What if I told you that there was a psychological force that was causing you
to spend and was ultimately holding you back from becoming rich would you want
to know more about it well boss in this video I will share with you the
endowment effect and how it is keeping you broke and if you're new to the
channel then hit the subscribe button below for more a life changing content
have you ever been reluctant to let go of something you knew you didn't need
just because you paid good money for it and don't want to give it away for free
do you ever find yourself cradling a prize or reward that moments earlier you
a name for this phenomenon the endowment effect a term coined by Nobel
prize-winning economist Richard Taylor the endowment effect is a hypothesis
that people ascribe inflated value to items simply because they own them it's
related to social psychology x' mere ownership effect which states is some
people who own an object tend to value that object more highly than people who
don't own it sometimes called divestiture aversion the endowment
effect can have a powerful pull on your emotions and cloud your judgment when it
comes to spending saving and how you approach your finances it's also often
exploited by marketers and companies to get you to send more money which is why
the psychological effect may be making you poor but before we get into how to
combat the endowment effect it's worth understanding further how it works in a
1991 study Richard Thaler and his colleagues Daniel Kahneman and Jacque
Nach conducted a now-famous set of experiments that demonstrated the
endowment effect at work using college students at Simon Fraser University they
design an experiment in which they gave participants mugs purchased from the
campus bookstore and then gave these participants a chance to sell their mug
back to them their participants were unwilling to sell their mugs for market
value and instead wanted over twice the original price of the mug in order to be
willing to give it back even though the mugs were given to the students for free
as part of the study and hadn't owned them for very long they had described a
much higher value to them than was rational this wasn't a case of the
participants having long term sentimentality for their favorite coffee
mugs the study authors concluded that the
value we assigned to an object we received is almost instantaneous the
moment two students received the mug they ascribed an inflated value to them
furthermore when presented with the actual sticker price of the mug these
students still wanted more money than it was worth the part with unfortunately
many atoms lose value the moment you buy them so this behavior doesn't have a
rational explanation still companies often exploited to get us to part with
their hard-earned money and boy and keep things we don't need or sometimes even
want so now that you have a better understanding of how the endowment
effect works is worth knowing where this phenomenon is most often taking place in
our day to day lives you see most of us operate in the real
world and not in a college psychology study but the endowment effect is
everywhere causing us to make irrational decisions that work against our best
interests however by knowing what it is and how it
affects your behavior we can be more informed and logical and how we approach
situations where it may influence their behavior and finances
so here are four situations where we most commonly see the endowment effect
in action example number one in stores long before economists gave this
phenomenon a name companies understood that if they can make shoppers feel like
they owned an item right there in the store they were much more likely to
purchase that's the advent of fitting rooms where you can touch a fancy new
dress try it on and visualize yourself wearing it to work a party or on a date
stores have long known that customers are much more likely to buy an item
they've touched the reason according to a study in the Journal of consumer
research can be traced back to the endowment effect if you physically
handle an item you start to feel like you own it you can picture yourself with
it in your life and it starts to feel more like yours you ascribe more value
to it it might be willing to pay more because the item suddenly feels worth it
tons of companies now let you try something for 30 60 or even 90 days
seemingly risk-free with the option of returning the item if you don't end up
liking it through picking on the fact that once you get that mattress rug or
lamp into your house and set it up with the rest of your stuff you're not going
to return it it's in your home and it feels like it's
yours so in addition to not wanting the hassle of returning it you now think it
was worth the price thanks to the endowment effect the strategies used by
these companies aim to ensure that a shopper becomes emotionally attached to
an item then The Sharper becomes willing to part with their money for it even if
it was initially outside their budget or they didn't need or want the item to
start with example number two subscription services even if there's no
physical item the endowment effect can still come into play for example say you
sign up for a free trial of Spotify but I have every intention of canceling your
account once a trial period is over then over the next month you build playlists
get suggestions from the algorithm for new music and customize your listening
experience to your exact preferences the up greets you every time you sign in
your account now feels like your own personalized radio station and that
fifteen dollars a month seems like a bargain rather than an
