Saturday, February 13, 2016

Overvaluing What We Have

We humans are quirky people.  According to his research, Ariely identifies three fundamental quirks of human nature and our feelings towards the things we have: 
  1. We fall in love with what we already have.  (Can you say pack rat effect?)
  2. We focus on what we might lose, rather than what we might gain.  Thus when we think of selling something, we think about all the things we'll be loosing by getting rid of it (and thus may value it higher than the market does). We do not think about all the hassles of owning it.
  3. We assume that other people will see the transaction from the same perspective as we do.  So, we might be confused when a potential customer complains about too high a price - they value it completely differently than we do!
What's more, the more work you put into something, the more ownership you begin to feel for it (The "IKEA effect"), even if you actually do not own the item yet. This is exactly why so many companies can get away with money back guarantees.  The amount of people who default on them is minuscule
People hate to downgrade, even when it may be the best option for them.  

I think this is also why bidding processes work so well.  If you already are comfortable with pledging $x to buy an item, you already start to feel attached to the item, almost like you own it.  Thus if someone ups your bid, you are tempted to keep bidding - it is "yours" after all!  But, if you had proper training on sunk costs and thinking at the margin, maybe you would not have bought that item for much more than it is worth. 



An especially interesting anecdote is that these ownership quirks apply to ideas as well as things.  What is exactly why why we stick to ideologies that no longer seem rational.

No comments:

Post a Comment