The endowment effect and trade proposals

The endowment effect states that people place a higher value on items they already own as opposed to items they want but do not own. Victor Wang touched upon this concept briefly in this article, and I want to elaborate on it, since I think it is a bias that occurs frequently, yet is one that is frequently overlooked. This is somewhat similar to the prospect theory concept, loss aversion, proposed by Amos Tversky and Daniel Kahneman. Allow me to present a study to help explain this phenomenon in greater detail.

Ziv Carmon and Dan Ariely conducted a field survey amongst randomly picked students of Duke University. The students were asked for the highest price they would pay for a ticket to the tournament, assuming they didn’t already have a ticket (buying price). A second question asked for the lowest price they would agree to sell a ticket for, assuming they owned one (selling price). In addition to these questions, two factors were manipulated across the group of students, and were incorporated into the initial scenario. The first factor was the original face value of the ticket ($10, $30 or $100) while the second factor was the importance of the game (a regular season game or the NCAA championship game).

Carmon and Ariely found that the selling price of a ticket was considerably higher than the buying price. On average, the lowest price at which owners would sell a ticket was $2,411 while the highest price of those seeking to buy a ticket was $166, a difference of $2,245. The results also showed that the significance of a game had a greater impact on selling price while the original face value of a ticket had greater impact on buying price.

These findings suggest that buying price corresponds more closely to variables relating to the expenditure while selling price corresponds more closely to factors relating to the attitude toward surrendering a ticket (e.g. the significance of the game). Students also gave explanations for their responses, and the most common explanations for the selling price scenario were “this is a once in a lifetime opportunity” and “I will never forgive myself if I end up missing a great game”. On the other hand, the most common explanation for the buying price scenario was “there are lots of other things I could do with my money”. These comments further support the idea that buyers and sellers focus on different aspects of an exchange. To reiterate, buyers tend to focus more on the money they would pay for an item whereas sellers concentrate on the act of giving up the item.

In the aforementioned article linked above, Victor mentions how the endowment effect can often delay or even prevent a trade from occurring. Without a doubt this effect can help explain various situations. Realize that in sending a trade proposal, you are effectively acting as the buyer and the opposing manager is acting as the seller. And unless your trade proposal is one that your opposing manager had already been targeting, I suspect that his initial reaction would be that of reluctance. According to the findings of Carmon and Ariely, this makes perfect sense as the owner of an item values his possessions at a higher price since they concentrate more on the loss of the item. So the manager, at least at first glance, will tend to overvalue those players you ask for because he has instinctively inflated the value of those players simply because he owns them, and he doesn’t really want to give them up. The flip-side of this, of course, is that your proposal might be garbage to begin with because, according to Carmon and Ariely, as a buyer, you are concentrating on the amount you would have to pay for the item. So as a result, you may be offering the absolute bare-minimum (not that there’s anything horribly wrong with that).

I think awareness of this concept can be very useful, not just in terms of assigning a proper value to your own players, but in possibly manipulating your opponent into making mistakes. During trade talks, you can phrase your messages in a manner that frames your proposal in terms of what your opponent will gain rather than what he will lose. Show the opposing manager what stats, categories or points he will be gaining as opposed to losing. In addition to this, focus on the notion that some of his stats will be replaced by whomever his replacement player is. Remember, as a seller, the opposing manager is already overvaluing his players. But in order to get a trade done without overpaying, you need to help release him of this instinctive attachment and awareness of the endowment effect, combined with carefully chosen words and numbers, can help immensely.


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Michael Lerra
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Michael Lerra
I think there’s another factor at work here as well.  If we’re heading into a draft, and I think Ryan Braun is going to hit 45 HR this year, and you think he’s going to hit 35 HR, I’m much more likely to end up with him on my team.  I value him higher, so I’m more likely to pick him early or pay more in an auction. So when you offer me a trade for him, you’re trading for an expected 35 HR, whereas I’m looking at giving up 45 HR.  I think this is a bigger effect than… Read more »
Donald Trump
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Donald Trump

This is sound theory, but cmon now.  Nobody likes it when someone else says “Here is why this trade proposal makes so much sense for you…”

Ed S.
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Ed S.

Adding to Michael’s point is the Gambler’s fallacy. If I think Braun will hit 45 HR but he’s on pace for 35, I might suspect that he’s due for a home run tear and value him even higher, whereas trade partners probably think he’s worth far less.

