The possession effect ...
...or for no money in the world!
In an experiment, groups were divided into two halves.
The first group was given a coffee cup, the second group none.
The participants in the first group were asked to set a price for this coffee cup at which it should be sold.
The second group was asked what price they would pay for the coffee cup.
The result: The average asking price of the first group with the cup was 7.12$. In contrast, the second group only wanted to pay an average of 2.87 dollars.
This "possession effect" was scientifically proven by Richard Thaler in 1980.
We know this problem all too well. When we want to sell something, we have an idea of the price; if we were to buy this exact product, we would have a completely different price in mind.
In other words, you could say: Someone who owns an item tends to demand a higher price when selling it than they would be willing to pay to buy it.
This effect is more pronounced for physical goods than for intangible goods.
A lot of emotions or memories play a role here.
The possession effect is often interpreted as the result of an irrational aversion to loss, according to which a loss hurts more than an equal gain.
This effect can be found in many areas:
- In relationships, "Do you have your girlfriend because you love her, or do you love her because you have her?" (Ivo Bischoff)
- In the workplace: an employee and an unemployed person assess the value of a job differently (e.g. linked social structure)
- In marketing: "Ownership creates value"! The customer is involved in the sales process at an early stage, e.g. with a test drive, a trial subscription, etc.
The possession effect also leads to irrational investment behavior in financial investments.
For example, if you physically own gold coins or gold bars and the price of gold is very high at the moment and you also received these coins as a gift from your grandfather. Is it easy for you to sell them, even if you urgently need the money at the moment?
You could also quote the great investor Peter Lynch at this point: Never fall in love with a share. Always keep an open mind!
Which is a little help could be that you should try not to mentally take on "our possessions", e.g. promised bonus payments, repayments etc..
You should also exercise caution when buying physical assets. This could easily create a psychological barrier due to the possession effect. A further aid would be to define a concrete exit strategy despite the purchase, where a certain value/price is set in order to part with the property.
Next episode:
Illusion of results, or good results are not always the result of good decisions.
#psychologyinfinance
#börsenweisheiten #investment mistakes
