How does the "endowment effect" influence what you buy?

You've been using a free trial of a new streaming service, and you think it's...okay. You use it once every few days, but you've customized the settings to your preferences. However, the free trial is coming to an end, and you need to decide whether you want to purchase a subscription.

You feel obligated to keep the service — but why? This is an example of the endowment effect. What is it, and how is it affecting your decision to purchase?

The endowment effect describes the tendency to value things more highly because you feel ownership toward them and feel that they're customized for you.

You may believe that something is more special because you "own" it, and giving it up would result in a loss. This "justifies" your decision to purchase something to keep that feeling of ownership.

Endowment Effect Example

You plan to buy a ring online. You liked it at the time, but now you're having second thoughts. However, because you picked it out, you feel attached to it, and you hesitate to remove it from your cart even though you don't really want it anymore. That's the endowment effect working on you!

• Ownership: Trying, customizing, or imagining owning something can create an attachment, making you more likely to purchase an item to keep it.

• Loss aversion: The pain of losing something is stronger than the pleasure of gaining it. Even if you don't like the item, you don't want to lose it, influencing you to purchase it.

• Familiarity bias: If you've used it for a while, it may be a part of your life, so you'll value it more and be more likely to purchase it.

• Effort invested: If you spent a long time looking for this product (for example, if it was a limited/rare item), you may be inclined to buy it even if it no longer interests you.

Because you've grown an attachment to an item/service, you're much more likely to buy it. It boils down to:

• Overvaluing the item. This makes the purchase "worth it", and you'll be less likely to resell it since it's now yours.

• Preferring familiar products over alternatives. Once you've used a product, you're less likely to look for different options even if they're cheaper or better.

• Paying more for customizations. You may be willing to buy customizations and features to make this item uniquely yours.

George has been using the shampoo brand Knees and Toes for over 15 years. He's bought customization pods for it to make his hair extra shiny.

His brother recommends a new brand that is cheaper and more effective: Pigeon. However, George refuses to switch.

How is the endowment effect influencing George's decision? Select all that apply:

A. He fears losing the shine he likes if he switches.

B. He's been using it for many years.

C. He's customized it to meet his needs.

D. This shampoo formula is rare.

Marianne is walking around the mall and doesn't have plans to buy anything. She stops by a store, tries on multiple outfits, and begins imagining how good she'd look wearing them on the weekend. She now feels that she wants to buy them even though she doesn't need new clothes.

In what ways does the endowment effect push Marianne to buy these outfits? Select all that apply:

A. She can see herself wearing them often.

B. She spent a lot of time searching for these perfect outfits.

C. Putting them back may feel like a loss she'd regret.

D. She tried them on and liked the way they made her look.

Back to the streaming service dilemma:

You realize that the endowment effect is pushing you to buy a subscription. The free trial's feelings of ownership and personalization have made you emotionally attached.

Whether or not you decide to keep the service, remember that you have the power of choice, and you need to decide what's valuable to you. Buy what you love, but don't feel pressured to do so! Be mindful of the endowment effect on you: