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.
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 the endowment effect, on fantasy baseball at least. I don’t know what to call it, but it’s similar to the “winner’s curse”, right?
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…”
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
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 tickets.
Assuming that the endowment effect really exists does this suggest that it should be easier to trade a player you drafted than one you picked up off the waiver wire even if both are equal value? I say that because the face value of the player you drafted is higher.
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.
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.
@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.
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.
Concerning trades, I think you have to expect that people overvalue what they have, but this doesn’t take into account (like some folks were saying about) that people will overpay for what they want the most. Favorite players, favorite teams, that trendy sleeper pick—they all have enhanced trade value depending upon the person evaluating the proposal.
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 insight (i.e. how and why) into these differences.
I should have mentioned this in the article, but the goal wasn’t to present the endowment effect as the *only* reason for differences in perceived values of players. I think it almost goes without saying that there are other mechanisms at work, that a certain situation may be more influenced by one bias/effect over another, that there could be multiple effects working in conjunction, or that one manager could simply be inept compared to another. The point was to present the endowment effect as a *possibility*.
To bsball,
I think you are on track with the idea that the amount of income may influence buying and selling prices, sort of as a wealth effect where the richer one is or at least perceives himself to be, the more one might spend. However, I’m not sure of the degree of change.
The difference in perceived value is interesting because its fairly intuitive to think that the amount a consumer is willing to exchange for that item reflects the value he puts on having that item. But, studies show that this gap in pricing still exists even when income effects are controlled.
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 one of those two pictures with digital alteration to make them less attractive (messing with the eyes, nose, whatever—either A’ or B’, depending on which picture was altered).
Something like 75% of the time, the respondents chose A if the three pictures were A, B, and A’, and chose B if the three pictures were A, B, and B’. His interpretation of that was that you couldn’t necessarily compare A and B, but you *can* compare A to A’ (or B and B’). Because A had won the comparison with A’, therefore it had a higher desirability than B, having won a comparison.
Take that to a fantasy trading level (if no one’s done it already—I didn’t take the time to look). You have a player I want to trade for. According to this theory, I should make you two differently structured offers, one somewhat better than the other. If that theory’s right, then:
—You could decide to keep the player (A).
—You could decide to trade him for the better offer I made (B).
—You could decide to trade him for the lesser offer I made (B’).
In comparing those three options, because the better offer has won the comparison between the offers, then you might find trading the player would be preferable to keeping him. I wonder if, anecdotally, people have done that and found it to work. If I were to offer you, in a keeper league, your choice of Carlos Zambrano for Justin Upton, or Oliver Perez and a 2nd round pic for Upton, would you find yourself more willing to keep Upton or trade him for Zambrano?
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 makes mistakes because loss aversion or endowment effects cloud his judgement, the owner needs a better interview process.
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 A and B, thus increasing the desirability of option A (when C is dominated by A but not by B).
-the addition of option C changes the weights that people place on the characteristics of A and B.
-the introduction of option C, when dominated by A but not by B, simply helps justify the desirability of A.
Ok, so onto the possible implications of these findings on fantasy baseball…
Let’s do the following, where three different players are offered for the same player:
1). Player A is offered.
2). Player B is offered.
3). Player C is offered.
I think an example of a trade situation that runs a little more parallel to the design of the study by Ariely and Co. would be like this:
-Player A is offered.
-Player B is offered; Player B is of equal value to A, but with different characteristics.
-Player C is offered; Player C has similar characteristics to A, but is of slightly less value.
Obviously, this application isn’t that cut and dry for the simple fact that these offers can ALL be rejected. But, I suppose that in theory, it is possible that such a presentation could have an effect. For example, it might increase the chance that *a* trade will actually happen or it might actually make player A more appealing than player B.
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. I’m also going to be more likely to trade for him in leagues where I didn’t draft him. The moral here is that it’s important to force yourself to select different players when drafting!
The key part of the Endowment Effect is that we overvalue what we own. You propose a strategy to try to de-bias your trading partner of the Endowment Effect, but isn’t the most important thing to try and de-bias ourselves? I don’t really care if a trading partner is over-valuing his players, the important thing is that I don’t over-value mine!
As a general rule of thumb the way to sell things is to aggregate the gains and integrate the losses. So the key to making a trade is to explain to your partner how many different things they will gain, just by trading away one thing. Of course, this is explained by Kahneman and Tversky’s Prospect Theory (did I imagine an article on this recently?). As is, of course, the Endowment Effect. Give that man a Nobel Prize!
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