Book | We Want to Own Everything — Loss Aversion and More

For this season's book study, the material is not actually a book but a digital article. We're going through the psychology terms on a site called growth.design and sharing related cases. The part I'll be presenting is in the fourth stage: Peak-End Rule, Sensory Appeal, Zeigarnik Effect, and Endowment Effect.

While I was at the library over the weekend organizing related material, I happened to come across a book that felt like a single volume describing the Endowment Effect from start to finish. While I'm at it, I'll post the key points along with my study notes.

The Extended Self

The Canadian marketing expert Russell Belk also wrote about the relationship between the self and what we own in several influential papers. At the heart of these is the concept of the 'extended self'.
Building on the work of James and Sartre, Belk divided the developmental stages of the extended self into four.
First, infants distinguish themselves from their environment.
Second, children distinguish themselves from other people.
Third, possessions help adolescents and adults manage their identities.
Finally, possessions help the elderly achieve a sense of continuity and prepare for death. p.231

The Self-Reference Effect

In a study with children in India and Britain, when participants were asked to talk about themselves immediately before being asked to share, both groups behaved more selfishly. Here we see the power of activated implicit memory to easily change attitudes toward possessions. Sharing behavior changes flexibly with context, and changes especially dramatically once we become aware of others' expectations.
The fact that we are reluctant to share our possessions is not so much because we don't think of others as because we're too focused on what we have. The moment we think about ourselves we pay special attention to what is important to us, and we adopt a task-focused stance. In a study using a supermarket sweep game, participants were asked to sort photos of groceries and household items into red or blue baskets according to color cues in the photos. They were then asked to imagine winning a prize that consisted of every item in one of the baskets — getting all the items in the photo. After the sorting task, the researchers tested how many items the participants could remember. The result: both adults and children around age 4 remembered the items in the basket they were told they had won more accurately and in greater number than the items in the other basket. This is called the 'self-reference effect,' in which information encoded in relation to the self is later remembered better than information encoded in relation to other people. p.249

Loss Aversion

According to Kahneman and Tversky's thinking, even if two bonuses are of equal value, twins would still be reluctant to swap them. They called this 'loss aversion', which is why standard economic models do not apply in such situations. If two resources are of equal value, an exchange should also be easy. But once something is established or owned, people don't treat them the same. When reasoning about economic decisions, we have to take into account the biases of the human mind. Why is reasoning about humans so capricious?

In the bestseller Thinking, Fast and Slow, p.57, Kahneman argued that the human mind has two route-systems for reaching a decision.
System 1 often relies on emotional 'gut' feelings and operates quickly and intuitively, whereas
System 2 is slow, deliberate, and reaches decisions much more slowly through rational logic and reasoning.
We use both types of thinking, and sometimes their solutions clash. The standard economic model is grounded in System 2's cold, hard logic and reasoning, but humans often surrender to System 1's fast, intuitive bias, so without taking emotion into account our decisions can look illogical. Once you recognize the difference between these two systems, the irrational side of ownership starts to make sense. p.256

Prospect Theory

Behavioral economics applied psychological biases to economic decision-making and, by paying attention to humans' capricious decision-making, overturned the models that had been the standard for commerce. Through 'prospect theory', Kahneman and Tversky laid out several psychological principles that govern how we reason about decisions. Just as when we calculate the temporary joy gained from social status or a purchase, our brains do biased work when making decisions. First, as already discussed, evaluating changes in our surroundings is highly relative. Whether we will gain or lose depends on what we had in the past. Our experience is shaped by past events, ranging from the memory of one honeyed sip to the boredom of a program rerun many times.

Think once more about the hedonic adaptation that we constantly experience. We compare every experience to our past selves. Kahneman and Tversky's second principle is that every change is relative to the present value we hold. So not only past experience but also our current position (state) matters. Even if you were rich in the past, if you're starving now you'll gratefully accept anything. The most important last principle is that expected losses loom larger in our minds than expected gains. We will release the bird in our hand only if there are at least two birds in the bush.

