# Loss Aversion vs The Endowment Effect

Tuesday, October 12, 2021
By dreeves

This is part 1 of a two-part series. First we explain loss aversion and how it’s distinct from the endowment effect. (Spoiler: loss aversion is a generalization of the endowment effect.) Asking Google how those things are different currently yields a fog of opaque logorrhea, so we hope this is enlightening. We’ve also collected some cute examples to convince you how irrational loss aversion is.

Part 2 might be embarrassing. In the past we’ve talked up how we harness loss aversion for productive motivation. Tune in next time for why we’re disavowing that.

The endowment effect is like a “but it’s miiiine” bias — an irrationally increased value for the feeling of owning something. Not that valuing anything — even (especially) vague feelings — is necessarily irrational. It’s only irrational if you’re inconsistent. The most familiar example of irrational/inconsistent preferences may be addiction, where you want something but you don’t want to want it. The endowment effect is a bit like that.

World B: Your car does fit in your garage and you’re offered $1000 to have it not fit anymore. Maybe your neighbor offers you that to store their car in your garage. No way, you say, can’t give up that garage space. But those are inconsistent. What’s the value to you of having your car fit? If less than$1000 then you were right in World A but wrong in World B. If more than $1000 then it’s the other way around. There’s no good way to rationalize saying no in both worlds, but people do. I say “no good way” which invites a lot of nitpicking and well-actuallying. There are uncertainties to account for, or social dynamics with your neighbor, blah blah blah. But when the discrepancy between willingness-to-pay and willingness-to-accept is big enough, it’s pretty suspect. A factor of two seems to be common in some experiments. ### Lawn Mowing You know how people will mow their own lawn or change their own oil because it seems extravagant to pay someone$20 to do something they can perfectly well do themselves? But if a neighbor offers to pay you $20 to mow their lawn then you say no. That’s inconsistent! I mean, at some point you’d run out of time but if it makes sense to turn down the neighbor’s offer to mow your lawn then you should also accept when your neighbor offers$20 to mow theirs. Either it’s worth $20 to get out of a lawn mowing or it isn’t. And, again, you can always find excuses. Maybe you don’t trust someone else to do as good a job, or don’t know if they’ll be happy with how good a job you do. It makes sense for there to be a gap between willingness-to-pay and willingness-to-accept. Just that people seem to have nonsensically high gaps. ### Buying vs Getting Bumped From Flights This is an example Bee and I spotted in the Boston airport one Sunday in August. First, imagine you’re buying flights and there’s a flight at a much more convenient time, saving you basically a day of wasted travel time, but it costs$800 more. Almost everyone (in my socio-economic circles) chooses to save the $800. Then you get to the gate for your flight and the flight is overbooked and they’re asking for volunteers to be bumped to a flight that’s 8 hours later and they’ll pay you$800 in actual money, not those scammy airline vouchers. Almost everyone chooses to stay on the flight they have (we checked!).

This means people are probably being irrational, either to save the $800 in the first case or to not take the$800 in the second case!

Can we rationalize this one? Easily. An unexpected 8-hour travel delay may be much worse than a similar delay you can plan for. But plenty of people are plainly being inconsistent/irrational in these situations.

### Shut Up And Guess

Scott Alexander has a fun example from medical school in which med students persist in using a suboptimal strategy on a multiple-choice test because the feeling of losing points stings more than the feeling of gaining points salves. See also a fascinating paper on Guessing and Gambling.

You have to twist yourself into especially tangled knots to rationalize this one.

### Decluttering

I personally very much suffer from the endowment effect bias and I try to consciously override it. When cleaning house and it feels hard to throw something away, I can sometimes snap myself out of it by reframing the question: “What would I pay to acquire this? Oh, right, zero dollars. So my loss aversion is irrational and this is zero skin off my nose to throw away!”

### Beeminder

What if Beeminder is telling me to, I don’t know, publish a blog post and I’m staring bleary-eyed at a pile of notes and I really don’t want to? But also I’m really averse to being charged money, and so I get the dang post out the door? Is that not fighting irrationality with irrationality, for the greater good?

Nope, we’re doubling down.

In part 2 we’ll make our case for fighting irrationality with rationality instead. (Spoiler: that still means using Beeminder.)

PS: And, no, loss aversion has not been debunked.

## Footnotes

[1] In terms of lifechangingness, five million dollars is not that different from one million dollars. Econ-nerd version: You have concave utility for money. Equivalently: You are risk-averse.

Image credit: Faire Soule-Reeves and Wikipedia

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