Experiencing The Endowment Effect

I recently decided that it was finally time for a new car, so after a lot of shopping around, I picked one out and ordered one.  There was definitely some significant psychic pain involved in spending that much money, but I spent many hours thinking over and discussing the decision, and am happy with the purchase.

The release of the Kindle has made me realize just how much clutter books add to my life – including books I may never get to, and others I’ve read but will never read again.  To have those books on an SD card instead of piled in my room and shelves sounds wonderful.  So as a first step in decluttering, I’m getting rid of all the books I expect to never open again.  Perhaps then I’ll get ebook versions of the books I actually read and get rid of the physical copies.

I’m planning to just give my books to friends or Goodwill, since the effort it would take to sell them (list, package, and ship) would not be worth my time.  Yet in contemplating this, I’m experiencing psychic pain far, far greater than that of buying my new car, even though the total cost of these books is only a few thousand dollars.  Thanks to the damn endowment effect, it is so much easier to convince myself that a high income justifies buying expensive things than throwing away cheap ones.

And it’s just so clearly irrational.  If I considered the total income from selling the books, and the time it would take, and I encountered it in the context of "Would you pay this much in order to save that much of your time?", I’m sure I would.  Yet framed as "Would you rather throw these things away, or put in this much time to eke that much value from them", it feels like a terribly wasteful decision.

Ah well.  I’ve had enough practice at overcoming bias that when I can clearly and consciously identify what’s going on, I can usually do the right thing.  I just wish the psychic pain was more amenable to being argued out of existence.

GD Star Rating
Tagged as:
Trackback URL:
  • Cynical Masters Student

    And while we’re at it, could we please find a way to get rid of the desire for for hours of research for a 100$ purchase, too?

  • Great story. Reminds me of something.

    I once bought a book that was shrink wrapped, walked outside the bookstore, unwrapped it, realized it wasn’t something I wanted, and dropped it in a trash can. My brother witnessed this. He was shocked. I thought he was kidding at first, but later I realized he was in minor psychic distress over what I did.

    I explained why what I did was reasonable, but he couldn’t accept it. I think he was experiencing the Endowment Effect By Proxy.

    Here was my rationale, BTW:

    – The book had an intriguing title, worth taking a chance on.

    – The bookstore was going out of business, so I would have felt bad asking for my money back. In general, returning things in stores is a social interaction that has high negative utility for me. Even returning it without getting my money back would require me to make an explanation to the store clerk. No thanks.

    – The book turned out to be a religious book. It was of no value whatsoever to me, in terms of its content, nor did I have a need to burn it for fuel.

    – Carrying the book around with me until I found someone else who wanted it was a further investment that would probably have no return.

    – I felt that the best thing I could do for myself, emotionally, was to deny this book any more hold on me than it had already falsely claimed. I tossed it in the garbage with a feeling of satisfaction. Ties severed. Attack on my attention span repelled.

    I don’t think I’ve told this story to a single person who has accepted my reasoning. My brother still tells the story of his crazy wasteful sibling. But I’d do the same thing again. I think my course was the most rational one, considering my utility curves.

    My brother saw the book as money in a different form. I saw the book as an object of negative value: no physical value (at least that I had access to) and negative symbolic value, since it represented my mistake in buying it to begin with (is that a negative Endowment Effect?)

  • James Bach: could your brother have taken the book out of the trash if he had wanted it? If so, that would demonstrate that he didn’t actually think the book worth the cost of carrying about either.

    I think that people perceive a particular sacredness to books – your brother would probably have reacted differently if it had been, say, a computer part that turned out to be the wrong thing.

  • James Hubbard

    What will you do when your Kindle breaks? What will you do if you decide that you like another reader better than Kindle (in a few years), want to change, and it doesn’t support Amazon’s DRM? It’s so tempting to go down the path of the Kindle. The whole DRM just ruins it for me. Of course you could look at it as another opportunity to de-clutter your life/sd card at that time.

  • LG

    James, I think the break down occurs in two places. First:

    “I once bought a book that was shrink wrapped, walked outside the bookstore, unwrapped it, realized it wasn’t something I wanted”

    I feel that you should have been more careful in selecting the book in the first place. It wasn’t rational to purchase something you could so easily have discerned to be worthless to you before the purchase. The shrink wrap doesn’t change that for me — I have never seen the cover of book so misleading that I couldn’t get the same gist from it that I could get from a quick glance through the pages.

    “The bookstore was going out of business, so I would have felt bad asking for my money back. In general, returning things in stores is a social interaction that has high negative utility for me. Even returning it without getting my money back would require me to make an explanation to the store clerk. No thanks.”

    This also doesn’t make sense to me. There is no negative social utility here — the clerk doesn’t care. Whatever uncomfortability you felt was in your mind alone, and that is probably the least rational part of your account.

    So you bought something irrationally, then irrationally invented a negative social utility in returning it when you had the opportunity. The result was wasted resources. I can see why people don’t follow your reasoning.

  • It’s not just money–for a lot of people, books are Special. That’s why there’s such a market in used books, and why people are willing to run low-end used book stores even though there isn’t much money in it.

    If your brother had had more initiative, he could have taken the book out of the trash and just put it back in the store. Or taken a lower effort route and left it by the trash in case someone wanted to pick it up.

  • Patri, I have a few thousand books in the same status. I have several boxes to dispose of, but irrationally extreme frugality prevents me. I could purge my shelves of books that I will not read in the next five years, and the library will still have copies. Oh well, the marginal cost of storage space in my house approaches zero.

