CogBlog – A Cognitive Psychology Blog

If you are not aware of the United Airlines disaster/debacle/controversy/blunder (take

Figure 1: United Airlines aircraft

your pick), I would highly recommend familiarizing yourself. However, to save you some time, I will provide you with a short recap of what happened. On April 11, 2017 United Airlines had over booked a flight from Chicago to Louisville and needed to make room for four members of the flight crew. You can probably guess where this is going –  an overbooked flight with four additional seats needed means that four passengers have to change to a later flight (math!). No one wanted to volunteer to give up their seat, so United Airlines bumped four passengers who were already seated from this flight. For whatever reason, one man really did not want to give up his seat that he had already paid for. Thus, United Airlines underwent an “involuntary de-boarding situation” and thought that it would be a good idea to physically remove this man while he was kicking and screaming. Fortunately for us, and unfortunately for United Airlines, this incident was caught by many people on video and then posted to social media. If you’re curious about what United Airlines missed and how they could have potentially avoided the bad PR they incurred after the event, you should continue reading.

No matter if you think United Airlines was in the wrong, or that the man should have just given up his seat like the others who were asked and did so, you may be surprised to know that there’s actually an underlying psychological explanation for all this: a cognitive bias known as the endowment effect. The endowment effect, coined by Thaler (1980), occurs when you value something that you already own, i.e. the airline seat you purchased and were sitting in, at a higher value than if you were trying to obtain the same item. Consequently, if the tides were reversed and you were the one who was trying to obtain said item, the amount that you’d be willing to pay for it is less than the amount that you’d be willing to sell it for had you already possessed it (Thaler, 1980).

The endowment effect has been recorded and studied in both economics and psychology. In an example not as extreme as the United Airlines one, the endowment effect is evidenced in the context of March Madness tickets. The NCAA March Madness basketball tournament is a very popular sporting event, so tickets to the

Figure 2: March Madness Tickets

games can be quite expensive. Using buying and selling price estimates for NCAA Final Four tickets (aka the semi-finals) Carmon and Ariely (2000) show evidence of the endowment effect. In their study, the hypothetical prices that participants were willing to sell Final Four tickets that they were given were on average 14 times more than the hypothetical price that other participants were willing to buy them for. Other studies also demonstrate the endowment effect, including the occurrence in pre-school children (Hood, Weltzien, Marsh, & Kanngiesser, 2016) and even capuchin monkeys (Lakshminaryanan, Chen, & Santos, 2008).

There are two main theories that explain the endowment effect: loss aversion and mere ownership. Loss aversion is the tendency for people to prefer avoiding a loss over attaining a gain of the same amount. For example, if you were given the choice of either the risk of losing $10 on a bet or the chance of finding $10 on the street, you would want to not risk losing the money. One of the most notable experiments demonstrating how loss aversion can explain the endowment effect was conducted by Kahneman, Knetsche, and Thaler (1990). In this experiment, half of the participants were given a coffee mug while the other half did not receive anything. The researchers found that participants were only willing to sell their mug at a price significantly higher than the price that those buying the goods were willing to pay for them, and additionally that the sellers were not willing to trade their mug for pens, even though they were of equal monetary value. Kahneman et al. (1990) explains that this happens because the sellers have established their ownership of the good, thus the negative feeling that they would experience from letting go of the item is greater than the benefits they’d get if they were to obtain it.

The second theory, mere ownership, can also help explain the endowment effect.

Figure 3: A photo representing possessiveness over an object

This theory is based on the idea that the unwillingness to let go of an item is because they associate the particular good with themselves. Going back to the airline example, this second theory says that the man didn’t want to give up his seat simply because he owned it and had established it was his by sitting in it. A study by Morewedge, Shu, Gilbert, & Wilson (2009) uses mugs to show that when the buyer already owns the mug being sold, they are now willing to pay the high price that the seller is asking for. This study shows evidence that the endowment effect has disappeared if the item is already owned by the buyer, thus pointing to the mere ownership effect. If you’re not convinced yet, Tom (2004) also uses mugs (see a theme here?) to demonstrate that the endowment effect is more pronounced when the item being sold is one’s own college insignia mug. Would you ascribe a higher selling price on your Colby mug than a plain mug with no personal connection? This study suggests you would.

One bridge that connects the endowment effect and cognitive psychology is attention. Attention is a limited cognitive resource, and we must choose how we allocate this resource to certain tasks (Kahneman, 1973). Opposed to automatic processing, which does not drain cognitive resources and is something that we are unaware of when they are happening, controlled processes use up a lot of attentional resources and are utilized for doing things that are new to us. Think about learning how to drive a stick-shift car; you need to actively pay attention to every motion you are doing, such as changing gears, steering, and putting your foot on the right pedals at the right time (McBride & Cutting, 2015). Putting more attentional resources into a task will help us eventually learn that task better – after a while driving stick will become automatic!

