Create An Endowment Effect

Professor Richard Thaler just gave his Nobel lecture.  He is a pioneer in behavioural economics.  Often times, behavioural economics flies in the face of classical economics.  However, there are some pieces of behavioural economics that are really interesting to think about when it comes to startups.

Here is his lecture.

In the lecture, he talks about a few things that I think could really help startups. The Endowment Effect is particularly powerful. This bias occurs when we overvalue a good that we own, regardless of its objective market value (Kahneman, Knetsch, & Thaler, 1991). It is evident when people become relatively reluctant to part with a good they own for its cash equivalent, or if the amount that people are willing to pay for the good is lower than what they are willing to accept when selling the good. Put more simply, people place a greater value on things once they have established ownership, which is especially true for goods that wouldn’t normally be bought or sold on the market, usually items with symbolic, experiential, or emotional significance. The endowment effect is an illustration of the status quo bias and can be explained by loss aversion.

In the lecture, the endowment effect messes with the expected outcome of Coase Theory.  I am a huge fan of Coase, which is why I think it’s particularly powerful.

Can you find a way in your startup to create an endowment effect among your customers?  If you can, you will likely make them stickier, and when competitors come knocking it will be harder for them to switch because of psychological lock-in.