A new video (Chapter 7): The High Price of Ownership
Dec
30
We have been a bit slow with the videos, but here is the one for Chapter 7
Dan Ariely
My Irrational Life7 Comments to “A new video (Chapter 7): The High Price of Ownership”
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A very interesting study. I wonder a couple of things though.
Could it be that the owners in this particular case are holding out for a very high price because they know their chances of regaining ownership is very difficult without re-winning the lottery. If there was a lively trade in these tickets, ie the owners knew they could sell and then rebuy if they changed their minds, would they have asked for less?
How does this relate to the current housing market? In San Diego, where I live, antedotal evidence suggests to me that in the expensive areas, people who do not have the income to repurchase, are much less likely to be willing to lower their price when selling. (Hey, they won the once in a lifetime housing lottery) Whereas people who have substantial income, and who could repurchase at a much later date are much more likely to lower their price. Likewise in lower priced neighborhoods, people are much more willing to lower their prices. (Again, this is just antedotal from my acquaintances, not a legit experiment)
I wonder also how much other issues play into the experiment you’ve done. At Duke, what would be the social effect if your friends found out you sold your tickets? Would they think of you as having poor school spirit? Would that make owners less likely to sell than if the experiment had used something that wasn’t associated with school spirit and didn’t have social ramifications?
What about fears of being taken? We all hate to be “taken” by some fast talking salesman. Since these tickets are not openly traded, most people don’t have a reference point to put on the price. With no reference point, do sellers up their price out of fear that they might sell too cheap? Likewise do buyers lower their price out of fear that they would overpay? If you had started each phone call with a statement suggesting price range, ie, “Hi, we’re interested in buying your tickets. So far today I’ve bought ten of them for $100 a piece” would that have impacted the prices?
Sorry, more questions than answers, Spotty
The “what you are giving up” argument for the endowment effect was new to me. Shows you what I know. Any other references to experimental work supporting this hypothesis? Sounds like a potentially useful way to think about economic and financial cyclicality: flight to quality indicates buyers of t-bills are giving up unnecessary risk, bubbles indicate buyers of the bubble security are giving up lousy returns (a reverse endowment effect).
Did you take into account in your study that students are typically poor people? Asking for $1400 is easy for a poor person, offering $1400 is not. This fact needs to be incorporated into your analysis.
The “what you are giving up” argument for the endowment effect was new to me. Shows you what I know. Any other references to experimental work supporting this hypothesis? Sounds like a potentially useful way to think about economic and financial cyclicality: flight to quality indicates buyers of t-bills are giving up unnecessary risk, bubbles indicate buyers of the bubble security are giving up lousy returns (a reverse endowment effect).
slartibartfas – I agree that the students’ ability to pay should be taken into account – but what is interesting here is not the inability to pay $1400, it’s the demanding of $1400 for a ticket on the behalf of the ticket holders. Their sense of ownership, and the attachment they had made to the tickets caused them to ascribe a value to those tickets that had little to do with the market for those tickets, and lots to do with the connection they made with tickets.
What would be interesting is to see how the price demanded changes over time – are people demanding higher prices as they’ve owned the tickets for longer? Do they start ascribing the personal value to the tickets when they start anticipating owning them?
I definitely believe that the endowment theory holds true and that people value something more once they own it, thinking about my own personal experiences. But perhaps for the Duke basketball example, part of difference in sell-price and buy-price might be due not only to a sense of ownership, but also to the sunk cost of achieving that ownership. For example, I might spend several hours researching digital cameras and buy one online for $1000. Or might drive out to the countryside and stumble upon a charity shop and find an antique sewing machine and spend £50 on it. But I would neither sell the camera for $1000 nor the sewing machine for £50 not just because I feel like it is mine, but because I spent time or energy on the purchase. So the sale price of the camera would have to be the amount the camera itself is worth to me ($1000 if I am rational, right?) *plus* the cost of my time of those hours researching online, *plus* the cost of the emotional investment into decision making (“can I afford $1000? Well, if I save here or skip that…” or whatever). And the sale price of the sewing machine could be £50 (its value to me when I bought it) plus the sunk cost of hours driving out to the countryside, plus some unknown because I don’t know if I could ever buy that machine anywhere else.
The Duke b-ball experiment highlights this really really well, because the (sunk) cost of achieving ownership is so high. So the differential you showed between the sale price and the buy price (given the same set of buyers/sellers) makes sense. Certainly some can be attributed to the endowment effect. But I think that a lot of it is due to the fact that these guys spent days and days out in a tent trying to enter the ticket lottery. So the seller would say, I’ll sell my tickets for the X that they are worth, plus the Y that compensates me for the days I spent outside in a tent, plus Z to compensate me for the fact that I failed an exam or got the flu because I spent that time in the tent… So, sale price = X + Y + Z
But the buyer, who has already gone through that same vetting process to get to the ticket lottery but who did not win, would say: I’ll buy those tickets for the X that they are worth, but minus the Y and the Z that I have already “paid” by wasting so much time in those tents outside. So the buy price = X – Y – Z
PS: I loved the book! Hope you come out with another one soon.