Journal of Economic Psychology 27 (2006) 589–597 www.elsevier.com/locate/joep

The role of emotions in the endowment eVect Chien-Huang Lin a, Shih-Chieh Chuang b,¤, Danny T. Kao a, Chaang-Yung Kung b b

a Department of Business Administration, National Central University, Chung Li, Taiwan Department of Business Administration, Chao-yang University of Technology, 168, Gifeng E. Road, Wufeng, Taichung County, Taiwan

Received 29 July 2004; received in revised form 7 September 2005; accepted 21 October 2005 Available online 27 December 2005

Abstract This paper argues that the endowment eVect – the tendency for minimum selling price to exceed maximum buying price for a particular object – might be minimized when a negative emotion is induced. The Wndings from two experiments on 400 participants support this hypothesis: the endowment eVect only occurs when participants are induced to feel happy, and is absent when people are induced to feel sadness. Thus, the importance of emotional states is highlighted. © 2005 Elsevier B.V. All rights reserved. JEL classiWcation: M31 PsycINFO classiWcation: 3920 Keywords: Endowment eVect; Emotion; Value; Willingness to accept (WTA); Willingness to pay (WTP)

1. Introduction Economists are often concerned about the estimated “value” of various goods or services, and they attempt to derive estimations regarding said value. The assessment of objective values is typically derived from two concepts: “WTA and WTP.” “People are required *

Corresponding author. Tel.: +886 5 5223843; fax: +886 4 2374233. E-mail address: [email protected] (S.-C. Chuang).

0167-4870/$ - see front matter © 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.joep.2005.10.001

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to estimate the least price they are willing to accept to sell (WTA), and the ceiling price they are willing to pay (WTP)”. Most economists argue that the gap between WTA and WTP should converge for most commodities. However, experimental research shows that the values of WTA and WTP might be remarkably diverse, even for an identical object. SpeciWcally, research on the valuation of objects by laboratory experiments indicated that people set a higher WTA on an owned object than WTP for a not-owned-yet object (Kahneman, Knetsch, & Thaler, 1990; Knetsch & Sinden, 1984; Thaler, 1980). The gap between the buying price and the selling price of an object is dependant on the status of ownership, and is termed “the endowment eVect” (Kahneman et al., 1990; Thaler, 1980). The endowment eVect has been highlighted in studies employing diverse methodologies, including laboratory experiments (Kahneman et al., 1990), economics style market experiments (Franciosi, Kujal, Michelitsch, Smith, & Deng, 1996), and Weld studies (e.g., Johnson, Hershey, Meszaros, & Kunreuther, 1993). Previous research has shown that emotional states are inXuenced directly by subjective valuation for an object (Forgas & Ciarrochi, 2001). This research also asserts that emotional states may moderate the endowment eVect, and two experiments prove the endowment eVect only occurs with positive emotions – not with negative emotions. 2. Literature review and building hypotheses 2.1. The endowment eVect review Research on endowment eVect (Franciosi et al., 1996; Johnson et al., 1993; Kahneman et al., 1990; Strahilevitz & Loewenstein, 1998) has shown that people tend to demand a higher selling price for a commodity that they own than they would be willing to pay if they were looking to acquire it as a buyer. The endowment eVect also appears to be moderated by regulatory focus: participants were reluctant to exchange an endowed object when they focused on preventative measures, but not when they focused on self-promoting goals (Liberman, Idson, Camacho, & Higgins, 1999). Mandel (2002) found that the endowment eVect was observed when participants imagined another individual wanting to buy from or sell to them, but not when they imagined wanting to by from or sell to another individual. Recent research has focused on emphasizing the importance of aVective response (i.e., positive and negative feeling evaluations). Loewenstein and IssacharoV (1994) found that the manner in which people obtained particular objects aVected their valuation of the objects. SpeciWcally, individuals who received goods based on exemplary performance valued the goods more than if they received the goods by chance or based on poor performance. Loewenstein and IssacharoV suggested that aVective roles create positive associations with the items in question. SpeciWcally, much research in decision making has emphasized the importance of aVective response in judgment and choice (Damasio, 1994; Loewenstein, 1996; Peter & Slovic, 2000; Slovic, Finucane, Peters, & MacGregor, 2002). Given this data, the following will focus on exploring the relationship between emotional states and the endowment eVect. 2.2. Building hypotheses Reference point dependence and loss aversion are key roles in the endowment eVect (Kahneman & Tversky, 1979). In this article, reference point dependence and loss aversion

