Years ago, I loved staging weekend garage sales.
I’d fill my garage and driveway with our household’s excess and unneeded stuff; furniture, electronics, clothing, kitchenware, toys, yard equipment, and whatever else I wanted to get rid of. I usually made a couple of thousand dollars.
However, these events take a lot of effort, tie up an entire weekend, and are a bit discouraging. After all, the prices people are willing to pay for items at a garage sale are super low compared to the value they provide my family. Such as receiving only ten dollars for a perfectly functional lawn mower.
Really?
Potential buyers didn’t care how much I paid for an item or what its value was to me.
The sales transaction was all about them.
The behavioral economics reasoning behind this pricing phenomenon is called the endowment effect . Perceived value increases with ownership. In other words, items are worth more to an owner than to a buyer.
Emotional attachment to owned items can explain some of this; our aversion to losses is also a factor. In other words, the loss of value of something given up is greater than the gain in value associated with something purchased.
Selling Tactics That Work
Once a seller recognizes this value (pricing) disconnection, tactics can be adjusted to close the value gap.
Basic sales training instructs sellers to focus on the value of benefits to the buyer, rather than the features valued by the seller. This approach is designed to get buyers to visualize how their situation would be improved by making the purchase.
A while back, my Dallas Stars season ticket partner opted out. I still wanted to attend many home games, just not all 41 of them. The best way for me to see all my desired games was to purchase a full season and sell the tickets I wasn’t going to use.
I learned pretty quickly that potential buyers didn’t value these tickets the same way I did. To break even on the 25 unused games, I created a pricing strategy based on the endowment effect and another bias, the anchoring effect, to my advantage.
- I received face value for tickets sold to fans who were emotionally invested in the visiting teams from their hometowns. Our perceived values for those tickets were equivalent.
- I gave away tickets to the pre-season games I would not be attending. These “free trials” created a sense of ownership in the recipients, who ended up buying tickets to regular-season games at face value.
Anchoring is the familiar process of setting a high price and negotiating a sale price that’s lower, but still higher than you’d otherwise receive.
- For games in high-demand, I set a high price on a resale marketplace and made a nice profit.
The gains resulting from anchoring to a high price offset the losses I incurred on the remaining tickets sold below face value because of the endowment effect.
Applying My Knowledge of Biases to Investing
The endowment and anchoring effects are in play in all markets of buyers and sellers, including the stock market.
My understanding of these and other cognitive and emotional biases is valuable knowledge I use to help clients make objective decisions regarding their investments and other money matters.