Friday, August 30, 2013

The Endowment Effect

Have you ever noticed that people value their things more than they value similar things that belong to someone else? Did it ever happen to you to be so proud of something you did that you can't understand why you're not getting a Nobel Prize for it - even though it was just another iPhone app? Well, this the Endowment Effect put into practice and this is what it does: it makes you value your stuff much more than it's really worth. And it has a direct impact on Project Management too.



What is the Endowment Effect

An accurate definition can be found in Wikipedia:
The Endowment Effect is a person's willingness to accept compensation for a good is greater than their willingness to pay for it once their property right to it has been established.
This is another concept of behavioral economics and in practice it's just a cross cultural bias that makes you value your stuff more than what it's worth. And once again, it's one of our irrational behaviors and you can find a few more articles on it here. This is just another bias, that is, a tendency that we have to somehow distort the way we see and feel things.
But it's no rocket science, in fact we have this knowledge embedded in the Portuguese culture for a long time. Just consider the Portuguese saying "O olho do dono engorda o cavalo" (meaning A horse looks fatter on his owner eyes). It just expresses just this feeling that we all have that our stuff is worth more than similar stuff from other people.

Examples

If you're a parent you probably value your sons and daughters much more than any other kid, right? Like it or not, the truth is they're worth exactly the same... That's the Endowment Effect working.
I have a friend that makes the best Lime Pie in the world, or so he says. If you ask me, it's a good Lime Pie but I've had better... but he doesn't agree with me.
If you take wine as an example you'll find that any wine producer you meet has a problem understanding why his wine isn't considered the best wine in the world year after year. And you have this problem with many other products.
30 days money back guarantee is yet another example: why would someone let you use something for 30 days and give you back the money afterwards in case you're not satisfied and keep a used product? Because once you start using that product you add value to it and in the end you won't be able to return it just for the money you paid for it.

Related bias

The IKEA Effect, if you've read about it, builds on this Endowment Effect. The mains difference is the IKEA Effect is about adding value to stuff where put your effort into while in the Endowment Effect you just need to own the stuff to value it more than it's worth.
Actually, I invite you to take a look at Wikipedia's list of cognitive biases you'll easily conclude that:

  • there are loads of them
  • a lot of them are related
It's a wonder how can we humans keep in touch with reality, isn't it?

What about Project Management?

In a Project Management perspective, we can easily take advantage of this. Just think about this: Why is it that in some projects you hear a lot of stakeholders talk about it as "my project"? The fact is that in some projects stakeholders can consider it as theirs, and if they do, well, they must value it more because of this Endowment Effect, right? And this can happen even with minor (at the lack of a better word) stakeholders - not the client, sponsor, project manager or a team member. Have you ever heard a supplier talking about his project and when you ask about it you find out that it's just some project where he supplied notebooks, cement or something?
Now the tricky part is: how do you make someone feel like they own a project? It can be pretty easy to make someone feel involved (thus taking advantage of the IKEA Effect. I'd like to give you a definitive answer on this but I'm really sorry I don't have one. What I can tell you is that the project is a success any way you look at it when you get to a point where people feel like they own it. Just picture this project where a bunch of kids were working at making their move from the 4th to the 5th grade smoother (a lot of changes going on: different school, a teacher for each subject and so on). When they ended the project, they came to a point where they said: we are in charge of this project!
Regardless of OTOBOS (On Time, On Budget and On Schedule) or any other way of capturing project success, can you imagine any possible way that such a project is not considered a success? Who cares if it was on budget or not, right?
It's my Project! It's my job! I did it! Each time your hear a stakeholder say this you know you're on the right path.

Not all good

Of course this is not all good. We're talking about feeling like there's extra value to things that actually don't have any extra value, right? We're talking about getting away from reality. So it can't all be good.
Have you ever managed a project where you were having so much fun that when it was canceled it you felt miserable? Even though it was cancelled because there was no more need for it? I know I did.

Conclusion

Projects are made with people and people are irrational beings. We have a lot of ways of distorting reality and the Endowment Effect is just one of them that you should consider. As in most things, there is good and bad about it. You should recognize this bias first so you can either take advantage or protect your project from it, according to the case.

Images from http://www.funnyjunk.com/


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