My friend was complaining about the fact that her father lost her 8 GB pen-drive and she wanted the very pen-drive back. And she also stated that she’s somehow making her father to buy her another pen-drive with a 16 GB pen-drive as a compensation. My friend is not too happy about losing her pen-drive but why is she too attached to it in the first place? She can easily replace her pen leaving aside the fact that she has important files in it… come on!! Those are movies 😝 The thing is we get too attached to something after we buy a certain good and value it more than the amount we actually paid for.
In this article, we’ll be focusing on endowment and “how” and “why” we become irrational when it comes to consuming certain goods. Why mothers keep baby clothes, or else why you refuse to throw away a broken keychain a friend gifted to you or maybe you refusing to throw away or give away clothes which was bought but doesn’t fit you anymore or why you fight for stationary you bought a second ago with your brother….
What’s going on here? In economics we call this the endowment effect. It is a hypothesis which states that people ascribe more value to things merely because they own them. For instance, I feel quite miserly to handover a pen I started using 5 seconds ago in class and ends up giving a pen which was not used but bought at the same time. We get this sense of ownership when we buy something and get attached to it a bit more when we start using it.
But what drives us to think like this?
In economics we learn about reference dependence, loss aversion and diminishing sensitivity. Reference dependence explains that the consumers first evaluate the potential change in question as either being a gain or a loss. There is a certain point you mentally create as a reference point where you decide whether the trade is a loss or a gain. According to loss aversion humans are sensitive towards losses than gains. Imagine you own a durable good… like a mug. You buy it for let’s say 100 rupees and use it for 5 minutes. Would you trade it with another mug which is the same kind, but let’s say is 80 rupees and assume that you get a 20-rupee compensation by trading the good too. I wouldn’t because I value the memories or whatever that is made out of that mug more than the 20 rupee gain. The fact that you don’t trade the item is because you feel the loss of the mug than the profit of 20 rupees. This is loss aversion. Would you trade the mug if you were to get 50-60 rupees? You might or you might not. You see the mental point we compare our losses to gains is called the reference point. These reference points differ from a person to a person and also according to the context where the owner may value less the same object another person values more.
But… can this pattern be seen continuously? A study done by Kahneman and Tversky (1979) based on gambling founded out that people’s sensitivity to further changes in an outcome is smaller for outcome levels that are further away from the reference point. For instance, don’t we fuss a lot when we don’t get that 2 rupee change from the bus conductor? But do we at least make an attempt to complain if we are to get a 10 rupee balance on a bill you’ve been credited at the Pizza hut? Either you would assume that would be for the tip but they charge for services too on the bill you get! The difference is the proportion. You are less sensitive when this proportion is low and more sensitive towards the amount you pay and the balance you are to get is high.
In today’s article we explored the economics of getting too attached to stuff we consume interestingly our mind being a bit more irrational. Think about all belongings you own and why you keep them… you might be able to do some spring cleaning “economist” style!