518. The Endowment Effect: Why We Overvalue What We Own

Summary

The Brainy Business Podcast: Understanding the Psychology of Why People Buy

Episode 518: The Endowment Effect: Why We Overvalue What We Own
Host: Melina Palmer
Release Date: July 29, 2025

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Introduction to the Endowment Effect

In Episode 518, Melina Palmer delves into the Endowment Effect, a cognitive bias where individuals assign more value to things merely because they own them. Opening with a compelling thought, Melina states, “Isn't it interesting how something can instantly feel more valuable just because it's yours?” [00:35]. This sets the stage for an exploration of how ownership influences our perception and decision-making processes.

Defining the Endowment Effect

Melina defines the Endowment Effect succinctly: “The Endowment Effect teaches us that we value things more when we own them or have perceived ownership over them.” [02:52]. She emphasizes that this bias extends beyond physical objects to encompass business processes, jobs, and relationships. This overvaluation can lead to resistance in making changes, even when better alternatives exist.

Triggering the Endowment Effect in Business Communications

A significant portion of the episode focuses on practical applications of the Endowment Effect in business. Melina illustrates how subtle language shifts can activate this bias. For instance, she explains the power of personalization by comparing two phrases:

• Generic: “If you go check out the article.”
• Personalized: “When you go check out the article, you will notice...”

She notes, “By making it personal by using the word you, it triggers the Endowment Effect,” enhancing perceived ownership [02:52].

Furthermore, Melina advocates for changing conditional statements:

• Conditional: “If you want to learn more...”
• Assertive: “When you order your own copy...”

She asserts, “Swapping from if to when makes a huge difference in your conversion rates” [05:15].

Relationship with Loss Aversion

Melina connects the Endowment Effect with loss aversion, explaining that this bias heightens the salience of potential losses. Citing a study from Neuron, she explains, “It makes the possibility of loss more apparent or clear in your mind, making you hold tighter to the item” [07:10]. This interplay ensures that once we perceive ownership, the fear of losing that possession outweighs the benefits of acquiring something new.

Practical Examples and Studies

To illustrate the Endowment Effect, Melina references classic experiments:

• Monkey Study: Monkeys given peanut butter are less likely to trade for juice, demonstrating a similar bias in non-human primates [09:05].
• Mug vs. Chocolate Bar Experiment: In studies inspired by Kahneman, individuals given a mug value it at 89% retention over a chocolate bar initially preferred by others [10:00].

Melina further shares a personal anecdote about her subscription to Textiful:

“I wanted to keep paying to not lose the credits I already owned... [11:20]”

This experience underscores how the Endowment Effect can lead to continued investment in unused resources due to perceived ownership.

Strategies to Utilize the Endowment Effect

Melina offers actionable strategies for businesses to harness this psychological bias:

1. Use of Imagination: Encouraging customers to visualize ownership by saying, “Imagine your living room with this chocolate leather sofa...” [14:55]. This technique fosters a sense of ownership before the purchase.

2. Physical Touch and High-Quality Imagery: Though physical interaction enhances ownership, businesses can replicate this through vivid images and videos that trigger mirror neurons, making customers feel connected to the product without direct contact [13:46].

3. Satisfaction Guarantees: Implementing money-back guarantees leverages the Endowment Effect by reducing the perceived risk of ownership. Melina explains, “If I know I can try the thing out and get a refund down the line, I'm more likely to try it” [17:47].

Addressing Ethical Concerns

Acknowledging potential criticisms, Melina addresses the ethical use of the Endowment Effect:

“As with every episode of the Brainy Business, I want to say to use your powers for good and not for evil... Help the right people find the best products and services for them” [16:50].

She emphasizes responsible application, ensuring that businesses do not manipulate customers into unnecessary purchases but rather enhance their buying experience.