Now that we have some background on what attention is, we can now talk about the role of attentional shift in helping to explain the endowment effect. What is attentional shift you ask? Well, if you are reading this post and there is suddenly a neon dot displayed on the screen, or maybe the fire alarm starts to go off, your attention will be drawn to these other stimuli. These are examples of exogenous, or involuntary, attentional shifts. There are also endogenous, or intentional shifts. An example of this would be shifting your focus back to reading this blog post away from focusing on the people walking by near you.

In a study by Ashby, Dickert and Glöckner (2012), eye movement technology was used to track where participants focused their attention. In this experiment, participants were either told they were the buyer or the seller of a lottery ticket. These lottery tickets had two outcomes on them: one low outcome (i.e. only winning a small amount) and one high outcome in which the earnings are a large amount. The results showed that the buyers of the lottery tickets shifted their attention to the low outcome area of the ticket and the sellers of the ticket shifted their attention to the high outcome area. This difference in attentional shift depending on if one is the buyer or seller indicates that buyers and sellers shift their attention to focus on different attributes of an object. If sellers are more focused on the more positive aspects and buys on the more negative ones, then it makes sense why sellers would price the item they’re selling higher than the amount a buyer would be willing to pay for the same item.

Figure 4: A picture showing unwillingness to let go of something (someone)

We’ve seen how attention, mere ownership and loss aversion play a role in the endowment effect. You may be wondering now: what can I learn from this and who cares? First and foremost, United Airlines should probably care. They should learn that it’s really not in their best interest to forcibly remove passengers from their flights. However, there are also some very practical everyday applications of the endowment effect. For example, think about marketing. The goal of any marketing campaign is to sell some product. Well, marketers should know that while they may think that the product they are marketing should be sold at a certain price, the price that buyers might be willing to pay for the same item is lower. Incorporating this knowledge to either make the product more attractive or to think about lowering prices would be beneficial to marketing companies. Another application of the endowment effect you may come across is buying or selling a used car. If you’re selling the car, you might have to price the car based on its actual features, mileage, and current condition rather than wanting to sell it for a higher price because you have so many good memories with the car.

The endowment effect has many real-life applications, but it is also interesting because it is related to other cognitive biases. If you have already read my peer’s blog post about the IKEA effect, you may have noticed some similarities between this bias and theirs. In both of these biases, people ascribe different values to items that are very similar to one another, or even identical. While it is important to understand the mechanisms behind these biases, the applications of them are just as valuable. So, in closing, a final message to United Airlines: the next time you need people to change a flight that they have already purchased, and especially if they are already sitting down, think about their perspective from an endowment effect standpoint and try offering them greater incentives to voluntarily give up their seat!

References

Ashby, N. J., Dickert, S., & Glöckner, A. (2012). Focusing on what you own: Biased information uptake due to ownership. Judgment and Decision Making, 7(3), 254.

Carmon, Z., & Ariely, D. (2000). Focusing on the forgone: How value can appear so different to              buyers and sellers. Journal of Consumer Research, 27(3), 360-370.

Hood, B., Weltzien, S., Marsh, L., & Kanngiesser, P. (2016). Picture yourself: Self-focus and the              endowment effect in preschool children. Cognition, 152, 70-77.

Kahneman, D. (1973). Attention and effort. Englewood Cliffs, NJ: Prentice Hall.

Kahneman, D., Knetsch, J., & Thaler, R. (1990). Experimental tests of the endowment effect and            the coase theorem. Journal of Political Economy, 98(6), 1325–1348.

Lakshminaryanan, V., Chen, M., & Santos, L. (2008). Endowment effect in capuchin monkeys.                Philosophical Transactions of the Royal Society B: Biological Sciences, 363(1511), 3837-                  3844.

McBride, D., & Cutting, J. (2015). Cognitive psychology: Theory, process, and methodology.                  SAGE Publications.

Morewedge, K., Shu, L., Gilbert, T., & Wilson, D. (2009). Bad riddance or good rubbish?                        Ownership and not loss aversion causes the endowment effect. Journal of Experimental                Social Psychology, 45(4), 947-951.

Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior &             Organization, 1(1), 39-60.

Tom, G. (2004). The endowment-institutional affinity effect. Journal of Psychology:                                  Interdisciplinary and Applied, 138, 160–170.

Yechiam, E., & Hochman, G. (2013a). Losses as modulators of attention: Review and analysis of              the unique effects of losses over gains. Psychological Bulletin, 139, 497–518.

Photo Credit:

Figure 1: www.newyorker.com

Figure 2: NCAA.com

Figure 3: www.aaanything.net

Figure 4: www.reddit.com