Credit Cards

Is Your Last Purchase Worth More, Now That You Own It?

Value isn't necessarily determined by the market in every case. The psychology behind ownership can play a significant role in how individuals perceive the worth of their possessions.

Depreciation is a well-known concept. For example, many goods (such as vehicles, electronic devices and furniture) tend to decline in value as time passes. Fewer types of items can actually increase in value over time, like a home or a piece of fine art. But, how about everyday purchases? The answer to that question depends on one's perspective. Below, we explore how the role of ownership can affect consumer behaviour and how people may value certain goods.

Ownership Can Boost Value from the Perspective of the Owner

According to the Endowment Theory, just owning an item can increase its worth–from the perspective of the owner. This can apply to many aspects of life: for example, people grow attached to their pets or favourite car. We often develop an attachment (whether we're cognizant of it or not) to purchases we've made and gifts we've received. Such attachment and sense of worth occur almost immediately, which means integrated memories and emotional ties aren't the only things that drive perceived value.

What does boosted perceived value look like in a concrete way? Kahneman, Knetsch and Thaler performed an experiment whereby people were given a free coffee mug. These people valued the mug at a median price of USD $7.12, but people who weren't given one only valued it at USD $2.87. Then, a third group established a value of USD $3.12. Thus, owners felt their mug was worth more than twice the market value and the price buyers were willing to pay.

Research has shown that owners' valuation of their possession is far higher than prospective buyers'

It's notable that buyer expectations are fairly close to third-party-determined market value, but owners' price expectations are far above that mark. This dynamic often results in mismatched perspectives on transactions. If one can understand these implicit biases, one may have better success when it comes to dealmaking.

Ownership Bias May Cost You Better Opportunities

If someone will keep an item forever, it's great that pure ownership makes the item feel more valuable. However, this bias has a negative effect if one decides to trade or sell the item.

First of all, the attachment to something can drive an irrational need to keep it, even if there is something of truly better value for which one could trade. Kahneman, Knetsch and Thaler illustrate a specific example in their study. To summarize, one group was given mugs and another was given chocolate bars, both of which had similar value. Then, each group was given the opportunity to trade for the other item–the mug for a chocolate bar, or a chocolate bar for a mug. Given the size of the experiment, one might think that participants would have a fairly even split in terms of preference (trade or don't trade). But, 89% of the mug group chose to hold onto their mugs, while 87% in the chocolate group opted to keep the chocolate bar.

This suggests it's likely that people who naturally preferred the opposite item kept what they were given anyway, even after they were given the chance to obtain the good they truly valued more. Under that assumption, ownership could have prevented greater fulfillment.

More directly, let's say you're a chocolate fan who doesn't drink much coffee. But, you're given a free coffee mug. Then, you're told you can swap it for a chocolate bar, but you decide not to. While you've developed an attachment to your mug, you probably won't use it much because you don't drink coffee. And, now you're missing out on the pleasure of indulging in your favourite sweet.

When ownership-driven attachment overrides preference, value is lost in terms of potential enjoyment

Irrational Attachments Risk Loss of Value for Both Buyers & Sellers

Another potential dilemma caused by ownership involves selling. While ownership does have an immediate impact on perceived worth, time can inflate this worth even further. Experts hypothesize that people incorporate certain possessions into their sense of self and personal worth. Further, we may associate them with strong memories, and therefore, link them to our identity. Thus, the idea of selling such items can feel like a threat to the individual.

Unfortunately, this can result in financial loss in practice. For example, suppose you're in the process of moving or you've decided to redecorate your home. Perhaps you've spent years shopping and accumulating furniture and other household items. Perhaps you've spent a lot of money on appliances or electronics that took time to pay off. Your sense of attachment to them, which has grown over time, contributes to an inflated sense of their worth. Specifically, perhaps you feel strongly that your favourite chair is worth Rs. 5,000, and you can't fathom selling it for any less. After putting it up for sale, no potential buyer has offered more than Rs. 3,000. Your move date gets closer and closer, and you face a decision: accept a "low" offer or hold onto a chair that doesn't fit in your new home? Accepting a seemingly low offer can feel like a letdown, but not selling results in an even lower reward: Rs. 0.

In these scenarios, owners can wind up with nothing. On the other side, sellers lose out on the value that an item could have provided to them–like Rs. 3,000 for your chair. If you're aware of this potential bias you can negotiate to a middle ground, which maximizes the chances of both parties coming away with value.

Parting Thoughts: Ownership Bias Can Have a Social Impact Too

Finally, ownership bias can go beyond personal possessions, for instance to one's social life. Beyond physical items, identifying an idea or a concept as one's own can result in an overvaluation of its worth, which can make it hard to move on from it or accommodate others' views. One can also develop a sense of ownership over a space at home, school or work that cultivates strong familiarity and attachment, making changes in these areas uncomfortable too. On the whole, being aware of ownership bias is an important tool in evaluating several parts of life.

Dan Grossman

Dan is a Senior Research Analyst at ValueChampion India, focusing on credit cards. He holds a B.S. in Mathematics & Economics from the University of Michigan, and previously worked in the financial services industry at Capital One and Moelis & Company.