Business Insights and Applications

The Endowment Effect has profound implications across various business domains:

• Branding and Sales: Understanding that customers overvalue their current choices helps in crafting messages that facilitate seamless transitions to new products.
• Product Development: Designing products that customers can visualize owning increases perceived value and desirability.
• Customer Experience: Implementing free trials or personalized onboarding processes creates early ownership, fostering long-term loyalty.

Melina shares, “Free trials, limited time offers and even customized onboarding can be so powerful” [19:20], highlighting the importance of early engagement in building customer loyalty.

Conclusion and Takeaways

Wrapping up, Melina reflects on the pervasive nature of the Endowment Effect:

“It's deeply human to overvalue what we already have... It shows up when you stick with a product that doesn't quite work, or a job you've outgrown...” [22:57].

She encourages listeners to recognize and evaluate their own instances of the Endowment Effect, both personally and within their businesses. By leveraging this bias ethically, businesses can enhance customer satisfaction, increase sales, and build lasting relationships.

Key Takeaways:

• Personalization: Use “you” and “when” to create a sense of ownership.
• Visualization: Encourage customers to imagine using the product.
• Physical Interaction: Utilize high-quality images and interactive content to simulate ownership.
• Satisfaction Guarantees: Offer refunds to lower purchase barriers and foster trust.
• Ethical Application: Ensure strategies enhance customer value without manipulation.

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Looking Ahead

Melina previews the next episode featuring Vicky Tan, author of Ask this Book a Question, which will further explore decision-making and overcoming biases like the Endowment Effect in personal and professional contexts.

For more insights and resources, visit thebrainybusiness.com/518 or connect with Melina Palmer on LinkedIn as The Brainy Biz.

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Have you ever noticed yourself overvaluing something just because it’s yours? Share your experiences on social media or during the next episode to join the conversation on understanding and overcoming the Endowment Effect.

Transcript

[Melina Palmer]

Welcome to episode 518 of the Brainy Business Understanding the Psychology of why People Buy. In today's episode, we're talking about the Endowment Effect and why we love our stuff a little too much. Ready? Let's get started.

You are listening to the Brainy Business Podcast, where we dig into the psychology of why people buy and help you incorporate behavioral economics into your business, making it more brain friendly. Now, here's your host, Melina Palmer.

Hello. Hello everyone. My name is Melina Palmer and I want to welcome you to the Brainy Business Podcast. Isn't it interesting how something can instantly feel more valuable just because it's yours? Whether it's your favorite coffee mug, an old pair of jeans, or even an idea you've been holding onto? Once we have it, we don't want to let it go, and definitely not at whatever the market rate is. And that's the Endowment Effect in action. This refreshed episode, which Originally aired in February 2021, is a replay of my deep dive into the Endowment Effect, the cognitive bias that explains why we tend to overvalue what we already own. Whether it's a physical object, a business process, a job, or even a relationship, this bias plays a huge role in how we make decisions or avoid making them. I chose to bring this one back now because it's the perfect lead into this Thursday's conversation with Vicky Tan on author of Ask this Book a Question. Vicki's book is all about how to make better decisions by understanding your own thought patterns, especially when it comes to life's big questions around work, love, money, and identity. And one big reason why people get stuck when facing those kinds of decisions, the Endowment Effect. We cling to what we already have, even if something else might be better, simply because it's ours. And as you listen to this episode, I encourage you to think about the things in your life that you've maybe held on to, not because they're serving you best, but simply because they're yours. That object on your desk, that process at work, or the job itself, the habit you've had for years. What might you be overvaluing just because it's been with you for a while? Keep it in mind as you listen today and in preparation for that conversation with Vicki, so you can work on forming the question you might ask yourself or her book about it really quickly. Before we get into the episode, I want to be sure you know there are links in the show, notes for my top related past episodes and books, ways to get in touch, and more. It's all within the app you're listening to and at the brainy business.com518 now let's jump right in and talk about the Endowment Effect. In its simplest form, the Endowment Effect.

