Add the “Endowment Effect” To Your Neuromarketing Toolkit

November 28, 2019

Marketing professionals, including those in advertising, often have looked to behavioral psychology and related disciplines for insights into human motivations–identifiable behavior patterns and predictable emotional reactions–to understand how potential customers will react to marketing strategies. This is known as Neuromarketing.

Reportedly, the search for clues to persuasion in the commercial realm goes back well into ancient times. But a much newer discipline within psychology, behavioral economics, is offering research results that marketing professionals only now are beginning to explore.

One such intriguing and increasingly well-established insight in behavioral economics is the “endowment effect.” Perhaps the pioneering investigation of that phenomenon was by Kahneman, Knetsch, and Thaler. In the study, participants were given a mug, theirs to keep, and then offered the chance to sell or trade the mug for an equally valued alternative (in this case, pens). The chief observation, since repeated and confirmed in study after study, was that the participants uniformly refused to trade the mug they now owned for less than twice as high an amount and they had been willing to pay to acquire the mug.

The broader concept, called “prospect theory,” developed by Daniel Kahneman and Amos Tversky in the late 1970s, was based on carefully controlled studies–unlike much of earlier economic theorizing by abstract logic. It formulated the principle that individuals have an “asymmetric” calculus of their losses and gains.

This new formulation applying to the most general level of economic behavior by individuals won Kahneman the Nobel Prize in Economics in 2002. It is now widely applied to the forecasting of behaviors and decisions of consumers, particularly in neuromarketing.

The “endowment effect”

Now reconfirmed repeatedly, and named the “endowment effect,” the insight is that people attach a much higher relative value to what they already own (part of their “endowment” of worldly goods) than to what they could acquire.

The principle has been variously restated and paraphrased as “divestiture aversion,” the “ownership effect,” and the investment insight that most people experience loss of part of their capital as a much greater threat to their well-being than failure to acquire an equal amount of new wealth.

How is the endowment effect now beginning to shape new marketing strategies? There are many examples, but the key to the strategy is to give potential customers the experience of “owning” a product—a sense that the product is now part of their lives and their experiences. That is expected to translate into a feeling of reluctance to part with that ownership experience—a feeling shown by endowment effect studies to be far more motivating than the yen to acquire the new product. So how exactly can you incorporate the “endowment effect” into your neuromarketing strategies?

Marketing moves

The marketing move can be as simple as offering a free sample of a food or drink, giving the customer some “ownership” of the product. Does this experience of a brief connection with a product actually involve the endowment effect?

For example, at a specialty food store, does a shopper who has eaten a free sample of the store’s food, in the store, begin to identify with it as “his store” or “her store”? That probably depends upon the surrounding context of the giveaway. Does it reinforce the sense of ownership? If a server engages the customer in a conversation about the experience and solicits “advice” about whether or not the store should offer this product, then the customer probably has taken some “ownership.”

Staff showing a sample of cheese to customer at counter in his store

Subsequent research on the endowment effect has suggested that although it has general validity, it tends to be strongest when what an individual own not only has economic value, but some kind of sentimental value or emotional significance, too. This plays into neuromarketing. It suggests that experiments with marketing on the basis of what the studies have called “mere ownership”–the bare fact of an individual’s possession of a product, for example–will be less powerful than creating situations where personal feelings come to be associated with the product and with ownership of it.

This has been called “lifestyle integration,” the individual’s making emotional “room” in his or her life for the product. And we see in several types of marketing moves described below that lifestyle integration along with ownership tend to promote a more robust endowment effect.

From test drive to lifestyle test

A far more determined and explicit employment of the endowment effect as related to neuromarketing was done by a Cadillac dealership that doubled down—and more—on the traditional “test drive” marketing approach. It offered potential buyers 24-hour use of the model of their choice—a full day in which to “own” the car and “discover Cadillac refinement, innovation, and performance.”

For an entire day, the customer would “own” the new Cadillac and experience it in contexts such as driving to work, going out on a date, or driving the kids to school. After enjoying the experience of “owning” a new Cadillac, integrating it into their lives, would test drivers find it difficult to “give up”?

At least provisionally, the conclusion seems to be that the marketing offers of free trials and free samples usually are not motivated by understanding the psychology behind the endowment effect. The company extending the free sample or free trial does not consolidate and reinforce the experience with messages that focus on the feeling of ownership and how it affects the customer’s lifestyle.

The Cadillac case illustrates how a context can be created, which, by going beyond what people expect in a given industry, fosters a true experience of ownership and involvement with the product. The Cadillac dealership, in this case, was willing to enable potential customers to experience being a Cadillac owner not for a half-hour test drive in the vicinity of the dealership and with a salesman.

The unusually extended period of “trial ownership” enabled potential customers to put ownership in the reality of their own daily routines and families. In this way, the endowment effect had the optimal context in which to come into play.

For more information on this and other concepts in neuromarketing, Download Our Free Optimization Workbook.

Be sure to check back regularly for information, insights, and updates on marketing strategies rooted in sound research and experimentation. And book a call with the Vivid Labs team for support of your new marketing ventures with fact-based, rational decisionmaking.

About Vivid Labs

Vivid Labs is a science-based marketing agency. We focus on conversion optimization, which is the science of improving the performance of a sales or marketing system. We publish our findings and strategies for you to explore and try in your own organization.

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