Friday, 15 September 2017

Lottery tickets and the endowment effect

Behavioural economics teaches us that people are not purely rational. The behavioural economist Richard Thaler notes that people are quasi-rational, which means that they are affected by heuristics and biases. One of the biases that we are affected by is loss aversion - we value losses much more than otherwise-equivalent gains. That makes us are unwilling to give up something that we already have, or in other words we require more in compensation to give it up than what we would have been willing to pay to obtain it in the first place. So if we buy something for $10 that we were willing to pay $20 for, we may choose not to re-sell it even if someone offers us $30 for it. We call this an endowment effect.

As a graphic illustration of endowment effects, and timely given that Lotto Powerball in New Zealand jackpots to $30 million this weekend, take this recent video from Business Insider:

Most of the people in the video were unwilling to give up their Powerball tickets for what they paid for them, or even for double what they paid for them (after which, they could have bought twice as many Powerball tickets and doubled their chances of winning). Crazy.

[HT: Marginal Revolution]

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