Of course, knowing this you can turn it around to make people think you value certain players in certain ways smile

bsball
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bsball
Thanks for the article, Marco.  The endowment effect survey results you show are interesting but I was left wondering how much of that depends on who the buyers and sellers are.  For example, I can imagine that if CEOs were asked instead of students that they would be willing to pay far more for a ticket they did not have and that they would be willing to accept far less to sell a ticket. Also, the students’ perceived value of the ticket they have is likely strongly influenced by the price that some people actually pay (to scalpers) for similar… Read more »
Mad Bum
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Mad Bum

I generally agree with this concept. In my trade proposals, I’ll often state that my potential trade partner will gain in certain categories, aka “you’ll get homers, rbis, era and saves, while only giving up stolen bases and batting average. The other categories are a wash.” Now, the guy doesn’t have to do the deal, and of course he can disagree, but it creates a lot more goodwill than not saying anything or sounding like a used car salesman.

Also, it, at least, gives the impression that you’ve thought about the trade beyond the names involved.

Mad Bum
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Mad Bum

Also, fantasy owners tend to overvalue their own players because, in more cases than not, they drafted those guys. They follow those guys everyday. They root for those guys. They have more of an emotional investment in them. Thus, it’s harder to give up a guy you’ve had on your team for awhile.

Ed S.
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Ed S.

@Mad Burn: Well, you don’t want to come across as too calculating either. You want to understand the guy you’re trading with. You can offer less and “settle” for what you want. You can try to get them to say what it is they want then get them to think they can get what they want by agreeing to your terms. All sorts of negotiating theory.

But Marco’s key point is still poignant; by understanding the endowment effect you can better understand how you and your opponent/trade partner value players. That knowledge will help you craft a winning deal.

sean
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sean
This entire article can be summed up in one sentence: people tend to overvalue what they have, forgetting that those things are really only worth what someone else is willing and able to pay for them. In fantasy baseball, this boils down to things like me hanging onto Tulo on my bench last year despite the injury and the awful start because I didn’t want to give up on my draft pick, my hunch, and my expectations. Turns out, if I cut my losses and went to the waiver wire immediately, I could’ve netted several top producers at his position.… Read more »
Marco Fujimoto
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Marco Fujimoto
First off, thanks guys for reading and leaving comments. And sorry about the delay in response. I am in academia, and well, we are habitually late to everything. I also haven’t been feeling well, but hopefully my response will be coherent… To Michael, Ed S. Mad Bum and Sean, You guys are absolutely correct in that people tend to value items differently. That idea extends far past fantasy baseball and applies to anything in life, really. I think its important to understand that these differences do occur, and I also think its interesting to go beyond that, to seek further… Read more »
Ben
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Ben
Marco,   In the same book that Ariely presents the Duke basketball ticket experiment (Predictably Irrational, to be specific), he also talks about a different experiment with … I think … serious ramifications in fantasy trading.   I won’t go into all the specifics, but a group of students was presented with three pictures and asked which of the three they would be most interested in dating.  (Yes, it’s shallow to decide these things just on a picture.  Work with me for a minute.)  The three pictures were of an attractive person (call them A), another attractive person (B), and… Read more »
Derek
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Derek
There is much less evidence that endowment effects matter in contexts where people are given the task of buying, selling, and re-selling as a job.  People who suffer from such a bias or any other behavioral glitch that leads to poor buying and selling decisions will not last long as a commodities trader, wholesaler, or a sports executive. Baseball GMs are not a random sample of college graduates.  Many people get light headed at the sight of blood.  However, we do not worry about this being a problem for surgeons.  If an owner hires and keeps a GM who systematically… Read more »
Marco Fujimoto
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Marco Fujimoto
Ben, I believe you are referring to the asymmetric dominance effect, which basically states (as you illustrated) that when a third option (C) is introduced into a field of two already existing options (A and B), and C is dominated by A but not by B, then it becomes more likely that the A will be selected out of the three-item group. I haven’t read the book, and this could be outdated by more recent research, but I believe there are three explanations for this effect: -the addition of option C changes the subjective values that people place on options… Read more »
John Dent
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John Dent
The Endowment Effect is an important one for fantasy baseball. But where I always feel it exerts an influence is with draft strategy. Often, I end up with very similar rosters for all of the teams that I draft and I attribute this, in part, to the Endowment Effect. Let’s say that I value 3 outfielders: Tori Hunter Jermaine Dye Bobby Abreu as similar in terms of value prior to the draft. I then draft Hunter. Because I now own him my perception of what his value is has increased. I’m therefore more likely to draft him in subsequent leagues.… Read more »
http://www.stipendiatenkooperation.de
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http://www.stipendiatenkooperation.de
I am here for my Earthling Brothers and Sisters today as the time has come for transition and transformation to take place on so many levels of themselves and their home planet. There is nothing less on our plate right now than establishing peace and harmony to a world of deceit and anger. The Earth changes you are currently experiencing are helping you to prepare for the future. Obatala always wears white clothing and is often depicted as an old man. His G-R parallel is Zeus/ Jupiter Optimo et Bono Who destroyed the Titans and established the reign of the… Read more »
songjihyo
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songjihyo

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