Welcome to the Vital Integrities Blog

The Endowment Effect

In the mid-1980s, researchers Daniel Kahneman, Jack Knetsch, and Richard Thaler conducted a series of experiments involving economic decision-making behavior. In their famous "mugs studies," the trio gave random subjects $6 coffee mugs which they could keep or sell in a mock marketplace. Mug owners wanted an average price of $7 to part with their possessions, while buyers were only willing to pay around $3 to purchase a mug. The researchers attributed the pricing disparity to the sellers' loss aversion. The resulting "Endowment Effect" theory states that people will demand more money to give up something they already own than they will pay to acquire the same object. It's why marketers willingly guarantee a full refund if you're not completely satisfied with their products after thirty days -- they know that, even if you are dissatisfied, a refund of the purchase price cannot compensate for relinquishing ownership of the item. As Kahneman explained, the Endowment Effect does not "enhance the appeal of the good one owns, only the pain of giving it up."

Although it's largely an economic concept, the Endowment Effect explains why your employees are resistant to change. Remember, employees don't fear change; they fear loss. In other words, what they might lose from the change looms larger than the perceived benefits from what you're trying to implement. Not surprisingly, as the Endowment Effect suggests, employees will spend more (time, energy, and effort) to keep what they already have (the status quo) than they'll expend to obtain what they don't have (any benefits resulting from the change).

To overcome worker resistance to change, you must factor in the Endowment Effect. Like mug sellers, your employees will forfeit the status quo only when they have extra incentive. No, I don't mean you should pay them a higher salary to accept change; but you will need to hype the benefits of the proposed change more than you might have expected. If that doesn't work, take a cue from marketers and ask employees to try the change for a limited time. As Kahneman, Knetsch, and Thaler demonstrated, once workers "own" the change, they'll be reluctant to give it up.
Bookmark this post on del.icio.us

What do you think? Post a Comment
Vital Integrities Blog - Blogged