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are applied, and the adaptation-level theory (see also Hoch & Loewenstein, 1991) has been added into our theoretical framework to examine the control of emotional states on the endowment eVect. Adaptation, in the context of object ownership, is the tendency for people to become psychologically accustomed to changes in their material situation. Adaptation has two main consequences: (1) a diminution in one’s hedonic response to the change and (2) increased sensitivity to departures from the new state of aVairs (Helson, 1947). For example, one typically appreciates the comfort of a new car, but only for a limited period. If the new car breaks, forcing one to go back to the original one, the old car may seem intolerably slow (see in Strahilevitz & Loewenstein, 1998). Loss aversion refers to the prevalent trend that people tend to place greater weight on losses than on gains of equal magnitude (Kahneman & Tversky, 1979). Namely, loss aversion occurs when losses are evaluated more than gains, which implies that people desire a higher WTA than WTP. We adopt Strahilevitz and Loewenstein’s (1998) model – that applied the value function integrated in Kahneman and Tversky’s prospect theory (1979) to illustrate how adaptation and loss aversion can account for the endowment eVect to build our hypothesis. In Fig. 1, the value function represents the relationship between the cognitive status of ownership and the value as a function of a discrete outcome level (no ownership and partial adapted ownership) relative to some reference point. The reference point is identiWed when the value function is assumed steeper for negative departure (losses) than for positive departure (gains) (Bell, 1985; Kahneman & Tversky, 1979). Consider an object that would yield a value of V1 if it were owned. The no-adaptation value function, represented by the lighter line that goes through the origin, is drawn such that owning the good yields V1, and non-owning it yields zero. This no-adaptation function depicts the case of the individual who would derive value from owning an object, but who has not adapted to the notion of possessing it. With no adaptation, the steeply sloped negative region of the value function is not relevant. The value function’s usefulness lies in showing what happens when the people partially adapt to possession of the object. The partial adaptation case is depicted by the bold-line

No adaptation

Value

Partial adaptation V1

Ownership No adaptation

Partial

Full adaptation

V2

Fig. 1. The value function for no adaptation, partial adaptation, and full adaptation (see in Strahilevitz & Loewenstein, 1998).

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value function. As compared with the no-adaptation situation, the zero point of the value function has moved to the right, signifying that the individual is now in an intermediate state between “no” and “full” adaptation ownership of the object. Failing to possess the object is no longer aVectively neutral, but instead results in deprivation (the distance between the origin and where the bold-line value function I intersect the y-axis). The endowment eVect is explained by the fact that due to loss aversion (V1), the value of possessing an object for someone who has not possessed it yet, is smaller than those who have possessed it and are adapted to such possession but are unwilling to lose it to someone, V2. Therefore, Fig. 1 illustrates that an increase in adaptation will move the reference point and change V. The magnitude of value depends on how strong the motivation is to adapt to possession of an object. As to the ownership with no adaptation, it is homogeneous to neutral with no ownership. According to the emotion congruency model (ECM), the evaluation of objects and events is negatively inXuenced by bad emotions and positively inXuenced by positive emotions (Iness-Ker & Niedenthal, 2002; Rusting, 1998, 1999). Bower (1981) applied a network theory of memory encoding to explain this phenomenon, and suggested that each speciWc emotion corresponds to a speciWc memory node comprised of multiple dimensions of emotions. The emotions stored in nodes can be activated by various stimuli, which may ignite the chain reaction to activate other connected memory nodes. Therefore, we assume that if the object is accompanied with negative emotions, people will recall various negative experiences and project them onto the object; and in turn are willing to accept the loss of the possible beneWts just as if they had never possessed it (refer to V1). In contrast, if the object is accompanied with positive emotions, people will recall various pleasant events and project them onto the object, and they are willing to partially (V2) or fully adapt the ownership; they are unwilling to accept giving up the object because they are focused on the belief that it will cause a loss of beneWts. Our hypothesis is that the endowment eVect is smaller in negative than positive emotional states. 3. Study 1 3.1. Method One hundred and sixty undergraduate students (91 females and 69 males) participated in this experiment as part of the course requirement in marketing management class. They were randomly and equally assigned to one of four diVerent experimental conditions. At the beginning of the experiment, half of the students were individually endowed with a mug, and the rest received none. Then, participants were induced to yield either happy (positive) emotions, or sad (negative) emotions. The emotional induction that we intend to manipulate on emotions and memory is adapted from the processes used by Smith and Ellswoth (1985), and the same procedure is followed for both pleasant and unpleasant emotional experiences. Initially in the emotional induction procedure, participants were asked to recall some past experiences or events, which activated a particular emotion; then, six general questions were asked about that particular experience. Immediately after the emotion was induced, participants were asked, “How happy do you feel right now?” to rate their current emotions. The scales ranged from “1,” being “extremely unhappy,” to “7,” being ”extremely happy”. Then, all of the participants were

