In economics, the endowment effect refers to an illogical quirk of human behavior that runs contrary to assumptions of rationality. In academic jargon, the endowment effect occurs when an economic agent’s willingness to pay for a good does not equal his willingness to accept an offer to sell the same good. In layman’s terms, it means that we all like our stuff way more than we should.
The classic experiment, run and re-run since 1990, involves coffee mugs and college students. On randomly receiving a mug from experimenters, subjects became irrationally unwilling to part with them and valued them twice as much as subjects without mugs.
This finding is surprising to modern economics because economic theory stipulates that buyers and sellers should value goods similarly, thus facilitating free-market trade. This finding is not surprising to ordinary people who have thought about people for more than two seconds, because life as we know it would fall apart without irrational valuations.
Take, for instance, the entire premise of friendship: ordinary people thrown together by chance or convenience who decide to love and support each other, despite evidence of seven billion other human beings in the world who potentially deserve just as much lovin’. Instead of searching the globe for people about whom it might be more effective to care, we appreciate (in econo-speak, “overvalue”) the ones we already have.
To be fair, though, we’re at least allowed to choose our friends, and looking for a new social group isn’t all that uncommon after a period of boredom or a falling-out. Family, however, is perhaps symptomatic of the so-called endowment effect. After all, we’re born to our families with absolutely no choice in the matter—and yet conventional wisdom dictates that family ought to come first in any list of life priorities. Is there an economic justification for this loyalty?
An economist might defend his field by saying that emotionalism isn’t encompassed within the realm of consumer theory. People can’t be seen as goods to be traded around because human relationships require more than just utility. At the very least, people aren’t easily substitutable the way that coffee mugs are because they stand for more than just themselves. They represent memories, values, and other intangibles tied up in personal identity.
But if this is true of people, can’t it also be true of objects? I’m not strictly talking about emotional keepsakes, like kindergarten tree ornaments, whose sole purpose is sentimentality. What about mundane items—a lamp, a backpack, a car? Given enough time, these objects become part of our everyday circumstances. We expect them to define a part of our lives, and removing even the most commonplace object entails an inconvenient recalibration of reality. It’s why we all have so much junk stored in boxes and stacked in our basements, why packing up a dorm room for the summer invariably involves storing things of questionable usefulness.
Even a coffee mug, if given to a college student for mere minutes, can start to mean something more than its market price: a penholder, a late-night library companion, a story about a random economics study.
This is not an attempt to overplay the importance of coffee mugs by equating them with people. Of course a mug would never be as important as a human being, and who would ever imagine putting a price tag on a friendship? But an assumption of human rationality gives us too much credibility as objective beings when in actuality even the most ordinary detail is contingent on having a particular perspective, on keeping the right biases.
It’s surprising, therefore, that economics continues to grapple with evidence of irrationality as though illogic were a deviant characteristic. Even when it limits itself to pure market transactions, excluding the more nebulous aspects of life, economics must battle with human inconsistency. Could it be that the real aberration is rationality itself, that the majority of human behavior isn’t actually all that logical?
In fact, the endowment effect, rather than being a quirk of human nature, seems to me to be a necessity of just being alive. An existentialist bent on self-destruction could wonder about the legitimacy of selfhood: Who can say that his or her own particular consciousness is the one he or she should want to have? Subjectivity—the fact that we are trapped in our own minds—limits us to just our individual thoughts, precluding an impartial justification of self. The very acceptance of being alive already necessitates having an irrational faith in the subjective self.
In lieu of getting lost in convolution, I propose an aphorism of unknown origin to sum up the discussion: “Happiness is not having what you want, but wanting what you have.” Go ahead, be irrationally happy.
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