This was originally blogged at IonPsych on 3/9/2011 with the title “March Madness: Priceless for Some, Overpriced for Others.” I’ve decided to re-post it from the archives today, in honor of the fact that tonight is the 2nd Duke-Carolina game of the season. You can see the original post here. And, as always, Go Duke!
When I was in college, I slept outside in a tent almost every night during the 2 coldest months of the year.
OK, before you call me crazy, there’s more to the story.
I actually did this for four years in a row.
And all four years, this ‘tenting’ experience that cost me quality sleep, socially acceptable hygiene habits, and at least a few tenths of my cumulative GPA was all for a two-hour basketball game.
Alright. I guess that doesn’t make me sound much saner. Unless I tell you it was for the annual home Duke-UNC game. Then it might make me sound a BIT more rational. But probably not, unless you’re a Duke or Carolina alum.
Here’s what I can tell you, though – I don’t regret a single second of it. In fact, it’s one of my fondest college memories. And if I had the chance to sell my spot at that game, even for a few thousand dollars, I never would have taken it.
The bad news for me is that I appear to have horrible economic sense. The good news, however, is that I’m not alone. Most people, given the chance to have a once-in-a-lifetime experience, wouldn’t trade it in for money – and if they did, it would require far more than any buyer would be willing to pay. This is known as the endowment effect (Thaler, 1980).
Here’s the basic gist. When you have something – like a mug, tickets to a Final Four game, or plans for an exciting Argentinian vacation – you’ve already started to think about all of the amazing things that this item or experience will bring you. You’ve possibly thought about all of the times that you’ll make home brewed coffee, or the stories you’ll tell your grandchildren about hiking through the Andes. So if someone were to ask you to name a hypothetical selling price, these thoughts are going to color your normal sense of economic savvy. Namely, the lowest possible price for which you’d consider selling your item or experience is considerably higher than the highest price that any buyer would be willing to pay (Kahneman, Knetsch, & Thaler, 1990).
The most common explanation for this used to be the idea of loss aversion – the bad feelings of a loss ‘hit’ people harder than the good feelings of a gain (Kahneman & Tversky, 1979). Using loss aversion logic, missing that trip to Argentina is experienced as a tangible ‘loss,’ while simply not buying the trip to Argentina in the first place is a ‘foregone gain.’ Since losses are theoretically more painful than not gaining something in the first place, the price difference was assumed to reflect a difference in ‘painful feelings.’ As a result, when thinking about what you’d require as compensation for a loss, you expect to receive a lot more money than you rationally should – while buyers would logically expect to pay the normal market value of the item.
However, a series of studies examining what really contributes to the endowment effect happened at Duke University (my beloved alma mater). And it studied those basketball fanatics (like me) who do crazy things like sleep in tents for basketball games.
The first study occurred in 1999, right before Duke was set to play in the Final Four for a spot in the championship title game (which they eventually lost to UConn). The researchers (Ziv Carmon and Dan Ariely) called up 100 students who had entered a lottery to buy a ticket to that all-important Final Four tournament game. Some of them had won the lottery and been able to purchase a ticket, while some had not. The ones who had tickets were asked to name the lowest possible selling price they’d ever consider, while the ones who did not were asked to name the highest price they’d be willing to pay.
The average buying price? Approximately $150.
The average selling price? A whopping $2400. That’s SIXTEEN TIMES HIGHER.
That’s a solid replication of previous research. But what if the psychological process isn’t strictly the loss-aversion logic described earlier? What if, instead, both sides are focusing on what they’d be losing – they’re just focusing on different losses? Later on, Carmon and Ariely investigated this simple question: What if the ticket-holders are focusing on what they’d be losing by sacrificing the experience, but the buyers are also focusing on what they’d be losing … by sacrificing their money? They asked both Duke and UNC basketball fans to name hypothetical buying & selling prices for different basketball games, but they manipulated two crucial elements – the importance of the game (experiential value) and the base value of the ticket (financial value). As it turns out, when the students were deciding how much they’d be willing to pay for a ticket, they gave greater weight to money-related factors – how much the game should cost, how much other similar experiences would cost, and their personal attitudes towards money. However, when the students had to decide how much they’d be willing to sell their own tickets for, they focused their evaluations on aspects of the experience – how significant the game was, how enjoyable the game would be, and how much they’d regret it if they didn’t get to be there (Carmon & Ariely, 2000).
This points to some pretty interesting stuff. We don’t always think about things very rationally – indeed, when it comes to experiences in which we’ve become emotionally invested, we might allow that bias to cloud how accurately we value them. Just the simple act of having something means that we overestimate how valuable it is to have it.
And when it comes to basketball, let’s just agree that you can’t put a price on a rivalry game.
THALER, R. (1980). Toward a positive theory of consumer choice Journal of Economic Behavior & Organization, 1 (1), 39-60 DOI: 10.1016/0167-2681(80)90051-7
Kahneman, D., Knetsch, J., & Thaler, R. (1990). Experimental Tests of the Endowment Effect and the Coase Theorem Journal of Political Economy, 98 (6) DOI: 10.1086/261737
Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk Econometrica, 47 (2) DOI: 10.2307/1914185
Carmon, Z., & Ariely, D. (2000). Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers Journal of Consumer Research, 27 (3), 360-370 DOI: 10.1086/317590