unnecessary expense just a few months ago you would have scoffed at paying for
streaming music but now that you've experienced it personalize the service
and feel like you own it you're now more than willing to add this expense to your
monthly bills think about how you watch movies and TV shows at home if you're
like millions of Americans who have cut the cable cord you probably have a
subscription to a streaming service such as Hulu Netflix or HBO GO there was a
time when everyone watched only live TV whether was with a cable box or simply
using old-fashioned bunny ears now we can all choose our favorite shows and
movies and these services learn how to predict our preferences they can offer
suggestions remember where we were in an episode and customize our viewing
experiences in any number of ways by building this customization into their
services these companies make the consumer feel ownership of the product
and ascribe an inflated value to it then when the free trial ends they want
to keep owning the service and will pay more than they originally intended
because they've endowed it with a greater value in their lives example
number 3 investing decisions the reluctance to sell something whether
it's a physical item or something intangible like stocks and bonds is also
a function in the endowment effect humans are incredibly loss averse
creatures studies have shown that the pain of losing something can be twice as
powerful as the joy of gaining something and a sauce aversion can cloud our
judgment when it comes to many things including the stock market if you
ascribe a higher value to stocks you own it can cause you to be reluctant to sell
them for less and you perceive them to be worth however any good investor knows
that stocks are only worth as much as someone is willing to pay for them on
the market so it doesn't matter what price you feel they should fetch if no
one will pay that amount that doesn't mean you should hold on to them forever
because you think they should be worth more
you might also recognize this feeling if you've ever tried to sell a used car
boat or other big-ticket item and were insulted if people tried to bargain for
a lower price we often believe that whatever we're selling is valuable and
the amount we're asking is a great deal potential buyers who don't see it this
way are just trying to lowball us in reality any items only worth what
someone else is willing to pay for it and by inflating this value
we're only setting ourselves up to be annoyed and disappointed example number
four irrational money choices the endowment effect extends beyond goods
and services that you buy and sell it can also influence your behaviors
including encouraging complacency or inaction for example almost half of the
people in the United States who have gym memberships don't use them people like
the idea of belonging to a gym and knowing they could workout whenever they
want but they don't actually go to the gym enough to get their money's worth
from that monthly fee most know that they could workout without a gym but
they think that paying for a membership is a worthy expense related to good
health instead of being rational and realizing
that not using the gym is a waste of money they think that the service is
worth it because they are complacent about cancelling it at this point you
might be feeling like the deck is stacked against you and there's nothing
you can do there's no use trying to fight human nature right don't despair
there are steps you can take to conquer your instincts and one of the easiest
ones is simply to be aware of how your brain works and its emotional triggers
that can influence its actions first consider the usefulness of the item
you're thinking of buying or trying to sell keep in mind that as a general rule
20% of the items we own give us 80% of the utility of all of our possessions
this concept called Oh principle is most often applied to
business productivity but it is a useful tool when considering the stuff and
services you spend your money on second if you're headed to a store be mindful
of what you touch and try on it could be tempting to run your fingers over
everything but retailers know that if consumers touch items and try them on
they're much more likely to buy them and at a higher price third if you're trying
to downsize cut costs or sell some items ask yourself how much you would pay for
these things if you didn't already own them perform the stranger test whenever
you get rid of a possession ask yourself if a stranger had the item in one hand
and its monetary value in the other which would I choose more often than not
you will take the money so do a little research to see what similar items are
selling for and make the wise financial choice finally when it comes to stocks
bonds and mutual funds think about your investments as
employees their job is to make you money forget what you bought them for and
don't think about how the price he paid made you feel whether it was a great
deal or a bad one only focus on whether or not they're still profitable in short
the endowment effect in our aversion to loss aren't always bad things to help us
maintain our homes and possessions whether long-term relationships through
ups and downs and instill in us a sense of pride in our stuff as long as we're
careful inform consumers who approach transactions armed with knowledge and a
firm's grasp of our budget parameters we can make smart decisions and avoid the
trap of this psychological force thanks for watching if you want to go from the
life you have to the life you deserve then hit the subscribe button
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