The moment Thaler encountered prospect theory, much of human economic behavior suddenly clicked into place like gears falling into alignment. People are not rational when it comes to ownership. People are biased toward overvaluing their own possessions, and as prospect theory predicts, this can be explained by loss aversion. As with simple gambles like coin tosses, people on average require twice the amount they would willingly pay to acquire a possession before they will give it up. This may look like both buyer and seller trying to maximize the gains they get from the trade, but what is actually at stake here is the seller's overheated sense of ownership and personal loss.

The Endowment Effect

We overvalue things that have become our possessions. This bias, called the 'endowment effect', is one of the most solidly established phenomena in behavioral economics. In short, when selling an item, people expect more than they would willingly pay to acquire the same item. There is always an imbalance between sellers and buyers, but that imbalance is even greater when the item to be sold is a personal belonging.

The endowment effect can be induced by various manipulations. Once you've placed a single bid on an item you don't yet have at auction, you're more likely to bid again — a tendency that most auction houses are well aware of, which is why frenzied bidding wars often break out. Just gripping or touching the item you're considering buying can also produce the endowment effect. A salesperson who urges you to try on the clothes or test-drive the car is using the endowment effect (the first experience of ownership) to clear the biggest hurdle to purchase.
*my* Personally, I think model homes also play a similar role.

The endowment effect is common, but not universal. When researchers began surveying various societies and cultures, an interesting finding emerged: the strength of the endowment effect varied along an individualist/collectivist dimension. The social psychologist William Maddux and an international research team conducted an interesting cross-cultural study with university students of Western or Eastern background in the United States, Canada, China, and Japan.

Experiment 1.
The researchers assigned the students the role of either 'buyer' or 'seller'.., *my* Westerners tried to buy at a lower amount and sell at a higher amount, while Easterners bought at slightly below the average price and sold at slightly above it.

Experiment 2.
In yet another group of Chinese students, the experimenters manipulated participants' self-construal before the trade.
.., when they wrote about other people, the endowment effect decreased, whereas when they wrote about themselves it increased.

Experiment 3.
Finally the team manipulated the relationship between the owner and the mug.., This manipulation increased the endowment effect for Western students, but actually had the opposite effect on Eastern students. In other words, when attention was focused on the possession, Western students valued it more highly while Eastern students valued it less.

Summary.
Clearly, the endowment effect is not inevitable; rather, it reflects how our self-construal shapes our attitude toward possessions, and that self-construal in turn is influenced by the cultural norms of individualism or collectivism.

If the endowment effect is influenced by culture, can we observe its seeds in children before culture has had time to intervene? To investigate the development of the endowment effect in very young children, we activated implicit memories of self or others during a task in which children evaluated toys. .., In an experiment in which various toys were placed on a smiley-face scale, we were able to induce the endowment effect in children of an age group where it is normally not observed by directing their attention to themselves.

Differences in self-construal along the independence/collectivism axis can also explain cultural differences in the endowment effect.
Think again about the Hadza in northern Tanzania, one of the last remaining hunter-gatherer societies in the world. As we saw earlier, they have very few personal possessions and follow a demand-based sharing policy in which they take and use what they need when others aren't using it. So in trading experiments using items appropriate to Hadza culture, many Hadza people show no endowment effect.., But there was an interesting exception: it was observed in Hadza people who had been exposed to Western influence. As anthropologists studied this subgroup, they found evidence of the endowment bias in those who had had frequent contact with tourists or experience trading in markets. The bias was also observed in Hadza people who had had to trade with Westerners.
The endowment effect appears to be a system-level bias for avoiding losses, but it can also disappear depending on the cultural context in which we attach value to possessions and the goals of making a profit. p.271




People Addicted to Pursuit

What is it that pushes us to acquire things? Why do some people think of themselves as shopping addicts?

