Using the endowment effect to your advantageApril 6th, 2009 by ftobia
Let’s say you’re a rational actor bent on maximizing your utility (happiness). If your preferences are fixed, you do your best to make yourself happiest given the constraints you face. But if you can control your preferences, or even shift them around a little, you can be even happier.
The endowment effect causes people to value something more because they own it — or they feel like it’s theirs. Ever feel like you deserve something, and then you don’t get it, and you’re pissed? Bam, that’s the endowment effect messing with you.
But it’s not all bad. You can use the endowment effect to maximize expected future happiness — or maybe just hedge your bets. Let me give a totally hypothetical for-instance. Let’s say you’re accepted at a good economics PhD program, and waitlisted at a great one. You’re not sure if you’ll get off the wait list — but if you do, you’ll definitely go there.
So, what do you do? One strategy is to feel like you own the good school. Go for a visit. Meet the friendly interesting students and faculty and tour their fabulous facilities. Note the quality of the campus, and of the surrounding city. Recognize the huge potential to be amazing at this school. And realize how really awesome it would be to go there. In other words, make that school yours.
Then what if you get off the wait list? Aww, shucks, the endowment effect kicks you in the face. How delightfully unfortunate.