Teaches us that we value things more when we own them or have perceived ownership over them. To put it another way, we like our stuff more than other people's stuff. What's crazy and really useful for businesses to know is that it is incredibly easy to trigger the Endowment Effect. Even a slight change in words can make a huge impact. There is actually a really subtle use of the Endowment Effect in that example I just shared about the Psychology Today article. Did you catch it? Let me say it again here and then I'll break it down for you. Here is the full sentence in question again. And you will notice when you go to check out that article that while it says they aren't in any particular order, the brainy business is first on the list, which is very, very exciting and such an honor. Did you hear it that time? By saying you will notice when you go to check out the article, I'm triggering the Endowment effect. I could have just as easily said I was so excited to see that the brainy business was first on the list. We which is true and in many ways is saying exactly the same thing, but it doesn't have the same impact. Making it personalized by using the word you makes a difference, but also saying when you do this thing is really powerful for triggering perceived ownership in the brain. This is also why when I have a guest on the show and I share about their book, for example, I don't say if you want to learn more or if you're interested in getting a copy of the book or for anyone who might want a copy of the book. No, I say for everyone who's going to go order their own copy of the book or to get your copy of the book. So making it personal is important, but it's also about the implied assumption that whatever you're saying is a foregone conclusion of sorts of one very simple language shift that makes a huge difference when applying the Endowment Effect, and one I always encourage my clients to use, is the swap from if to when. If I would have said you'll notice if you go check out the article, it doesn't have the same weight as you will notice when you go check out the article. You care. You're going to read it. It isn't about if. It's a when, and that's much more impactful. Even if you don't go check it out right away. It was stored in your memory as something you care about, something you're interested in, something you will do someday. It's subtly endearing you to the idea, whereas if kind of washes over your brain and is gone before you give it a second thought. And I promise now that you look for them, you are going to notice that you use if all the time and you have tons of opportunities to just swap in whens throughout and it will make a really big difference in your conversion rates. The Endowment effect is very closely linked to loss aversion, but as I said at the top of the episode, they're not the same thing. A study in Neuron, which is of course waiting for you in the show notes, found that the Endowment effect works by enhancing the salience of possible loss. To put that in less academic speak, it makes the possibility of loss more apparent or clear in your mind. It makes it so you're more aware of the possibility that you would lose something. And because we humans are averse to losses, we hold tighter to the item in question. Sometimes physically and sometimes just in your mind. When you're given something or interact with it, your brain takes some ownership over it. It can become part of your identity as the Endowment effect takes place. You don't need to have physically purchased it or technically own it for this to happen. Your brain doesn't wait for little details like that. This is why an overnight test drive works. Or trying on clothes in a dressing room or free samples at Costco, or using an app to mock up what your room would look like with that new rug or sofa or paint color. Or getting a drawing of what your new yard will look like if you pay the landscaper. Or getting a free mock up of what your website could look like from a design designer. Or even being able to play around with an item on Amazon by zooming in or turning it around virtually. It all works because it's triggering the Endowment effect in your brain. And again, this is also different from the IKEA effect, which takes place when you create something yourself. You like it more. They are similar, but you can have an endowment effect take place without actually touching things or building them yourself. And so because of the IKEA effect, you actually are putting in the effort to create something. It is a little bit different. And much like anchoring with numbers, the first thing you are given is going to act like the anchor that you're more likely to take ownership over. And we aren't the only animals impacted by the Endowment effect. When you give a monkey some peanut butter and then offer it juice. Only 20% are willing to trade. 80% want their peanut butter and will resist trading for the juice. And this isn't because monkeys find peanut butter more delicious. What happens when you give them the juice first and then make an offer to trade for peanut butter? 80% of them refuse and want to keep their juice. Whatever they're given first triggers the endowment effect and they don't want to give it up. It doesn't really matter what it is. That first item gets the imprint of love upon it. It's the same for humans. This test was done with people who were given mugs and chocolate bars. It was also done with cash versus lottery tickets. The endowment effect still holds, and it works even when the items are given at random. I'm guessing most students on any given day would say they would prefer to be given a chocolate bar over being given a mug. Though when Kahneman did the study, of those who are given the mug first, 89% chose to keep it. When presented with the chocolate bar, only 11% wanted to trade. Being given the item first and told it was yours made it so it was worth more to you and you didn't want to get rid of it. Of course, if you were to give someone 10 things and then ask if they want to trade any of them, they might all have some level of the endowment effect. The reason it gets triggered, remember, is that loss aversion. If you just keep giving people things, there's no potential loss of the items they have. So the endowment effect doesn't have much of an outward impact. It's only when that trade is presented and they need to give something up that we really see it in action. This is a lesson for your business to learn, and you've likely seen it come up all the time when you've bought items yourself or if you've ever tried to cancel anything, say a subscription. Many systems are set up so you earn things like credits or points they may keep accruing, and if you ever stop paying, you will lose them all. That little twinge will keep you paying often for things you don't really use or need. I had this happen for me personally with Textiful. That's the system I use that lets you text the word brainy to 33777 and get on the email list. Their system is free for a lot of their features, and when you go over a certain amount of subscribers in a month, it automatically bumps you up to a paid plan. And it's not that it reverts the next month when you're under, you stay there early on. When I was first getting into speaking, I didn't get tons of subscribes from. But there was one month where I had, I think, six different speaking engagements and I went over the quota, so I had to start paying. I had several speaking engagements over the next couple months, so I figured it was worth keeping it going. There were a couple of other features that I wanted to try out, but I never hit that cap again in those following months. So all the credits I was earning from my paid account were just piling.

