Anyone who's ever tried to sell a house, a car, or practically anything, quickly discovers that buyers and sellers rarely see eye-to-eye on price. A quick skim through the classifieds in the back of the local paper will reveal endless examples of people overpricing what seem like pretty ordinary items. But that's not how the seller sees it.
There's no doubt that sellers want to get the best possible price and they also want to introduce some wiggle-room for negotiation. But does this really explain the unrealistic prices people sometimes demand, or is there something else going on?
Similarly, when shopping we're unnaturally drawn to special offers like 30-day money-back guarantees. We'll happily buy a new digital SLR on the basis that we can always return it even though, more often than not, we keep it. On auction sites like EBay we will set ourselves a limit for an item one minute, then, the next with a rueful smile we'll break this limit when a higher bid comes in.
Behavioural economists argue that ownership - whether it's real, partial or virtual - has a strange effect on us. But before I run down the six quirks of ownership, let's see just how big an effect these quirks can have on us under controlled conditions.
The chasm between buyers and sellers
At Duke University, like many others, tickets for the most important basketball tournament of the year are like gold dust. There are so many people fighting over them that they have to be allocated using a lottery system. Consequently, after the lottery is complete, some people suddenly have something that others desperately want. Because of the random allocation, it provides the perfect opportunity for examining the psychology of buying and selling.
Into this ready-made market, researchers Ziv Carmon and Dan Ariely effectively set themselves up as ticket scalpers (Carmon & Ariely, 2000). They sat down with a list of students, some who'd won tickets in the lottery and others who'd lost but naturally still wanted to go to the game. They then started ringing up students who had tickets, along with those who didn't, to see if they could find any common ground on price.
What they found was an incredible disparity between buyers and sellers. The average price which buyers were prepared to lay out for a ticket to a single basketball game was $166. This actually sounds like a pretty good offer given that these are students and that it's only a few hours entertainment.
But it turns out these buyers' offers didn't stand a chance when compared with the expectations of sellers. The average price ticket-owners were prepared to sell their tickets for was a whopping $2,411! Did they really expect anyone to pay that price? Needless to say, no buyers were interested, no matter how desperately they were to see the game.
Six quirks of ownership
Dan Ariely, in his book Predictably Irrational argues that ownership has 6 strange effects on us:
- Ownership increases perceived value to us: As soon as we acquire something we start to develop an attachment to it. Just the sheer fact of ownership increases how much we value it - we seem to develop a relationship with objects.
- We tend to focus on losses: When selling we tend to overlook the money we'll be gaining and focus on the object we'll be losing. Our natural aversion to feeling bad then motivates us to place a higher asking-price on the long-cherished house, car or record collection than the market will bear.
- We assume others share our perspective: Surely potential buyers understand how strongly we feel about our dusty old vinyl records? No, they don't care - in fact they're far more likely to notice how badly we've stored them or what poor taste in music we have.
- Effort increases perceived value: A table I have bought and struggled to build myself has more value to me than the same table I bought, for the same price, ready assembled. Expending our own effort means we've invested ourselves in an object, so it has more perceived value to us. Other people don't recognise this (and there's no reason why they should).
- Virtual ownership: We can even start feeling we own something before we actually do. Dan Ariely argues that the prices people are prepared to pay on auction sites like EBay are often inflated by people's imagined ownership. Once we place our first bid we start to fantasise about ownership. Consequently when other bids come in we ignore our previously stated maximum because we're now starting to value the item more, since we've been thinking about owning it.
- Partial ownership: Marketing executives know the power of ownership so they use all kinds of tricks to encourage partial ownership because it often leads on to full ownership. We don't usually return our furniture within the 30-day money-back guarantee period because we've grown attached to it - it's ours.
So the high price we tend to put on our own possessions is not just greed, we really do begin to perceive stuff in a different way once we own it. Unfortunately these biases open us up to all sorts of detrimental effects.
We might set unrealistic prices for things we're trying to sell, resulting in us failing to sell them at all. Or, when buying, we can be suckered into virtual or partial ownership en route to full ownership of something we didn't necessarily want in the first place.
Of course the solution to these problems is trying to think objectively about our own possessions and those that we'd like to acquire. But that's easier said than done. It's very difficult to be dispassionate when selling something that you treasure and it's easy to form an imaginary relationship with something we want to own.
Theoretically, then, dispassion and objectivity are the keys to fighting the quirks of ownership, but is this enlightened, Zen attitude to ownership really possible in practice? What do you think?
[Image credit: DryIcons]
Carmon, Z., & Ariely, D. (2000). Focusing on the Forgone: How Value Can Appear so Different to Buyers and Sellers. The Journal of Consumer Research, 27(3), 360-370.
The Psychology of Money
→ This post is part of a series on the the psychology of money:
- Avoid The Relativity Trap – How Thinking Globally Can Save You Money
- Social Versus Financial Thinking – When Money Makes People Lazy and Selfish
- FREE! But at What Price?
- 6 Quirks of Ownership: How Possessions Bend Our Perceptions
- The 3 Reasons Money Brings Satisfaction But Not Happiness
- Do Big Money Bonuses Really Increase Job Performance?
- Money and Self-Control: The Battle Between Thoughts and Emotions
- Why Money is Part of Human Nature: Money as Both Tool and Drug
- Why We Buy: How to Avoid 10 Costly Cognitive Biases
- 8 Psychological Keys to Spending Wisely
- How Does The Cleanliness of Money Affect Our Spending?
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