I originally published versions of this post at IonPsych on 3/9/11 and at my Wordpress blog on 3/11/12. You can see the original posts by clicking here for the 2011 post, or by clicking the From The Archives icon for the 2012 post.

This is the first post in a March Madness series that I will be publishing over the next few weeks. Stay tuned for more psychology & basketball fun! 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 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, my experiences in K-Ville (the official name for Duke's "tent city") are some of my fondest college memories. If I had the chance to sell my spot at any of those games, 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.

Here's the basic gist of this phenomenon, known as the endowment effect. When you already possess something (like a mug, tickets to a Final Four game, or plane tickets and a hotel reservation 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. Maybe you've thought about how great it will be to drink delicious home brewed coffee out of that mug every morning, or you've imagined the wind blowing through your hair as you hike through the Andes. So if someone were to ask you to name a hypothetical selling price for that item or experience, 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.

The most common explanation for this used to be a phenomenon known as loss aversion. Because we already know that the bad feelings of a loss 'hit' people harder than the good feelings of a gain, we can understand that selling your trip to Argentina would be experienced as a tangible 'loss,' while simply not buying the trip to Argentina in the first place should be experienced instead as a 'foregone gain.' Since losses feel more painful, people who imagine losing something they already possess should value that possession much more than someone who's simply considering the possibility of buying it. As a result, when thinking about what you'd require as compensation for that loss, you expect to receive a lot more money than you rationally should, whereas buyers logically expect to pay the normal market value of the item.

However, a series of studies looking into what really causes the endowment effect happened at my beloved alma mater, Duke University. In fact, it specifically studied those basketball fanatics like me who do crazy things to watch the Blue Devils play, like sleep in tents and cover themselves head to toe in blue and white body paint.

The first study occurred in 1999, right before Duke was set to play in the Final Four for a spot in the championship 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 game. Some of them had won the lottery and were thus able to purchase a ticket, while some had not. Carmon and Ariely asked the lucky few who had been able to purchase tickets what the lowest possible selling price they'd ever consider would be, and asked the ones who were unable to purchase tickets to name the highest price they'd be willing to pay.

The average buying price? About $150.

The average selling price? A whopping $2400. Sixteen times higher.

So, that's a solid replication of previous research on the endowment effect. If you were able to buy a ticket, you've been busy getting yourself pumped up about going to the Final Four game. Maybe you've already pictured yourself telling your future grandchildren about that amazing Duke basketball experience, or thought about how incredible it would be to see a Duke championship game happen live. It would take a lot to convince you to give up that experience now. But if you weren't able to buy a ticket, you've probably already figured out something fun to do the night of the game. Maybe you have plans to watch the game with some fellow tenters at Sati's (a local Durham bar), or you're going to hang out with some friends from your dorm and watch the game in the commons room. Sure, you would have loved to go to the Final Four, but you're still pretty happy with the plans you have now. You would pay an average amount to go if you now had the chance, but you wouldn't go crazy over it.

But now, Carmon and Ariely wondered, what if the psychological process isn't really the loss-aversion logic described earlier? What if, instead, both sides are actually focusing on losses...they're just focused on the possibility of losing different things? This whole time, we've thought about the potential sellers focusing on losing that Final Four experience, and the buyers focusing on the potential gain of getting to attend. But really, the potential buyers could be focusing on the loss of something, too: Their money. If the buyers are focusing on the potential gain of going to the Final Four game, their estimates of what they'd be willing to pay should be swayed more by things that would make the game itself seem more or less appealing. But if they're focusing on the potential loss of their money, they should be swayed more by money-related factors, like what else they could buy or how much the game should actually cost.

To test this hypothesis, Carmon and Ariely asked Duke and UNC basketball fans once again to name hypothetical buying and selling prices for different basketball games, but they manipulated two crucial elements to tease these different predictions apart. First, they manipulated the importance of the game (i.e. the 'experiential value'), and second, they manipulated the base value of the ticket (i.e. the 'financial value'). As expected, 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; their decisions were swayed by 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. They were focusing on what they'd be losing out on by not getting to attend the game. However, when the students were deciding how much they'd be willing to pay for a ticket, they didn't pay as much attention to these experience factors -- they paid attention to the money-related factors. The amount they'd be willing to pay was mostly based on how much the game should cost, how much other similar experiences would cost, and their personal attitudes towards money. They weren't focusing on the foregone gain, after all -- they were focusing on the potential loss of their money.

This suggests 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 emotional bias to cloud how accurately we judge financial value. 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.

For more on the endowment effect:

Sam McNerney at BigThink: How Ownership Affects Our Valuations

Dan Ariely: Real-World Endowment

Jeremy Dean at PsyBlog: Why It's Easy to Overvalue Your Stuff.

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

Dommer, S.L., & Swaminathan, V. (2013). Explaining the Endowment Effect through Ownership: The Role of Identity, Gender, and Self-Threat. Journal of Consumer Research, 39, 1034-1050.

Weaver, R., & Frederick, S. (2012). A Reference Price Theory of the Endowment Effect. Journal of Marketing Research, 49, 696.

Morewedge, C.K., Shu, L.L., Gilbert, D.T., & Wilson, T.D. (2009). Bad riddance or good rubbish? Ownership and not loss aversion causes the endowment effect. Journal of Experimental Social Psychology, 45, 947-951.

All images are the author's personal photographs.

Note: Since this study was originally conducted in 2000, several other studies have been conducted on the roots of the endowment effect. For some specific examples, Carey Morewedge and colleagues find that it is specifically due to ownership, not loss aversion, Ray Weaver and Shane Frederick suggest that it might be due to an aversion to "bad deals," and Sara Dommer and Vanitha Swaminathan suggest that it might be due to the fact that we come to view our possessions as inherently linked to our self-concepts and personal identities. I welcome any thoughts and opinions in the comments about what you think of this study in particular, or what you believe the roots of the endowment effect might be!