Endowment Effect

Your constantly-updated definition of Endowment Effect and collection of topical content and literature

What is Endowment Effect?

The endowment effect refers to the way in which humans tend to prefer objects they already possess over those they do not. We thereby place a higher value on an object we are asked to give up, than on a similar object we are asked to obtain. Designers apply this effect to product and web design so as to influence user behavior.

The term emerged in the field of behavioral economics, where the empirical research of psychologists Richard Thaler, Daniel Kahnerman, and Jack Knetsch has shown considerable differences between buying and selling prices of consumption goods, even when strategic considerations (for making a profit) are excluded. The effect is generally interpreted as a manifestation of the “loss-aversion” principle, which states that humans weigh losses more heavily than they do gains.

When designing a user experience, designers can apply the endowment effect as something that will enhance the prospects of customer retention. For example, having accepted an offer for an initial free trial period for a digital product, users might start to consider the product as being something they “own.” Consequently, they might be more willing to pay a fair price for continuing to “own” it. This is opposed to the users approaching that item without having had the chance to sample it (in which case, lacking the warmth of an owner’s perspective, they would be far less prepared to pay that price for it). Naturally, the product has to prove itself to be of value to users; otherwise, they will not continue to use it. This effect can likewise account for why convincing customers to “switch” from a product they already find satisfactory to another is difficult—clearly the new product will have to offer considerably more, and at a lesser price, to convince a user to adopt it.

Literature on Endowment Effect

Here’s the entire UX literature on Endowment Effect by the Interaction Design Foundation, collated in one place:

Learn more about Endowment Effect

Take a deep dive into Endowment Effect with our course Get Your Product Used: Adoption and Appropriation.

Designing for user experience and usability is not enough. If products are not used—and it doesn’t matter how good they are—they will be consigned to the trash can of history.

Sony’s Betamax, Coca-Cola’s New Coke, Pepsi’s Crystal Pepsi, and McDonald’s Arch Deluxe are among the most famous products which made it into production but failed to wow their audiences, according to Business Insider. In fact, Harvard Business Review dedicated a long piece to “Why most product launches fail”—so it’s not just big brands that aren’t getting their design process right but a lot of businesses and individuals, too.

So, what is the way forward? Well, once you’re sure that the user experience and usability of your product work the way you want them to, you’ve got to get your designs adopted by users (i.e., they have to start using them). Ideally, you want them to appropriate your designs, too; you want the users to start using your designs in ways you didn’t intend or foresee. How do we get our designs adopted and appropriated? We design for adoption and appropriation.

This course is presented by Alan Dix, a former professor at Lancaster University in the UK and a world-renowned authority in Human-Computer Interaction. Alan is also the author the university-level textbook “Human-Computer Interaction.” It is a short course designed to help you master the concepts and practice of designing for adoption and appropriation. It contains all the basics to get you started on this path and the practical tips to implement the ideas. Alan blends theory and practice to ensure you get to grips with these essential design processes.

All Literature

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