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asked to look at the mugs. They were told to evaluate how much they would be willing to accept for selling an owned mug, or how much they would be willing to pay for a mug that they did not own. After estimating the price of a mug, the participants’ current emotions were subsequently rated with the same scales. This experiment lasted approximately 30 min. 4. Results and discussion 4.1. Manipulation checks of emotions The responses indicated that the two self-rating emotion-scales are highly correlated (r D 0.81). Participants in positive emotional condition (Mpositive D 4.5, SD D 0.89) felt happier than in negative emotional condition (Mnegative D 3.9, SD D 1.3) immediately after an emotion was induced (158) D 2.39, p < 0.05. At the end of the experiment, participants who were manipulated by the positive emotions (Mpositive D 4.27, SD D 0.91) were happier than those who were manipulated by the negative emotions (Mnegative D 3.95, SD D 0.95), t(158) D 2.01, p < 0.05. These results conWrmed the eVectiveness of emotional manipulation. 4.2. EVect of emotions on value assessment Our analysis focused on the examining the eVect of elicited emotions on the perceived value for a mug. The statistics F (1, 156) D 56.89, p < 0.0001 showed the main signiWcant eVects of ownership: people who own a mug perceive a signiWcantly higher price for the mug ($2.59) than the non-owners do ($2.07). This Wnding is consistent with prior evidence for the endowment eVect (Thaler, 1980). More importantly, a signiWcant interaction was found between the endowment eVect and the emotions, F(1, 156) D 39.96, p < 0.0001. Additionally, the price proved to be an irrelevant factor between “those who owned a mug but wanted to sell it” ($1.8, SD D 0.31), and “those who did not own a mug but wanted to buy one” ($1.72, SD D 0.21) in the negative emotional condition, t(78) D 1.38, p > 0.1. However, a signiWcantly higher price for a mug was perceived by the owners ($3.35, SD D 0.67) than by the non-owners ($2.54, SD D 0.36) in the positive emotional condition, t(78) D 7.76, p < 0.0001. These statistics strongly support our assumption that the endowment eVect in negative emotions is smaller than in positive emotions. Experiment 1 supported our hypothesis that emotions can inXuence the level of perceived value and the degree to which the endowment eVect exists. However, the Hawthorne experiment argues that the value is mainly judged by the participants’ involuntary reactions to the stimuli on the spot, instead of by objective evaluations. Similarly, participants induced by recalling past events may suVer from issues of self-esteem, and may be forced to make uncomfortable and reluctant decisions, which in turn aVect the perceived value of an object. In this context, the manipulated value may be judged by means of the cognitive and motivational reactions of the recalled events, rather than simply by the induced emotional states. Therefore, it is important to use diverse emotional inductions to verify that the emotion is a critically independent variable involved in the endowment eVect. That is why emotional induction procedures need to be conducted repeatedly. Experiment 2 aimed to increase the range of emotional inductions by using methods diVerent from those used in Experiment 1.