    I have a related issue with needing to convince myself to pay for minor repairs around the house, rather than muddling through myself. I’m not sure if that is frugality or a desire for self-sufficiency.

  • I went through similar struggles when giving away several boxes of books a couple of years ago. For me the most difficult part wasn’t what I would characterize as “endowment effect” — it was that all the books had specific memories attached to them and giving them away meant giving away (the most readily available triggers to) the memories.

    (If I’d figured this out sooner I would have made a list of all the books before I gave them away, but I wasn’t clever enough at the time.)

  • -ck-

    Donate the books to your favorite used bookstore — if they give you a credit, that’s okay; but a used bookstore has a better chance of getting the books into the hands of someone who appreciates them than a thrift store.

    Just sayin’ . . .

  • Gaurav

    My favorite way to dispose of unwanted books is to have a used book party. Invite over a dozen of your bookish friends, many of whom probably also have piles of books they no longer want to keep around. Everybody brings their books over, picks through the others, and generally interesting discussion ensues. Everybody goes home with a few to a lot of new books. Ideally, you are left with approximately the same size pile of books you started with, but have now acquired a few books that you find interesting. Have yourself one of the attendees volunteer to take the leftovers to Goodwill or a used book store. Positive value is extracted by all of the attendees, through the removal of unwanted books and the acquisition of new, often unexpected books. Chances are high that one of the attendees (grad students?) will find it worth their while to take the books to a used book store for credit, removing that burden from you as well.

  • LG,

    You have no idea what the book said on the outside. Why do you think you can judge the purchase as irrational? I would not have made the purchase myself, but I am probably more risk averse with money than James.

    Above you said, “This also doesn’t make sense to me. There is no negative social utility here — the clerk doesn’t care. Whatever uncomfortability you felt was in your mind alone, and that is probably the least rational part of your account.”

    Just because you see no negative utility doesn’t mean that someone else doesn’t. Yes it was in his mind. You can claim it’s irrational, but that doesn’t make it less real. Utility is within a person based on their personal values. Rationality is not relevant because emotions and values are simply not rational.

    I think the reason that most people don’t understand his action is the sunk cost fallacy; they believe that the book has value because he spent money on it. Also most people probably do not share his values.

  • Anonymous

    I want to throw this book away but my brain won’t let me do as I like, arrgh!

  • I don’t understand the main post or several of the comments, which seem to imply that the number of books you possess would not be a monotonically increasing function of time. Isn’t this a reductio ad absurdum?

    Besides, what’s the whole point of having a house (or apartment) if not to keep the rain off your books? If you owned a Kindle, why wouldn’t you just live in a 7′ x 7′ box? And what about your bookcases – how will you fit one Kindle into all of them?

    The whole concept of a Kindle is silly. It will never catch on.

  • This is very strange. I never thought I had invested books with any special sort of sacred status, but reading James’ story gave me a very noticeable internal twinge. Upbringing, education, who knows why, but throwing a book away would feel odd to me. Irrational I know, but interesting nonetheless. If there’s a silver lining to this bias, let’s hope it’s that we tend to hold symbols of information and learning in such high regard.

    Depending on what you have on your bookshelves of course….

    I’d never heard of the Kindle, it doesn’t appear to be available in the UK. Looks very snazzy though. Does this mean we can’t judge books by their cover art?

  • Nominull

    I guess I’ve noticed a similar effect. Once I fill all my available hard-drive space, I’m more likely to stop downloading/installing new things than to clear the crap off it.

    • quanticle

      I’m more likely to simply buy a new hard drive. At this point search technology is good enough (and my computer skills are high enough) to allow me to retrieve pretty much whatever I want from my hard drive with little effort. However, it still takes me a fair amount of work to go through a directory tree and clear out the files that aren’t relevant anymore. As hard drive costs have plummeted in recent years, I find that the monetary cost of a new hard drive is less than the opportunity cost of cleaning out the existing drive.

  • Caledonian

    Forget the “sacredness” of books – the sheer waste and folly of un-shrinkwrapping the thing and immediately tossing it in the garbage astounds me.

    Unless you got an extraordinarily good deal on it, you also have a lot of expendable income to blow.

  • David J. Balan

    There are a couple of recent experimental papers in the American Economic Review (2005, 2007) by Charles Plott and Kathryn Zeiler in which they more or less claim that the endowment effect doesn’t really exist. People can definitely come to be emotionally attached to things, but (they argue) the original experimental results that seemed to show that people placed extra value on things merely because they owned them aren’t right.

  • Alan Gunn

    I don’t know of any science behind it, but books are indeed special. I was voted “class bookworm” in high school–a great honor. When my shelves overflow, I give the excess to the library, which sells them for $1. It took me years to get to the point of being able to do that.

  • Nastunya

    For consistency, should we be as committed to eliminating the endowment bias in interpersonal relationships as in our treatment of objects? Is there really no value to our inclination to hold on to people because they are “ours”? If we could, should we try to treat all people, already-ours and not-yet-ours, as equally valuable, all other things being equal? If so, is the quest of seeking out and maintaining committed relationships misguided? And if it isn’t, and if the endowment bias with respect to people is actually useful, should we then “practice” it by allowing it to remain in other areas in our life?

  • Pingback: Cognitive Biases: Endowment Effect and Loss Aversion « Michael Graham Richard()

  • Pingback: Tweets that mention Experiencing The Endowment Effect: Comments: -- Topsy.com()