Up and up and up.

I didn't need them. I wasn't using them. I hadn't for many months when I was looking to downgrade back off the paid subscription. But there was this nagging feeling in the back of my mind when I thought about turning it off. I'm going to be speaking to bigger and bigger audiences. I've got some events coming up in a couple months. It probably won't be that long before I need those. And I'm going to be kicking myself if I lose those hundreds or maybe even thousands of prepaid credits. The sunk cost fallacy ties in here as well. As you can see, I wanted to keep investing because I might need those credits at some point in the future. It felt like it was worth continuing to pay $20 a month or whatever it was to keep the account going and adding more and more credits each month that I would never use. And this is because they were mine. I had earned them. I could see their value, and they were worth more to me because I already had them in my account. Consider if someone was to say, melina, I'll sell you 5,000 credits for $50. I wouldn't have bought them. I didn't need them. And I knew that logically it wasn't worth it to me to pay for a block of credits. So why did I want to keep paying to not lose the credits I already owned? As you know by now, it's because of the endowment effect. I did eventually drop the paid subscription and let those points, but I'm sure I paid for a few extra months along the way. Struggling with the endowment effect before I did. Think about that as you give people access to things in your business. If you look at it logically while building out a program, people who don't use their points or credits or whatever shouldn't have an aversion to stopping paying to keep things they don't use. But of course the subconscious isn't logical, and that line of thinking could cost you money and customers. Building the Endowment Effect into your programs can keep people motivated to stay. Ideally, you're also providing great value for them when they use it, but the Endowment effect can help carry them through the valleys where they might be less active because they don't want to lose out on the progress they've made so far. This is why rollover minutes were so powerful when cell phone companies first introduced them. It's the same as those Text to.

Full credits.

As you know from the early examples, physical touch has a big impact on the Endowment effect, and I did talk about this in great detail on the episode on the Sense of Touch, which is linked for you in the show notes. And as you'll learn in that episode, you can trigger the benefits of touch with really great pictures and descriptive words as well. Research has shown, for example, that showing a high quality image of a textile will impact the brain as if you were touching it just by looking at it, which can create that perceived ownership and the Endowment effect. So great high quality pictures and videos triggering mirror neurons of someone else engaging with the product can all help your business get the benefit of the Endowment effect. Another way to really trigger the Endowment effect, both for product and service businesses, is to use the word imagine or picture this. I also use really strong questions to help someone see the experience and live.

