Alphonso Lingis is one of the creatives who sent Harmon a letter with advice on living life.  One sentence from Lingis’ letter reads, “The ecstasy of going into the ocean, into the skies, into the rock core of the earth, into the ice is a pleasure radically different from the contentment that simmers over possessions.”
I really enjoy this quote but in my own life I fall drastically short of actually living it.  I am terrible at traveling, and while I do spend a lot of time out doors hiking, running, and cycling, I have trouble stepping away from possessions and work to enjoy exploring new places.  I truly do wish that I was better at planning vacations and escaping from the world I know, in order to explore new cities, majestic oceans, or different cultures.
What Lingis is saying in this quote is that if someone wants to know reality, they need to step away from their possessions, and give up a dream of making money to have more things.  Reality, in Lingis’ views, is the adventure of life that includes meeting new people and cultures, challenging our body’s limits and posture, and experiencing great joys, pains, laughter, and tears.  Trips into nature pull people away from the isolation of the city to connect them with the planet, and with people who live simply.  The bank of memories that one will gain, Lingis says is greater than the monetary and material possessions that one obtains through a life of work and societal demands.  For Lingis this bank of memories creates a special place of contentment within the soul, and allows the body to rest, while careers and material drives keep us wanting for more, and leave us in a place where we cannot be happy with what we have.