It is not always straightforward to get the price one wishes for when trying to sell a car. Despite the fact that some people are able to negotiate a higher-than-expected price, the majority of us are not successful in doing so, and often end up feeling like we did something wrong when agreeing to reduce the amount. So, why is it so hard to carry out such activities? The response may be linked to the so-called ownership effect - a phenomenon that demonstrates our inclination to overestimate the worth of our possessions simply because they are ours. But how was this effect determined?
How was this effect discovered?
Nobel Prize-winning economist Richard Theiler first used the phrase "ownership effect" in 1980. To test this concept, Theiler decided to conduct an experiment at Cornell University with Kahneman and Kentach. They rounded up a group of students and gave them all coins to participate in a simulated marketplace. Afterward, half of the students were rewarded with a mug. These students were asked for the least amount of money they'd accept for their mug, while the other half, who didn't get a mug, was asked what the most they'd pay for one.
After several training experiences in trading mugs, the participants were told that they now had to offer their mugs for sale. However, the price they put on it would be binding. Surprisingly, despite all the returns that were made, very few sales transactions took place. This is because most of the mug owners demanded twice the amount that buyers were willing to pay. According to this experiment, a few minutes of ownership made the mug's value seem higher to its owner, and other experiments done on the subject showed similar results.
In a separate study, Kentach gave each of the students in his class a mug as a "thank you" for completing a questionnaire he had given them earlier. The students were then told they could exchange their cups for chocolate. Students in a parallel class did the opposite, they received chocolate and were asked if they would like to exchange it for a cup. In the third class, each student was given a choice between a cup and chocolate, and each could take what he wanted.
When students were given the option, 56% of them chose the mug while 44% opted for chocolate - a nearly even split. By comparison, 89% of those given a mug before the decision kept it, and so did 90% of those with chocolate beforehand. This demonstrates the impact of possessing an item, which can make it more valuable than other objects.
Additional studies have reinforced this fact and revealed how potent this phenomenon can be and how it can hurt us. As part of these investigations, participants were asked to exchange a lottery ticket that they had bought for $1.28 and most refused to do so for less than $5.18, even though they could buy three tickets for that price and triple their chances of winning.
So, why does this happen?
Loss aversion is the concept used first to explain the ownership effect - the distressing feeling that a loss causes is more powerful than the positive feeling of winning, and loss is more powerful than profit. However, further research suggests that it is much more than just loss aversion.
In a very sophisticated study, researchers tried to separate the sense of ownership from the sense of loss. Some people were offered a mug, some were given nothing, and then everyone was asked if they wanted a mug (a second one for some) or money. The owners of the cup did not have to give it up, and they only had to choose between another cup or money. And yet they placed more value on a mug identical to the one they had. Many more of the mug owners chose another mug, compared to those who had not received anything before. What this experiment proved is that the ownership effect is not necessarily caused by the fear of losing something, but the fact that we own something is enough.
This hypothesis states that ownership forms a psychological bond between the holder and the object. Since we are inclined to look at ourselves favorably, we tend to have a fondness for items associated with us. Consequently, we seek more compensation for the "loss of a part of ourselves."
It is noteworthy that if the item doesn't reflect well on us - like a consolation prize - we attach more or less the same significance to it as any other person who has never come across it. Scholars argue that both ownership and the aversion to loss play a role in this, and they explain it in the sense that the seller perceives the sale as a threat to their reputation, and thus instinctively raises the value of the product as a way of bolstering their own worth.
This hypothesis was established by experiments that showed that individuals who had their self-esteem undermined (by writing down unfavorable events from their lives) or who were lied to about their performance on a particular task (told that their performance was inadequate) valued the coffee mugs, pens, bags, and thermoses that they had to a greater degree than those who did not acquire such items beforehand.
How can the ownership effect be avoided?
Some researchers believe that the ownership effect can be diminished by repetition. According to their trials, as more and more similar exchanges are made, buyers become more willing to pay more, and sellers become more willing to accept less. The ownership effect does not vanish completely, but the gap between the price the buyer is prepared to pay, and the seller is ready to take decreases.
While this phenomenon can't really help you, other researchers have shown that there is definitely something you can do to overcome the ownership effect. You need to strengthen your belief in yourself, for example by thinking of times when you acted in accordance with your values, or times when you were right in an argument or discussion.
Another idea is to wash your hands before you make a decision, and this has also been proven in research. Participants were given a can of drink or chocolate before being asked whether they would like to exchange what they received for a similar, but different, product. Those who washed their hands before making the decision were twice as likely to make the switch than those who did not, which means they overcame the ownership effect.
So if you are trying to sell your old car and are not successful, think about the ownership effect and ask yourself: Does anyone value my car as much as I do? Wash your hands, remind yourself of times when you felt proud of yourself, and try to lower the price a bit.