It a little bit.

Consider these two examples. I could say, here's a great leather couch and it's on sale today. Want to buy it? Meh. I'm not super excited by that and my brain doesn't have any ownership over the couch. Maybe later, maybe not. I'm going to go to the next store. If instead you say, picture your living room and imagine this chocolate leather sofa in the space, what direction would it be facing? Would you be sitting in it to watch the game? Or perhaps having a glass of wine while laughing with friends? How does it feel in the space?

Does it fit? Do you love it?

And great news. It's on sale. It's amazing. I do love it. And it's on sale, you say. I don't want to give that up. I can already see myself having parties with it. Don't take that dream away. I love who I am with this couch in my life. Same couch, same price, completely different buying experience. And before we move on, I know this is a point where there might be questions floating around about manipulation. I have a couple of points to make here. First, studies show that people get what they expect and as you know from the Endowment effect. They value things higher when they have ownership over them. So getting someone excited about the prospect of owning something can actually help them to enjoy it more when they do own it, which is a good thing. That could mean less regret and truly loving and getting value out of that item. As long as you aren't in predatory lending practices or forcing people to get products they don't need, I think this can have a very positive impact on the buying experience and can also increase satisfaction and loyalty scores when there's an optimal experience with a company. In addition, these are nudging techniques, and everyone has free will to not buy the item in question. Yes, of course, some people do have legitimate issues with overspending, but in general, when you're selling things, people don't get nudged into buying things they have absolutely no use for. There could be an amazing sale on a wedding dress or some size 6 shoes, but there's no deal good enough to nudge me into buying them. I have big feet and I'm very happily married. No description is grand enough to force me into buying it if I don't need the thing. And with all that in mind, as with every episode of the Brainy business, I want to say to use your powers for good and not for evil. Help the right people find the best products and services for them and make it an irresistible offer that will help them truly love you and that item. And after they've bought, the endowment effect can help you do just that. Now, to give an example for a service business with the Imagine technique, let's.

Talk a little about value.

Say you have a common concern from customers that your service is maybe going to be too expensive. Let's say it's $1,000 a month to work with you and they're concerned about the value. If you know this is a common concern or a pain point, it can be valuable to trigger the endowment effect to help pot customers see it as an expense that's worth it to them before they even voice the concern. Let's say you don't know anything about their numbers. And if you were to say, think about your gross sales from last year. Imagine if this year you and the team could do the exact same amount of work and have a 25% increase over last year. How much more would you be bringing in? What could you do to improve your business with that extra revenue? For only $1,000 a month, we can make that happen. Or if you know their numbers, you could make it even more compelling because they don't have to do the math themselves and lazy brains kind of like to tune that out. So you could say something like, let's look at your gross profit in 2020 of $500,000. Imagine if this year with no extra effort from your team, you could grow that by 25%. What would you do with an extra hundred thousand dollars if you had it right now to spend on anything? Our clients see a minimum of 25% in growth when they work with us and the investment is only $1,000 a month. Is that worth it to you for an extra hundred grand minimum in profits this year? Making the experience real for them right now is a great way to use the power of the endowment effect. And yes, you saw some anchoring in there as well. The last item I'm going to touch on today is something I've mentioned multiple times on the podcast a money back guarantee. One of the main reasons these work is because of the endowment effect. If I know I can try the thing out and get a refund down the line, no questions asked, I'm more likely to try it. That's another nudge. And once I have it in my hands and bring it home or start using your services, I I'm taking ownership over it and the idea of giving it up will trigger the loss aversion and endowment effect, so I'm less likely to return it. There's an exception to every rule, so I'm sure there is at least one business out there that would say their money back guarantee cost them money, but I've never heard of one. These are almost always working out in a way that they're profitable for the business. There's a reason Amazon, Zappos, Nordstrom, Costco and so many others have stellar return policies. More people take a chance and buy, and few comparatively return things. As a side note, I've brought up Costco a couple times now and want you to know there is already an episode of my Behavioral Economics analysis of Costco, which is linked for you in the show notes, along with your freebie worksheet and lots of other great links to articles and things like that. You'll find it [e-mail] 139 and before we close out today's episode, I want to do a quick summary of the tips I provided for you today on the show, which are summarized on your free worksheet. Of course, the first thing you can do to be triggering the endowment effect is to make the message personalized to say you. You can also be making that transition over from if to when to help have that implied endorsement that it's going to happen. And this is also a time where you want to switch from anyone to everyone. So instead of saying if anyone wants to take advantage of this, go here, you can say for everyone who wants to do this, when you're ready, go here. The next tactic is to use the word imagine or picture this or ask them some good questions to help overcome some time discounting and really feel in the moment experiencing this item, whether they're physically able to touch it or using that imagine experience is going to be very helpful to trigger the Endowment effect, which leads to the next item of physical touch. When you do have something you can put in people's hands, definitely, definitely take advantage of that. And if you can't know that, you can also have really great imagery and we can trigger mirror neurons by watching other people engage. This is also why when you watch a YouTube video and they have the little arrow click on subscribe. It can also be triggering that sort of endowment effect mirror neuron benefit when I'm not physically doing it myself. And the last tip is to definitely have a satisfaction guarantee with a great return policy. Getting people to have the item in their hands or to buy whatever it is, the service, whatever you have, and then knowing that they're much less likely to return it once the Endowment effect has taken place. But you'll get more people over the hurdle of buying with the opportunity of knowing they could return it, even though most people won't take advantage of that.

