Lecture 15 – October 29 , 2013
• Last class – shortcuts, rational choice theory, heuristics
• Bias/quirks about how we think about things, do stuff
o Deviation of standard, traditional rational behaviour
• Have bias how we view things – overvalue what people do to us (negative to us), tend to
see that as more outrageous ; do something to someone else (they don’t like) we tend to
• Forced escalation – e.g. “you hit me harder”
• Downplay what we do, upplay/amplify bad things people do to us or happen to us • Economic/monetary value we place on things; factors that influence that value we place
• Rational Choice theory – Unlimited time, processes, capacity, information
• Some sort of decision you make is going to have economic consequence – gain or
o Linear view of gains and losses
o Affected value (y axis) v. financial value (x axis)
o Gain money = positive value; lose money = negative value
• People value things differently – individual variability, less affected by money
NYT “Closing Doors” Article
• Loss aversion – we don’t like to give up options
• Will pay in time and money to avoid the emotional pain of a loss
• Diminishing rates of return – getting nothing to getting 10,000
o At some point it doesn’t matter how much money you’re losing – it just hurts
o E.g. $10 vs. $10,000 seems like big jump; whereas $10,000 vs. $20,000 may not
• Drops more steeply, More sensitive to losses, hurts => aversion to loss • Individual variability
• Prospect theory – Not actually linear function; rather gain, really hurts to lose money
• Opportunity cost, pay to not lose opportunity
The Endowment Effect
• People will pay more to retain something they already own than they will pay to
obtain the thing in the first place
• Sell product, trying to get people to buy product
• Free trials – product in your hands, get use to it, don’t want to lose that option once you
• Psychology – Make it a loss aversion situation
• Place more value of something you own; value something more because it’s yours
• “Worth a lot more to me than to you”
• Separate conditions – mug vs. chocolates
• Sellers – given, now own it
o How much would you sell it for? • Buyers – shown mug, how much would you pay to buy it?
• Manipulation between subjects – Whether own object, or had opportunity to buy it
• Result: product didn’t make difference; Monetary value of seller over double of what
o Value something more if it’s ours, sentimental value, emotionally invested
• Tell someone they can’t have it same effect, “I want that”
EXAM Question –What is the endowment effect? (greater financial value on things we own)
what would be an alternate explanation of endowment effect? (can’t have it)
Norton (2012) Two Questions to the Study
• Bias - Factors influencing how we value stuff; value tied to objects as it relates to status
you have with object
o Endowment – impact of ownership on how you value something
o Here - Not necessarily of ownership, but effect of agency in creating/making
object – building something
• IKEA effect – To what extent do people have increase valuation in what they assemble?
o Shows systematic progression – understand what is bribing us; is it time and
effort or completion?
o Value something because we make it or we complete it?
• To what extent do people increase their valuation of an object if they assemble it?
• Do you need to complete the project to get the “IKEA” effect, or is it just about the
Study 1A • Study – initial study validate initial effect; value something more because we own it
o now what if we build it?
• Group 1: Make origami how much are you willing to pay to keep it?
o Value more highly (IKEA effect)
• Group 2: non-builder, Look at origami how much are you willing to keep it?
• Group 3: non-builder, not they don’t value origami, but will purchase quality, expert
origami (control group)
• Only in the build condition, as predicted, were participants' bids for their own
creation significantly higher than their bids for their partners' creations, t(39)=3.08, p.=01; in fact, their bids for their own were twice as high as their bids
for their partners'. Building and then “unbuilding” sets, however, caused this
difference to become nonsignificant t(39)=1.20, p=.23.
• What is the IKEA effect?– place more value on things we build/construct than if we didn’t
• For this study, what does it allow us to conclude about the IKEA effect? What is
hypothesis being tested?
o Is IKEA effect due to working on investment of time and effort in building
something or does it depend on completing project? That causes increase in
o Assembled Lego – value more
o Disassemble Lego – effect went away
o IKEA effect – not just building something but having completed product;
investment of labour and time not sufficient; + completion or else effect goes
The “Free” Effect – Ariely (2007)
• Options – one cheap, one expensive
• How decision making changes if one option is free
o How many people buy each? --- how that
alter people’s decision making after shifting
it 1 cent lower free?
• Choice from 2 cent to 1 cent (data approx the
• 40% opt for expensive chocolate
• How does it change relative to free?
o 90% going for free cheap chocolate
o Decision making change, twice as many people went for free • (computer simulation)
• Reduce cost of expe