In Chapter 7 of “Predictably Irrational”, Dan Ariely discusses how once we value things we own far more than any stranger would. Even a simple mug becomes valuable once you claim ownership over it. People create a connection with what they own and familiarity leads us to overvalue our own possessions. This is why the market in possessions is prone to distortions and outright market failures. People selling their possessions will charge a price no potential buyer would see as reasonable.
In Duke University, if students want a ticket to a basketball game, they must camp out for week (there are checks to ensure the tents are occupied) before being entered into a lottery. Seeing as there is little difference between those who win a ticket and those who don’t (they’re both diehards), they should be willing to pay the same price. So Ariely called up 100 students who didn’t win a ticket and asked what would be the highest possible price they would pay for a ticket. After some haggling, the absolute maximum they would pay was on average $170. Ariely then called up those who won a ticket and asked what was the lowest possible price they would sell the ticket for. Surely the magic of the free market would bring these strangers with opposite needs together into a mutually beneficial deal? In fact, the average selling price was $2,400! (This is an example of actually testing the free market instead of relying on simplified hypothetical examples, something economists should do more often). In a clear case of market failure, not a single person was willing to sell at a price another was willing to buy at.
This is a clear example of the value of ownership. As soon as people feel something belongs to them, then they value it far more. In the above example, two people who valued an item roughly the same beforehand valued it by a difference of 14 once one person owned the ticket. There are three reasons for this. Firstly, we grow attached to what we have and familiarity leads to love. Simply having a mug you use all the time makes you value and enjoy it far more than the price you paid for it. Secondly, we focus more on what we might lose than what we might gain. This is why it is so hard to throw things out, we can easily think of some use for them better than we think of the money we will gain (which is abstract). The third reason is that we assume people see goods the same way we do. We see cherished memories and perfection while buyers see the cracks and damages. We expect the buyer of a house to see how the sun comes through the window, while they’re more likely to see the cracks in the ceiling.
Our sense of ownership is linked with how much effort we put into it. We value the shelf we made ourselves far more than the one that came with the house, even though the other one was probably made by trained builders. Ariely calls this the “IKEA Effect”. We also begin to feel ownership before we even buy something. Take eBay for example, when we bid on a product we begin to imagine ourselves owning it. From this attachment grows and if someone else bids against us, then we can pay far more than we intended to. We can even take ownership of an idea grow attached to this despite criticism. The world of politics is dominated by people who made up their mind a long time ago and refuse to bend their ideology.
This is why companies offer cheap trial rates. They know that once people get used to using the product and feel that they own it, then they will be unwilling to it give up. They have grown attached to it and feel they own it. Similar examples are the “satisfaction or your money back” offers. When we are unsure about a purchase they are reassuring, but afterwards you feel ownership of the product and never return it. We think we can try it out and then return it if we don’t like it, but we fail to realise how our perspectives will shift.