What if I told you that there was a psychological force that was causing you
to spend and was ultimately holding you back from becoming rich would you want
to know more about it well boss in this video I will share with you the
endowment effect and how it is keeping you broke and if you're new to the
channel then hit the Subscribe button below for more life-changing content
have you ever been reluctant to let go of something you knew you didn't need
just because you paid good money for it and don't want to give it away for free
do you ever find yourself cradling a prize or reward that moments earlier you
wouldn't have ever looked twice at but now that it's yours you love it there's
a name for this phenomenon the endowment effect a term coined by Nobel prize
winning Economist Richard thaler the endowment effect is a hypothesis that
people ascribe inflated value to items simply because they own them it's
related to social psychology's mere ownership effect which states that some
people who own an object tend to value that object more highly than people who
don't own it sometimes called the vestiture aversion the endowment effect
can have a powerful pull on your emotions and Cloud your judgment when it
comes to spending saving and how you approach your finances it's also often
exploited by marketers and companies to get you to send more money which is why
the psychological effect may be making you poor but before we get into how to
combat the endowment effect it's worth understanding further how it works in a
1991 study Richard thaler and his colleagues Daniel conman and Jack natch
conducted a now famous set of experiments that demonstrated the
endowment effect at work using college students at Simon Fraser University they
design an experiment in which they gave participants mugs purchased from the
campus bookstore and then gave these participants the chance to sell their
mug back to them their participants were unwilling to sell their mugs for market
value and instead wanted over twice the original price of the mug in order to be
willing to give it back even though the mugs were given to the students for free
as part of the study and hadn't owned them for very long they had described a
much higher value to them than was rational this wasn't a case of the
participants having long-term sentimentality for their favorite coffee
mugs the study authors concluded that the value we assigned to an object we
receive is almost instantaneous the moment the students received the mug
they ascribed an inflated value to them furthermore when presented with the
actual sticker price of the mug these students still wanted more money than it
was worth the part with unfortunately many items lose value the moment you buy
them so this Behavior doesn't have a rational explanation
still companies often exploit it to get us to part with their hard-earned money
and buy and keep things we don't need or sometimes even want so now that you have
a better understanding of how the endowment effect works it's worth
knowing where this phenomenon is most often taking place in our day-to-day
lives you see most of us operate in the real world and not in a college
psychology study but the endowment effect is everywhere causing us to make
irrational decisions that work against our best interests however by knowing
what it is and how it affects their behavior we can be more informed and
logical in how we approach situations where it may influence our behavior and
finances so here are four situations where we most commonly see the endowment
effect in action example number one in stores long before economists gave this
phenomenon a name companies understood that if they can make Shoppers feel like
they owned an item right there in the store they were much more likely to
purchase that's the Advent of fitting rooms where you can touch a fancy new
dress try it on and visualize yourself wearing it to work a party or on a date
stores have long known that customers are much more likely to buy an item
they've touched the reason according to a study in the Journal of consumer
research can be traced back to the endowment effect if you physically
handle an item you start to feel like you own it you can picture yourself with
it in your life and it starts to feel more like yours you ascribe more value
to it and might be willing to pay more because the item suddenly feels worth it
tons of companies now that you try something for 30 60 or even 90 days
seemingly risk-free with the option of returning the item if you don't end up
liking it they're baking on the fact that once you get that mattress rug or
lamp into your house and set it up with the rest of your stuff you're not going
to return it it's already in your home and it feels like it's yours so in
addition to not wanting the hassle of returning it you now think it was worth
the price thanks to the endowment effect the strategies used by these companies
aim to ensure that a sharper becomes emotionally attached to an item then the
sharper becomes willing to part with their money for it even if it was
initially outside their budget or they didn't need or want the item to start
with example number two subscription Services
even if there's no physical item the endowment effect can still come into
play for example say you sign up for a free trial of Spotify but have every
intention of canceling your account once a trial period is over then over the
next month you build playlists get suggestions from the algorithm for new
music and customize your listening experience to your exact preferences the
app greets you every time you sign in your account now feels like your own
personalized radio station and that 15 a month seems like a bargain rather than