Jean-Paul Sartre twisted William James's quote that "a person's 'self' is the sum of everything he can call his own," and wrote: a human being is not so much the sum of what he already has, as the sum of what he does not yet have, of what he might have. From Sartre's point of view, what defines who we are is not so much acquisition as the pursuit of goals. And his insight matches the neuroscience of motivation. The brain has mechanisms that operate differently depending on whether you already own something or want to own it! Objects already perceived as extensions of the self are integrated into the neural networks that generate the sense of self. By contrast, objects we want can also stir our sense of self, but they additionally activate the system that responds to novelty and the thrill of pursuit. If you think about it carefully, we spend more time pursuing pleasure than consuming it.

What the most pleasurable experiences have in common is novelty. Recall the Coolidge effect. As Stanford University neuroscientist Brian Knutson points out, the reason we celebrate and remember explorers — from those who crossed oceans to climbed mountains and landed on the moon — is that they established a kind of ownership for the first time.

We tend to think the joy of acquisition fuels consumer culture, but in fact what drives us to fill our lives with all sorts of stuff is the pursuit. Goals built on the motivation of acquisition are inherently bound up with reward, so failing to reach the goal brings disappointment or frustration. Yet even reaching the goal does not bring satisfaction, because acquisition does not deliver the joy we expected. Even if we do feel some pleasure, this emotion easily habituates, so we start looking for the next 'must-have' thing.

Even before we get a possession in our hands, our brains savor the anticipated benefit. And once we have it in hand we attach excessive value to it, because possessions are extensions of the self.
The trouble is that many people quickly habituate and then go off in search of the next conquest. Driven by a powerful emotional impulse that is not easily satisfied by possessions, some people are unable to stop their acquisition behavior, and may end up losing their lives or being literally suffocated by their possessions. p.275






Are owning and being happy the same thing?

Through the power of ownership, we extend our personal selves into the world, and through possessions we signal our identity and status to others. The reason losing a possession hits us so hard is not so much because of its value as because it represents a significant part of our identity. This relationship varies by individual and culture, but to some extent we all construct our sense of self through ownership. This explains not just our motivation to have more, but also why we have such a hard time letting go of what we have. To solve the relentless problem of materialism and consumer culture — not to mention territorial disputes — we need to understand this peculiar relationship between humans and the things they own.

Our irrational behavior arises because we identify ourselves with what we think we own. But there is an inherently contradictory side to this. Because our possessions represent our identity, we overvalue them and have a hard time letting go, but we also easily get used to most of them. In a relentless yet ultimately unfulfilled craving to elevate our identity, we strive to get more in our hands. This may give us a greater sense of success, but ironically, the more we accumulate, the less satisfaction we feel.

You may certainly disagree with the claim that materialistic goals do not bring satisfaction. In fact you may think the warning at the heart of this book has nothing to do with you. Many people are convinced that they will be satisfied once they have more, and so all the motivations of their lives are built on this belief. Ownership is a core problem of our morality, our politics, and our worldview, so the only way to settle the debate is to look at the data.
This kind of study of every available study is called a meta-analysis. Instead of relying on a particular study, research group, or individual scientist that might be biased in finding particular results, it averages the results of many studies and provides a much more balanced and accurate assessment of the field, which is why it has become the standard of scientific research.
According to the most recent and comprehensive meta-analysis, "there is a clear and consistent negative association between various types of personal happiness and the beliefs of people who prioritize materialistic pursuits in life.  This holds regardless of culture, age, or gender. Some factors weaken this relationship, but in no case was a positive relationship found."

If we were satisfied with our current possessions, we wouldn't need to strive for more. Yet putting together the thrill of pursuit, the desire for status, and the destructive effects of expected loss, we can see that ownership is one of the most powerful human impulses, and it rarely yields to reason. Of course, most people think they are free of that desire, that they're the exception. And so we end up unable to let go of what's in our hands. p.293

https://www.aladin.co.kr/shop/wproduct.aspx?start=short&ItemId=315614968