Don’t Waste Your Life: Overcome The Endowment Effect

Never, ever let your current situation adversely define your future situation.

Here’s a quick hit in the spirit of Saturday and “Coffee and a Do Not.”

How often do you “stick” where you are not because it’s the best place, but because it’s “your” place?

You keep a crappy job, or a good job within a crappy culture.

You keep a car that constantly breaks down.

You own stocks that have been perennial losers.

Perhaps you are business owner that keeps holding onto an underperforming management team, or a set of underperforming businesses.

In really nasty situations, you stay close to bullies, abusers, cheats, and other ugly people because they are the ones you’ve grown up with.

It happens to all of us.

The explanation

In social psychology is a cognitive bias known as The Endowment Effect.   In short and simple words, this effect means that, as humans, we have a tendency to value things we currently own more than we would value them if they were somebody else’s.

A bird in the hand is worth more than a bird in the bush.  But worse, even when faced with a better bird right in front of us we keep the bird in the hand.

That car you have that constantly breaks down?  You’d never buy it from someone else, because better ones are on the market right now.

That crappy job you’ve stayed in for years?  You’d never take it again if you knew what you know now because, again, better ones are on the market right now.

That loyalty you feel to that clearly unethical leader?  You’d criticize anyone else who did that because you know better.

But, these are yours, and so you ascribe higher value to them–in many cases defending them irrationally–than you otherwise would.

The impact

The result of the endowment effect isn’t all bad.  It allows us to have some comfort in difficult times.  How many times have you heard people justify their current awful situation as a “blessing” when pretty much anyone else would say it was a curse?  That is, at least partly, the endowment effect in action.  Loyalty has some roots in this effect, and loyalty can be good…to a degree.

But, on the downside, the endowment effect has a highly insidious effect on your career, finances, relationships, etc.

It causes you to let your current situation define more of your future situation than it should. 

That’s right, you “stick” in bad situations, investments, relationships, and jobs longer than a “smart” person would, because your brain is wired to make it so.

Why else do people look back on years working for a particular leader and say “what was I thinking?”

The truth is, they weren’t thinking.  They valued where they were, irrationally so.

How to guard against it

I’m not one who believes that absolute objectivity is either possible or really a good thing.  We have emotional and irrational ties to everything; and in general they help us to function.

But…

Because this particular bias can cause you to waste valuable years of your career (or, even valuable time repairing a crappy car), you and I need to watch out for its effects.

The best way to guard against the endowment effect is to think.   Yeah, that’s right, just think.   Stop for a minute and ask yourself if you are valuing the abuse you take, or the ethical stretches you have been ordered to execute, more than a sane person on the outside would.

Stop for a minute and ask yourself whether you’d be better off making a trade.  That works whether we are talking investments, jobs, subordinates, superiors, or that priceless artwork you own.

You guard against the endowment effect by considering a trade.

A parting, and partly personal anecdote

One of the very interesting people I had the opportunity to work with and then know for years was the famous “genius” of American football, Bill Walsh.

Bill was famously effective as a general manager in the NFL–that is, he was great at making personnel decisions.  In fact, he made a lot of very high profile athletes very angry by trading them to other teams while they were still “good” players. Bill wanted to trade players a year before their production fell off.  This facet of Bill Walsh’s approach was chronicled nicely in the recent NFL Network documentary Bill Walsh a Football Life.

A famous aspect of Bill’s objectivity was that he asked his staff what they thought Joe Montana’s trade value was…during Joe Montana’s prime.  Joe Montana, for those who do no know, was and is one of the greatest quarterbacks in the history of the NFL.  Bill was willing to test the market for his quarterback–the lynchpin of his offensive gameplan–while his quarterback was still building a hall of fame resume.

Bill didn’t suffer from the endowment effect, at least in his player personnel decisions.

I guess I should call it a privilege to be a guy who was recruited by, hired by, and cut by Bill.  You knew where you stood.

As brutal as that seems, and I’ll write on the brutality of NFL talent management at some point in the future, sometimes we need to adopt a little bit of that mindset to protect ourselves.

Where does the endowment effect show itself in your life and experience?  Please share…