Episode 5: Consumers overvalue what they have, and that’s a problem.

Another derivative of what I call “ownership bias” is the difference between the willingness to accept money (WTA) and the willingness to pay money (WTP).

People exhibit ownership bias when there is something that they feel is theirs; that they own.

Let me take you on a quick mind-journey.

Your grandfather carefully cut, planed, jointed, and hand sanded a desk. He stained the wood by hand himself. He specifically picked white oak because of its beauty and desire for it to be enjoyed for generations to come. It’s perfect in every way. Solid, friendly, worn yet warm. Just like your grandpa.

Let me pop your mind-bubble. It’s worth about $250 in market value. It’s a worn, decently crafted, brown hardwood desk. Maybe it’s worth even less. Maybe $150. I’d probably lowball you for about $75. You would never part with such a treasured family item. That’s ownership bias.

What’s interesting is that this can happen on a much smaller scale, even as small as “gifting” you a pen. We’ll talk a lot more about ownership bias later, so I don’t want to get too carried away (it’s so fun though)!

Ownership bias is the first half of the willingness to accept/willingness to pay divide (spoiler!).

The second half is fear of loss.  Your old brain is afraid of losing resources. It yells at you to hoard, to not lose what you have.

When someone offers us money (which is basically an abstract construct), for something physical we have in our hand, we often overestimate the value of the thing in our hand because we don’t want to lose it.

Mash those two concepts together and what you get is this gap between the WTA and the WTP. To measure this, the typical experiment goes like this:

Half of the subjects are given an item, and then offered money to return it (willingness to accept).

Half of the subjects are asked to pay for the item (willingness to pay).

Researchers make a ratio (two numbers divided by each other) out of these, with WTA on the top (because it’s usually bigger), and WTP on the bottom. AKA, WTA/WTP.

For example, if your willingness to accept a deal for my grandfather’s desk is $600, but my willingness to pay is $200, the WTA/WTP ratio is 600/200 or 3:1 (aka, 3).

I won’t bore you with the details of a thousand studies about WTA and WTP. Fortunately, in A Review of WTA/WTP Studies Horowitz and McConnell did this for us! Thanks for that.

Beyond the fact that WTA is almost always higher than WTP for the reasons noted above, let me give you one more smart tid-bit that the researchers discovered, and I quote from the study:

“We find that the farther a good is from being an “ordinary private good”, the higher the ratio”.

So, the MORE unique an item is, the HIGHER the ratio between the willingness to accept (WTA) and the willingness to pay (WTP) is. The researchers found that non-ordinary goods have ratios that are usually about 6-8 points higher.

This makes sense. The imbalance between the willingness to accept and the willingness to pay is because when we own something we overvalue its worth to other people.

The more unique and special it is to us the higher we as humans will overvalue that product. You’re going to proportionally overvalue your grandfather’s desk far more than a cup of regular uncooked white rice (which is the most ordinary good I can imagine).

Let’s talk about real world practicality.

If you are in an industry that buys anything from consumers, you should understand that consumers will almost always overvalue what they have. It will cause them to be uncooperative in the face of reasonable market value deals.

Or, say, in the insurance world a customer would feel cheated because their grandfather’s desk was replaced by market value. They will feel as if the insurance company stiffed them even though that is not the case.

And conversely, if you want to make your customers feel like they have been given something valuable, give them something special they can own and treasure.

 

Horowitz, J. K., & McConnell, K. E. (2002). A Review of WTA/WTP Studies. Journal of Environmental Economics and Management44(3), 426-447. doi:10.1006/jeem.2001.1215

Heuristics: The Unsung Heroes Of How People Think

Logo for HumanTech podcastWe talk a lot about “cognitive biases” — the tendencies we have to think and act in ways that are not always logical, and not always accurate, but we forget that many of these brain shortcuts are very adaptive and very successful.

In this podcast episode we dive into the positive side — Heuristics. What they are, why we use them, and how they are so successful that we may even want to program them into machines.


Human Tech is a podcast at the intersection of humans, brain science, and technology. Your hosts Guthrie and Dr. Susan Weinschenk explore how behavioral and brain science affects our technologies and how technologies affect our brains.

You can subscribe to the HumanTech podcast through iTunes, Stitcher, or where ever you listen to podcasts.

Behavioral Science vs. Behavioral Economics

Logo for HumanTech podcastWhat is behavioral science? How is it different from behavioral economics? And why are both so cool? Plus, Guthrie geeks out about Daniel Kahneman’s research.


HumanTech is a podcast at the intersection of humans, brain science, and technology. Your hosts Guthrie and Dr. Susan Weinschenk explore how behavioral and brain science affects our technologies and how technologies affect our brains.

You can subscribe to the HumanTech podcast through iTunes, Stitcher, or where ever you listen to podcasts.

Learn About Brain and Behavioral Science

Optical Illusion pictureWe’ve launched our new course curriculum in Brain and Behavioral Science!

If you’re interested in learning more about why people are the way they are, why people do what they do, and how to work more effectively with people and communicate more clearly, then check out our new series of courses:

You can take one course, or you can take all of them, pass the Certificate exam,  and earn the Brain and Behavioral Science Certificate.

Check out the new courses, and let us know if you have any questions (info@theteamw.com)

Use Promo Code: BBSNew and receive 30% off any of the Brain and Behavioral Science courses from now through Feb. 21, 2017.

Let us know what you think!

HumanTech — Check out the new podcast

Logo for HumanTech podcastJust a quick announcement to let you know we’ve started a new weekly podcast called HumanTech.

I’m hosting this podcast with my (amazing) son, Guthrie. Here’s the description at iTunes:

HumanTech — A podcast at the intersection of humans, brain science, and technology. We explore how behavioral and brain science affects our technologies and how technologies affect our brains.

Check out our first episode on the Internet of Things, and I hope you will subscribe to the weekly podcast on iTunes and on Stitcher.