Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / The Endowment Effect and Orson Welles as Proof
Transcript
- Lucas: So, Orson Welles, 1960. He's at a Sotheby's auction in London, and he buys an entire wine collection — hundreds of bottles, mostly Bordeaux and Burgundy, from a deceased English merchant. Luna: Right, the story I know is that he barely ever drank any of it. The bottles just sat in his cellar for years. Lucas: Exactly. Decades later, Welles is short on cash, so he decides to sell the collection. But here's where it gets interesting. He sets a reserve price that's about double what the market would pay. The auction house says, 'Mr. Welles, this is worth maybe fifty thousand pounds.' He insists on ninety thousand. Luna: And the collection doesn't sell, right? It goes back to his cellar. Lucas: It goes back. The wine stays with him until he dies in 1985. After his death, the exact same bottles sell at auction for — wait for it — a fraction of what he'd demanded. The discrepancy is textbook endowment effect. Once you own something, you value it more than an objective buyer would. Luna: And Welles didn't even particularly like wine, from what I've read. He was more of a brandy and steak guy. Lucas: That's the part that makes the story perfect. He wasn't a collector who derived daily pleasure from the bottles. He just owned them. And ownership alone was enough to inflate their value in his mind. Richard Thaler, the behavioral economist, actually used this case in his early work on the endowment effect. Luna: Thaler's famous mug experiment — where students who got a mug valued it at roughly double what students without a mug would pay to buy it. That's the same mechanism. Lucas: Precisely. In Thaler's 1990 study with Kahneman and Knetsch, they gave half a class of Cornell students a coffee mug with the university logo. Then they let the 'sellers' name their price, and the 'buyers' — who didn't get a mug — say what they'd pay. Sellers wanted about $5.25 on average. Buyers were willing to pay about $2.75. Same mug, same students, same room. The only difference was ownership. Luna: That's a nearly two-to-one gap. And it's not irrational in a simple sense — it's just how our brains are wired. Loss aversion. Lucas: Exactly. The pain of giving up something we own feels more intense than the pleasure of acquiring the same thing. So we ask for more to part with it. And this isn't limited to mugs or wine. It affects housing, stocks, even sports trading cards. Luna: I remember reading about a study with baseball cards. Collectors who owned a particular card valued it significantly higher than non-owners who were shown the same card. The effect persists even when the item is a commodity with a clear market price. Lucas: Right. And it's not just about physical objects. The endowment effect applies to rights, privileges, even ideas. Think about the 'grandfather clause' in insurance or cable contracts — people stick with an inferior plan because they feel they own the terms, even though switching would save them money. Luna: That's a great example. Or the way people price their homes. Homeowners consistently overestimate what their house is worth relative to appraisals, because they've lived in it, painted the walls, made it theirs. Lucas: Yes. And in a hot housing market, that's fine — buyers might meet you there. But in a cold market, sellers who can't let go of their endowment stay listed for months. It's the Orson Welles problem all over again: you'd rather keep the wine than sell it for what it's actually worth. Luna: So how do we know it's not just rational preferences? Maybe people who own a mug genuinely enjoy it more because they've had time to form an attachment? Lucas: That's the question Thaler's experiment was designed to answer. By having both groups be random — you just flip a coin to decide who gets the mug — any difference in valuation has to come from the mere fact of ownership, not from any pre-existing preference. And the gap persists even when you repeat the experiment with different items, like candy bars or pens. Luna: And it's not just about sentimental attachment either. In one variant, participants were asked to exchange a mug for a pen of equal value. Most people refused to swap, even though they'd had the mug for only a few minutes. The endowment effect can kick in almost instantly. Lucas: That's the part that really gets marketers interested. Because if you can create a sense of ownership before the purchase, you can drive sales. That's why free trials work so well. You let someone 'own' the software or the streaming service for a month, and then taking it away feels like a loss. So they subscribe. Luna: Same with money-back guarantees. You buy the shoes, you wear them around the house, they become yours. By the time you decide whether to return them, the endowment effect has already set in. Most people keep them. Lucas: Right. And this is a good moment to mention something practical. If you've gotten something useful out of the show — maybe a new way to think about why you hang onto things you should sell, or why you're reluctant to switch phone plans — the way we keep this podcast ad-free and focused on these ideas is listener support. Luna: Yeah, it's a small thing that makes a big difference. If you'd like to help, you can find us at buy me a coffee dot com slash fexingo. Lucas: Exactly. And even a small contribution goes a long way. So back to the endowment effect — one of its trickiest implications is in financial markets. When you buy a stock, you immediately 'own' it, and you're likely to demand a higher price to sell than a buyer would pay. That's one reason why trading volume dries up after a price drop. Luna: It's called the 'disposition effect' — investors hold onto losing stocks too long because selling would mean realizing a loss, which hurts more than the gain from selling a winner feels good. Lucas: Exactly. And it's the flip side of the endowment effect. You're overvaluing what you own, so you won't sell at the market price. Meanwhile, potential buyers don't have that emotional attachment, so they see the stock as fairly priced or even overvalued. Luna: Is there any way to overcome it? I mean, if you know about the bias, can you just decide not to fall for it? Lucas: Partly. Awareness helps, but it's not a magic bullet. One strategy is to reframe the decision. Instead of asking 'What is this mug worth to me?' ask 'What would I pay to buy this mug if I didn't already own it?' That shifts your perspective from a seller to a buyer. Luna: Or, for a stock, ask yourself: 'If I didn't own this stock, would I buy it today at the current price?' If the answer is no, you should probably sell. Lucas: That's exactly the advice many financial advisors give. It's a way to break the endowment spell. Another trick is to imagine you're acting on behalf of someone else — a friend or a client. That distance can reduce the emotional weighting. Luna: I think the Orson Welles story is a good reminder that even brilliant people fall for this. He was a genius filmmaker, a master negotiator in some contexts. But when it came to his wine, he couldn't see past ownership. Lucas: And the wine sat there. It didn't do him any good. He could have used the cash for other projects, but the endowment effect locked him in. That's the cost of the bias — it's not just a psychological curiosity, it has real economic consequences. Luna: So next time you're cleaning out your closet and you find that sweater you never wear, but you think 'I paid fifty bucks for it,' remember Orson Welles and his ninety-thousand-pound wine. Lucas: And ask yourself: if you didn't own it, would you buy it today? If not, let it go. Thanks for listening, and we'll see you next time.