The Endowment Effect: Unique Predictions from a Cognitive

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The Endowment Effect: Unique Predictions From a Cognitive Elaboration Account Christopher Cannon, University of Hawaii, USA Derek Rucker, Northwestern University, USA David Gal, University of Illinois at Chicago, USA

The endowment effect is a widely documented phenomenon whereby sellers demand a higher price for the same good relative to buyers. This work proposes a novel account for the endowment effect based on cognitive elaboration. This cognitive elaboration account provides new predictions about when endowment increases versus decreases consumers’ evaluations.

[to cite]: Christopher Cannon, Derek Rucker, and David Gal (2020) ,"The Endowment Effect: Unique Predictions From a Cognitive Elaboration Account", in NA - Advances in Consumer Research Volume 48, eds. Jennifer Argo, Tina M. Lowrey, and Hope Jensen Schau, Duluth, MN : Association for Consumer Research, Pages: 254-255.

[url]: http://www.acrwebsite.org/volumes/2656006/volumes/v48/NA-48

[copyright notice]: This work is copyrighted by The Association for Consumer Research. For permission to copy or use this work in whole or in part, please contact the Copyright Clearance Center at http://www.copyright.com/. The Endowment Effect: Unique Predictions from a Cognitive Elaboration Account Christopher Cannon, University of Hawaii, USA Derek D. Rucker, Northwestern University, USA David Gal, University of Illinois at Chicago, USA

EXTENDED ABSTRACT each experiment, we aimed to collect 300 participants to ensure a The endowment effect is a phenomenon in which sellers have sufficiently large cell sizes. For the endowment conditions, buyers a higher valuation of their goods than buyers (Kahneman, Knetsch, were asked to imagine that they are thinking about purchasing the and Thaler 1990, 1991). The term “endowment effect” was origi- product. Sellers were asked to imagine that they own the product and nally coined by Richard Thaler as a manifestation of prospect theory take it home with them. In the weak (vs. strong) argument condition, (Kahneman and Tversky 1979; Thaler 1980). The endowment effect participants were given a list of features in favor of the product, but has attracted significant scientific attention, with a multitude of dis- they were not particularly convincing (vs. exceptionally convincing). tinct perspectives being offered to explain the endowment effect such In each experiment, we measured WTP/WTA (i.e., measured on a as loss aversion (Thaler 1980), psychological inertia (Gal 2006), psy- sliding scale) and brand attitude (i.e., bad-good, negative-positive, chological ownership (Morewedge et al. 2009), and reference price and unfavorable-favorable). In experiments 2-4, we also measured theory (Weaver and Frederick 2012). favorability of thoughts generated about the product by having in- The present work introduces an additional, potentially power- dependent judges code the valence and relevance of the participants’ ful, yet entirely unexplored, explanation for the endowment effect: listed thoughts. cognitive elaboration. According to the Elaboration Likelihood Mod- Across four experiments (N = 1200), we demonstrate that sell- el (ELM), attitudes can be formed and changed through two routes ers (vs. buyers) show decreased cognitive elaboration when forming (Petty and Cacioppo 1986). Under high cognitive elaboration, people product evaluations and determining reservation prices; see table 1. engage in the central route to processing; they carefully scrutinize Moreover, we demonstrate that sellers (vs. buyers) show less sensi- the arguments presented in support of a message or product. Under tivity to argument strength. Therefore, when products were presented low cognitive elaboration, people engage in the peripheral route to with weak arguments, selling price was significantly greater than processing; they rely on simple heuristics and cues as opposed to the buying price. However, when products were presented with strong persuasiveness of the arguments. arguments, buying price was equal to selling price (experiments 1, We propose that buyers engage in more cognitive elaboration 3-4) and sometimes even greater than selling price (experiment 2). than sellers. Although neither proposed nor tested, a review of the Moreover, as further evidence for a cognitive elaboration perspec- literature provides evidence consistent with such a possibility. First, tive, favorability of message-related thoughts mediated our effects. Petty and colleagues argue that the intention to purchase a product Buyers (vs. sellers) generated fewer favorable message-related elicits high involvement and greater cognitive elaboration, whereas thoughts when the product was framed in terms of weak arguments. not needing to purchase a product leads to lower involvement and However, buyers (vs. sellers) had more favorable message-related lower cognitive elaboration (Petty, Cacioppo, and Schumann 1983). thoughts when the product was framed in terms of strong arguments. Building on this perspective, one might expect that buyers—who In contrast to prior explanations of the endowment effect, such might purchase the product—would be more involved than sellers— as loss aversion, psychological ownership, and psychological iner- who already own the product. Second, as additional evidence, buyers tia, a cognitive elaboration perspective can offer new insights into (vs. sellers) appear to be more sensitive to the actual value of the when and why the endowment effect is (and is not) observed. Of good manipulated through product descriptions (Weaver and Fred- course, these other accounts still offer insight into the endowment erick 2012). effect; however, the present experiments suggest such accounts are If differences in cognitive elaboration exist between buyers incomplete. and sellers, it follows that differences in participants’ sensitivity to This work also opens up the possibility for future research. the quality of arguments should occur. Specifically, buyers, who First, although we provide evidence that sellers engage in less cogni- are more attentive to the information about a prospective purchase, tive elaboration than buyers, it is still an open question as to what should exhibit a stronger response to whether the arguments in favor peripheral cues sellers rely on to form judgments about products that of a product are weak or strong (see Petty and Cacioppo 1986). In they own. Likely, sellers rely on multiple different cues, such as ref- contrast, sellers, who are less attentive to the product, should be less erence prices (Weaver and Frederick 2012), the price of a similar sensitive to the quality of the arguments. Importantly, a cognitive product one owns (Hsee, Dubé, and Zhang 2008), or misattribution elaboration account allows for novel theoretical predictions rela- of affect (Shu and Peck 2011). Second, although our evidence sug- tive to all prior explanations of the endowment effect. Specifically, gests that buyers unilaterally engage in greater cognitive elabora- when argument quality is weak, the classic endowment should be ob- tion than sellers, there may be cases when the reverse is true. Future served: Selling prices should be higher than buying prices. However, research could examine under which contexts sellers are more in- when argument quality is strong, an elimination and even a reversal volved in determining reservation prices than buyers, such as when of the endowment should occur: Buying prices should be equal to or there is high competition among vendors in the marketplace. Overall, higher than selling prices. we hope this work inspires researchers to apply novel psychologi- We tested a cognitive elaboration account of the endowment ef- cal perspectives to better understand the complexities of buyer-seller fect across four experiments. 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