So what got your brain buzzing as you learned about the Endowment effect today? For me, I always come back to how deeply human it is to overvalue what we already have, even when we know it isn't serving us. That's what makes the Endowment Effect so powerful and so sneaky. It shows up when you stick with a product that doesn't quite work, or a job you've outgrown, or a routine that doesn't fit anymore just because it's yours. It's comforting, it feels safe. But that doesn't mean it's right. While this episode will absolutely help you reflect on those more personal life level decisions, which is where we're headed Thursday in my conversation with Vicky Tan, there are huge takeaways for your business as well. If you're in branding, sales, product development, or customer experience, the Endowment Effect is something you must consider. Customers don't always make decisions based on what's objectively better. They often prefer what they already know. Even if your product is clearly superior. That means switching behavior can be hard. If you want someone to leave a competitor and choose you, you're not just selling a better product, you're asking them to give something up, something they already own, that they love, that they value more than they should. That psychological cost is real and if you ignore it, your messaging won't land on the flip side. Once someone does buy from you, even just once, their perception of your brand often improves. Why? Because now they own it. Their brain starts working in your favor just by making the purchase. That's why free trials, limited time offers and even customized onboarding can be so powerful. They create early ownership which helps reinforce long term loyalty. Understanding the Endowment Effect helps you shift how you position your brand, how you approach change management, and how you engage both customers and employees. Because whether you're selling toothpaste, tech solutions or a team wide initiative, you're always working with the human brain. So I'd love to know, have you ever realized you were holding onto something, a product, process or perspective just because it was yours? Come share it with me on social media. You'll find me as the Brainy Biz, but pretty much everywhere and as Melina Palmer on LinkedIn. There are links in the show notes to make it easy as well as for my top related past episodes, books, ways to get in touch, and more. It's all waiting for you in the app you're listening to and atthe brainy business.com 518 and just like that, episode 518 on the endowment Effect is done. Join me Thursday for a brand new episode with Vicki Tan to discuss her book Ask this Book a Question. It's going to be a lot of fun. You don't want to miss it. Until then, thanks again for listening and learning with me. And remember to be thoughtful.

Thank you for listening to the Brainy Business podcast. Melina offers virtual strategy sessions, workshops and other services to help businesses be more brain friendly. For more free resources, visit thebrainybusiness.com.