Business Built On Endowment Effect

Endowment Effect,  introduced by Thaler, states that people tend to value things they own more than they are valued by the market. Hence people are reluctant to let go of things they own at the market price and end up accumulating them. The New York Times magazine profiles  the business that is build on this, Self-storage. People are not rational automatons, they are not aware of sunk costs nor are they capable of doing net present value calculations of multiple options. They cannot tell the monetary difference between storing their wares in self-storage vs. selling them now in garage sales at the prices the market is willing to pay.

Clem Tang, a spokesman for Public Storage, explains: “You say, ‘I paid $1,000 for this table a couple of years ago. I’m not getting rid of it, or selling it for 10 bucks at a garage sale. That’s like throwing away $1,000.’ ”

People end up paying $100-$200 per month for storing things that will not even cover the rent if they were to be sold off. The result is a thriving business – self-storage  that adds negative value to most of its customers. The question is will we see a return to rationality due to current economic conditions?

Other related articles:

  1. Endowment Affect in Wendy’s commercial
  2. Theory Behind Home Staging
  3. Pricing Garage Sale

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