Our weekly explainer on economics using lessons from popular culture. In Installment 16, Richard Thaler makes an appearance in Deewar to explain the Endowment Effect.
Amitabh Bachchan: Aaj mere paas buildingay hai, property hai, bank balance hai, bangla hai, gaadi hai — kya hai tumhaare paas?
Shashi Kapoor: Mere paas maa hai.
This scene from Deewar is one of the most iconic in all of Hindi cinema. Amitabh informs his bro Shashi that he has “buildings, property, bank balance, a bungalow and a car.” What does bro have? There is a shocked moment right after Amitabh says these words, perhaps because both men realise the sloppy redundancy of mentioning buildings, property and a bungalow in the same sentence. Then Shashi, whose mom in the film is a stern copy editor (though this revelation was left out on the editing floor), says that he has mother.
Richard Thaler, who got the Nobel Prize for Economics yesterday, would have approved. The scene is an excellent illustration of a term he coined: ‘The Endowment Effect.’ Both men place a high value on what they own — perhaps higher than they should.
Thaler, a giant of behavioural economics, coined the term in 1980. There was an excellent illustration of it in a study in 1984 by Jack L Knetsch and JA Sinden. Participants in that study were given, at random, either a lottery ticket or two dollars. After some time, they were given the option to switch. Most of them refused, because they had come to value whatever they had been given because it now belonged to them. In another study that Knetsch and Thaler did in 1990 with the legendary Daniel Kahneman, half the participants, chosen randomly, were given a mug. Then the other half were asked to name a price they would buy a mug at, and the lucky owners were asked to quote a selling price. As Kahneman revealed: “The results were dramatic: the average selling price was about double the average buying price.”
The Endowment Effect, thus, to go by a common definition, is “the hypothesis that people ascribe more value to things merely because they own them.” Or, as you might say by reversing a common Hindi proverb, Ghar ki daal murgi baraabar.
There are multiple explanations for this behaviour. Thaler and Kahneman put forward Loss Aversion as one of them: The pain we feel at losing something we own is more than the joy we get at receiving something of equivalent value. Other explanations for it come from neoclassical economics, natural selection and so on. My own simple hunch is that in a world of scarcity, we are all wired to value what we own highly so that we have that minimum sense of well-being that we need to carry on.
If you look around you, you’ll find that everyone shows signs of the Endowment Effect. Ask someone what phone or car you should buy, and they’ll be likely to recommend the one they own. Indeed, I would say that this goes beyond material goods. Once people adopt an ideological label, they will defend that ideology to the death, and will close themselves to counter-arguments. Part of the reason for this, of course, is what they would already have invested into their involvement with it, so there are elements of the Sunk Cost Fallacy here. (Ajay Devgan demonstrated this in a previous installment of Houseful Economics.)
I have written about The Endowment Effect in the context of poker: some players get too attached to their hands, and don’t fold enough, for just this reason. Amitabh’s character in Deewar certainly shows signs of it, with his affection for his buildings, property and bungalow, though one should perhaps not blame a cognitive bias for Shashi’s attachment to his mother. Mothers can be awesome.
Further reading: There are two masterpieces on behavioral economics that you should read immediately if you haven’t already. One is Thaler’s book, Misbehaving. The other is Kahneman’s Thinking, Fast and Slow. To read more about the Endowment Effect, check out this excellent 1991 paper by Kahneman, Knetsch and Thaler.
If you buy physical copies of the two books above, I guarantee that you will value them more once you have them.