an unnecessary expense just a few months ago you would have scoffed at paying for
streaming music but now that you've experienced it personalize the service
and feel like you own it you're now more than willing to add this expense to your
monthly bills think about how you watch movies and TV shows at home if you're
like millions of Americans who have cut the cable cord you probably have a
subscription to a streaming service such as Hulu Netflix or HBO go there was a
time when everyone watched only live TV whether it was with a cable box or
simply using old-fashioned bunny ears now we can all choose our favorite shows
and movies and these Services learn how to predict our preferences they can
offer suggestions remember where we were in an episode and customize their
viewing experiences in any number of ways by building this customization into
their services these companies make the consumer feel ownership of the product
and ascribe an inflated value to it then when the free trial ends they want to
keep owning the service and will pay more than they originally intended
because they've endowed it with a greater value in their lives example
number three investing decisions the reluctance to sell something whether
it's a physical item or something intangible like stocks and bonds is also
a function in the endowment effect humans are incredibly lost diverse
creatures Studies have shown that the pain of losing something can be twice as
powerful as the joy of gaining something and its loss of version can Cloud our
judgment when it comes to many things including the stock market if you
describe a higher value to stocks you own it can cause you to be reluctant to
sell them for less than you perceive them to be worth however any good
investor knows that stocks are only worth as much as someone is willing to
pay for them on the market so it doesn't matter what price you feel they should
fetch if no one will pay that amount that doesn't mean you should hold on to
them forever because you think they should be worth more you might also
recognize this feeling if you've ever tried to sell a used car boat or other
big ticket item and were insulted if people tried to bargain for a lower
price we often believe that whatever we're selling is valuable and the amount
we're asking is a great deal potential buyers who don't see it this way are
just trying to lowball Us in reality any item is only worth what someone else is
willing to pay for it and by inflating this value we're only setting ourselves
up to be annoyed and disappointed example number four irrational money
choices the endowment effect extends Beyond goods and services that you buy
and sell it can also influence your behaviors including encouraging
complacency or an action for example almost half of the people in the United
States who have gym memberships don't use them people like the idea of
belonging to a gym and knowing they could work out whenever they want but
they don't actually go to the gym enough to get their money's worth from that
monthly fee most know that they could work out without a gym but they think
that paying for a membership is a worthy expense related to Good Health instead
of being rational and realizing that not using the gym is a waste of money they
think that the service is worth it because they are complacent about
canceling it at this point you might be feeling like the deck is stacked against
you and there's nothing you can do there's no use trying to fight human
nature right don't despair there are steps you can take to conquer your
instincts and one of the easiest ones is simply to be aware of how your brain
works and its emotional triggers that can influence its actions first consider
the usefulness of the item you're thinking of buying or trying to sell
keep in mind that as a general rule 20 of the items we own give us 80 percent
of the utility of all of our possessions this concept called the Pareto Principle
is most often applied to business productivity but is a useful tool when
considering the stuff and services you spend your money on second if you're
headed to a store be mindful of what you touch and try on it can be tempting to
run your fingers over everything but retailers know that if consumers touch
items and try them on they're much more likely to buy them and at a higher price
third if you're trying to downsize cut costs or sell some items ask yourself
how much you would pay for these things if you didn't already own them perform
the stranger test whenever you get rid of a possession ask yourself if a
stranger had the item in one hand and its monetary value in the other which
would I choose more often than not you will take the money so do a little
research to see what similar items they're selling for and make the wise
Financial Choice finally when it comes to stocks bonds and mutual funds think
about your Investments as employees their job is to make you money forget
what you bought them for and don't think about how the price you paid made you
feel whether it was a great deal or a bad one all only focus on whether or not
they're still profitable in short the endowment effect in our aversion to loss
aren't always bad things they help us maintain our homes and possessions
whether long-term relationships through ups and downs and instill in us a sense
of pride in our stuff as long as we're careful inform consumers who approach
transactions armed with knowledge in a firm's grasp of our budget parameters we
can make smart decisions and avoid the Trap of this psychological Force hey it
looks like YouTube thinks this next video is the one that will change your
financial life forever give it a watch and let's see if they're right