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5. Study 2 Based upon the success of Experiment 1, Experiment 2 sought to conWrm and extend these Wndings. In order to prove that the endowment eVect is moderated by emotions rather than by other variables, we use another emotional induction method in Experiment 2. Some audiovisual emotional induction methods were employed successfully to elicit manipulated emotions in experiments by Adaval (2003) and Forgas and Ciarrochi (2001), and we followed those processes. 5.1. Method Two hundred and forty participants (131 females and 109 males) were involved in Experiment 2 as part of the course requirement. They were randomly and equally assigned to one of four grids: (ownership: owners vs. non-owners) (emotions: positive vs. negative). Initially, half of the participants were endowed a mug and half were not. Then, they watched a 25-min Wlm to induce the happy or sad emotional states. After emotions were induced as in Experiment 1, participants were asked to assess their current emotional states by the question “how happy do you feel right now?” The scales were described with end point “1,” being “extremely unhappy,” to “7,” being “extremely happy”. Subsequently, they were asked to express how much they would be willing to sell the mug for that they owned, and how much money they would be willing to buy a mug for that they did not own. After determining the price of that mug, all participants completed emotions self-rating scales again and left the laboratory room. This experiment took approximately 30 min. 5.2. Emotional manipulation In Experiment 2, we used audiovisual emotional induction to manipulate emotions, which was diVerent from Experiment 1. Initially, the participants were told that we were examining the impacts of various stimuli that might be used for future studies. The experimenter then showed the participants one of two Wlm clips. In the positive emotional condition, a segment from the feature Wlm Pretty Woman was shown to induce a happy emotion (n D 120). The previous studies had shown that this Wlm reliably induced happy emotions (Adaval, 2003). In the negative condition, a clip from the movie Ordinary People was shown (n D 120) to induce a sad emotion. Previous studies had shown that it induced sad feelings (Adaval, 2003). Participants were instructed to watch the videos as if they were watching videos at home and allow them to be fully involved in the Wlm. Film as an emotion manipulator helps exclude potential motivational and cognitive preoccupations in memory (the so-called autobiographical task) in Experiment 1. 5.3. Manipulation checks of emotions The emotions of participants who watched the happy Wlm were rated signiWcantly more positive than those of the people who watched the sad Wlm. This conclusion was the same, whether it was instantly measured after watching the emotional induction Wlms, t(238) D 13.61, p < 0.001, Mpositive D 4.82, Mnegative D 3.41, or at the end of the experiment, t(238) D 5.98, p < 0.001, Mpositive D 4.39, Mnegative D 3.67. These statistics conWrmed the eVectiveness of the emotional manipulation.

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5.4. EVect of emotions on value assessment Our analyses focus on examination the eVect of elicited emotions on the perceived value for a mug. Results showed a main signiWcant eVect on the owners, F(1, 236) D 41.52, p < 0.0001, which implied that people perceived a signiWcantly higher price for the owned mug ($2.5) than the not-owned-yet mug ($2.07). This Wnding is consistent with Experiment 1 and prior evidence for the endowment eVect. Moreover, as we expected, an obvious correlation was found between the endowment eVect and the emotions, F(1, 236) D 23.75, p < 0.0001. More importantly, the price proved to be an irrelevant factor between “those who owned a mug but wanted to sell it ($2.03, SD D 0.47)” and “those who did not own but wanted to buy one ($1.93, SD D 0.38)” in the negative emotions, t(118) D 1.93, p > 0.1. However, a signiWcantly higher price was perceived by the mug owners ($2.96, SD D 0.5.98) than the non-owners ($2.21, SD D 0.55) in the positive emotions, t(118) D 7.03, p < 0.0001. These results support the hypothesis of this paper. These statistics provide clear support for our hypothesis that the degree of the endowment eVect with positive emotions is greater than with negative emotions. People who own an object under negative emotions and people who do not own the object project similar estimated values for the object (namely, the endowment eVect does not occur when the negative emotions are elicited). This suggests that negative emotions may reduce the perceived value of an owned object, and pinpoints the potential critical role for emotions in moderating the endowment eVect. 6. General discussion and conclusion Typically, people as sellers tend to pursue a higher selling price for an owned object than they would as a buyer determining a buying price (e.g., Kahneman et al., 1990). However, as demonstrated in this article with both experiments, a transient emotional state can aVect the magnitude of the endowment eVect. A higher price is estimated only when people are induced into positive emotional states rather than negative emotional states. Thus, the emotions can be classiWed as a moderator in the endowment eVect. Our research successfully identiWed the tendency of the endowment eVect to depend on how happy people felt at that time. SpeciWcally, while experiencing positive emotions, people seem to be more willing to possess an object at hand and adapt to full ownership, and in turn will subjectively overestimate the value of an object. Accordingly, sales reps often attempt to induce good emotions to potential customers by manipulating music, lighting, ambience and so forth. However, negative emotions could produce a marked undervaluation of one’s material achievements and could even accentuate experience of depression and dysphoria (Ottaviani & Beck, 1988). Potential customers with negative experiences tend to underestimate the value of the new products for a newly launched product. Therefore, marketing practitioners should avoid triggering the negative emotions of customers, in order to prevent underestimation of the value of the new product. Business consultants and managers should deWnitely be interested in both advantages and disadvantages of the emotional eVect. Previous studies have reported mixed and contradictory Wndings for the behavioral consequences of diVerent negative moods (Luomala & Laaksonen, 2000; Raghunathan & Pham, 1999), which suggests that their eVect is complex. For example, Lerner, Small, and Loewenstein (2004) found that two negative emotions, sadness and disgust, had opposing

