Sunday, October 09, 2005

The "Endowment Effect"

The rich get rich and the poor get children...
Uh, that's not what it says. I just got a little side-tracked.

While waiting for the printer to finish the next post for later today, I came across this fro the London Times via Gene Expressions.

...our emotional attachment to our possessions is “hard-wired” into our brains to help us to survive.

They cite an experiment in which every other student in a class was given a mug bearing their university’s logo. Students who had been given mugs could then sell them to those who had not received one.

They found that sellers demanded much more for the mugs than buyers were willing to pay. In other words, owners seemed to like the mugs more than buyers who did not have one, demonstrating a near- instantaneous endowment effect.
“Individuals with a strictly positive endowment effect will never die out in the long run,” the professors say. “An alternative evolutionary explanation for the endowment effect is that if one learns to like what one has, one may spend less costly resources to acquire other goods.”

The "endowment effect" holds that people demand more money to give up an object than they are willing to spend to acquire it, and explains why most of us would not swap our favourite sweater, for example, with something of equal value. Another way to look at, rich or poor, is that a bird in the hand is worth two in the bush. Or, stated another way, we have no way to know the "value" of what we do not posess but we unserstand the value of what we do.

I'm not sure what this study says about the widening gap between poor people and rich people both at home and abroad. The worshipers of unrestrained market economics might better have a look.

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