Tall, Grande, Venti? This isn’t about the size of the coffee bur rather the worth of the mug. An article on investing prompted me to take another look at the endowment effect. This is the well-documented phenomenon that the longer you own something, and the more you talk about it, the more devoted you are to it. Deciding you don’t really like, need or want “it” becomes increasingly difficult. It’s like severing a part of yourself. When the endowment effect (which seems to be our default setting) is at work, sensible and rational go out the window.
The mug experiment is simple, revelatory and has been replicated many times. Study subjects are sorted into three groups. The first group is offered a chance to buy the mug. The second group has a choice between getting the mug or an equivalent amount of cash. The third group is given a chance to sell the mug they’ve been given. The first two groups valued the mug similarly but the third group was exceedingly bullish on their windfall. They demanded more than twice as much to sell the mug they’d been given, as either of the other groups. Exact same mug. Wildly different assessment of worth. Endowment effect… take a bow.
“Messing up is easy. Admitting it is hard.” That was the headline that caught my attention. I know how powerful the endowment effect is with physical possessions so it shouldn’t have come as a surprise that the same is true with financial investments or relationships, or even jobs. We’re prone to doubling down on bad decisions because admitting that we’ve made a bad decision is hard. And the longer we bury our heads in the sand, the harder it becomes. We are loathe to cut anything from our team- even if it’s clearly a drag. It means admitting we made a boneheaded decision and no one likes to be a bonehead.
I’m siding with the behavioral economists with my Rule. Mistakes happen. Admit, learn and move on. If you can afford to correct your mistake, do so. If you have to live with it, at least don’t make the same one again. Maybe a Venti to celebrate a hard but important lesson learned!