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endowment eVects: disgust enhance the endowment eVect, whereas sadness decreased it. Our results, in contrast, show the endowment eVect is diVerently aVected by happiness and sadness. Therefore, our results are restricted to the happiness of positive emotions and the sadness of negative emotions. References Adaval, R. (2003). How good gets better and bad gets worse: Understanding the impact of aVect on evaluations of known brands. Journal of Consumer Research, 30, 352–367. Bell, D. E. (1985). Disappointment in decision making under uncertainty. Operations Research, 33, 1–27. Bower, G. H. (1981). Mood and memory. American Psychologist, 36, 129–148. Damasio, A. R. (1994). Descartes’ error: Emotion, reason, and the human brain. New York: Avon. Forgas, J. P., & Ciarrochi, J. (2001). On being happy and possessive: The interactive eVects of mood and personality on consumer judgments. Psychology and Marketing, 18, 239–260. Franciosi, R., Kujal, P., Michelitsch, R., Smith, V., & Deng, G. (1996). Experimental test of the endowment eVect. Journal of Economic Behavior and Organization, 30, 215–226. Helson, H. (1947). Adaptation-level as frame of reference for prediction of psychological data. American Journal of Psychology, 60, 1–29. Hoch, S., & Loewenstein, G. (1991). Time-inconsistent preference and consumer self-control. Journal of Consumer Research, 17, 492–507. Iness-Ker, A., & Niedenthal, P. M. (2002). Emotion concepts and emotional states in social judgment and categorization. Journal of Personality and Social Psychology, 83, 804–816. Johnson, E. J., Hershey, J., Meszaros, J., & Kunreuther, H. (1993). Framing, probability distortions, and insurance decisions. Journal of Risk and Uncertainty, 7, 35–51. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47, 263– 291. Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). Experimental tests of the endowment eVect and the coase theorem. Journal of Political Economy, 98, 1325–1348. Knetsch, J., & Sinden, J. A. (1984). Willingness to pay and compensation demanded: Experimental evidence of an unexpected disparity in measures of value. The Quarterly Journal of Economics, 99, 507–521. Lerner, J. S., Small, D. A., & Loewenstein, G. (2004). Heart strings and purse strings carryover eVects of emotions on economic decisions. Psychological Science, 15, 337–341. Liberman, N., Idson, L. C., Camacho, C. J., & Higgins, E. T. (1999). Promotion and prevention choices between stability and change. Journal of Personality and Social Psychology, 77, 1135–1145. Loewenstein, G., & IssacharoV, S. (1994). Source dependence in the valuation of objects. Journal of Behavioral Decision Making, 7, 157–168. Loewenstein, G. F. (1996). Out of control: Visceral inXuences on behavior. Organizational Behavior and Human Decision Processes, 65, 272–292. Luomala, H. T., & Laaksonen, M. (2000). Contributions from mood research. Psychology and Marketing, 17, 195– 233. Mandel, D. R. (2002). Beyond mere ownership: Transaction demand as a moderator of the endowment eVect. Organizational Behavior and Human Decision Processes, 88, 737–747. Ottaviani, R., & Beck, A. T. (1988). Cognitive theory of depression. In K. Fiedler & J. P. Forgas (Eds.), AVect, cognition and social behavior (pp. 209–218). Gottingen: Hogrefe. Peter, E., & Slovic, P. (2000). The springs of action: AVective and analytical information processing in choice. Personality and Social Psychology Bulletin, 26, 1465–1475. Raghunathan, R., & Pham, M. T. (1999). All negative moods are not equal: Motivational inXuences of anxiety and sadness on decision making. Organizational Behavior and Human Decision Processes, 79, 56–77. Rusting, C. L. (1998). Personality, mood, and cognitive processing of emotional information: Three conceptual frameworks. Psychological Bulletin, 124, 165–196. Rusting, C. L. (1999). Interactive eVects of personality and mood on emotion-congruent memory and judgment. Journal of Personality and Social Psychology, 77, 1073–1086. Slovic, P., Finucane, M. L., Peters, E., & MacGregor, D. G. (2002). The aVect heuristic. In T. Gilovich, D. GriYn, & D. Kahneman (Eds.), Heuristics and biases: The psychology of intuitive judgment (pp. 397–420). New York: Cambridge University Press.

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Title The role of emotions in the endowment effect

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