Charan Bagga, a former Phd student now a professor at Calgary, June Cotte, an Ivey colleague, and myself, have a recent paper in the Journal of the Academy of Marketing Science on the Endowment effect. Specifically what happens to the endowment effect when you rent or borrow. What then is the endowment effect for renting and borrowing?
The Endowment Effect
The endowment effect is where we invest an object with more value simply because it is ours. This has all sorts of implications for markets. Obviously, if the endowment effect is too strong it makes markets harder to make work. If I consistently value the things I own more than you do I don’t want to sell them at any price that you are willing to pay. No trades are made with extreme endowment effects. In reality, the effect is more subtle but it seems to be a fairly regular occurrence.
The Endowment Effect for Renting and Borrowing
A fascinating open question is whether the same effect derives from less clear forms of possession. For example, objects that we rent and objects that we borrow. We do some experiments in the lab and the real-world. This includes a cool one (literally) at a municipal ice rink on ice skate rental.
We show “that the valuation (i.e., willingness-to-pay) for rented objects is greater than the valuation for non-possessed or borrowed objects. Borrowed objects are not valued any differently than non-possessed objects.”
Bagga, Bendle, and Cotte, 2018, page 97
Renting seems to generate the endowment effect — but borrowing doesn’t for the same item.
We dug into why the effect might happen. In doing so we examined three factors:
- Control of the item,
- knowledge of the item, and
- self-investment in the item.
These had all previously been suggested to impact the endowment effect. We noted how changing two of these can change the endowment effect. (We didn’t focus on manipulating knowledge as we assumed that borrowing and renting always generate a certain minimum level of knowledge about the object).
Limiting The Effect For Rented Objects
What did we find?
That “..rented objects are not valued higher than non-possessed objects if the control or self-investment routes of psychological ownership are suppressed.”
Bagga, Bendle, and Cotte, 2018, page 97
The endowment effect is an interesting phenomenon. Hopefully, we can help people understand it a little better.
For more on behavioral economics see here, here, and here.
For a review of the endowment effect see here.
Read: Charan Bagga, Neil Bendle, and June Cotte (2019) Object Valuation and Non-Ownership Possession: The Cases of Renting and Borrowing, Journal of the Academy of Marketing Science. 47(1) pages 97-117 http://link.springer.com/article/10.1007/s11747-018-0596-3