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

Pricing Your Garage Sale – 4 Things to consider

I received somewhat surprisingly high number of views on  How to price your garage sale article I wrote. I think people are searching online because of the time of the year for tips on pricing their garage sale. The article I wrote was probably not suited for the most common garage sales that sells many items for less than $5.   Here is a set of 4 things to consider before your sale:

  1. Is it worth it?: Think of the opportunity cost of time spent categorizing, labeling, advertising and finally spending 3-4 hours manning the shop. Suppose your time is worth $50/hour, would you make more than $250 from your garage sale? If not, is it worth doing? Frugal families blog says, “anything under $2 sells fast”. That means you need 125 such items just to break even (after the opportunity cost). Note that you value your junk, err treasures, more than your potential buyers would due to endowment effect.  Don’t overestimate the total sales to justify the effort.
  2. Alternatives?: Are there alternatives to garage sale like giving the items away to local charity and claiming tax deduction? If you do not itemize your taxes this does not help you. But think of the time saved and the general euphoria, however fleeting, from donating things?
  3. It is sunk, now keep moving: You might have bought your item at a higher price or you might have spent considerable effort building or improving it. Do the money and time spent in the past justify additional time and money for holding a garage sale? No, what you spent in the past is sunk. You should only consider the effort not spent and pick the best among the alternatives.
  4. Doing it for the experience: May be you do value the experience more: If you really think that the experience of holding a garage sale means something to you, be it a lesson in negotiation or just a way to meet the neighbors then by all means do it. However see (2) again.