ticket to the coveted game.
AS ZIV CARMON (a professor at INSEAD) and I listened to the air horn during the campout at Duke in the spring of 1994, we were intrigued by the real-life experiment going on before our eyes. All the students who were camping out wanted passionately to go to the basketball game. They had all camped out for a long time for the privilege. But when the lottery was over, some of them would become ticket owners, while others would not.
The question was this: would the students who had won tickets—who had ownership of tickets—value those tickets more than the students who had not won them even though they all “worked” equally hard to obtain them? On the basis of Jack Knetsch, Dick Thaler, and Daniel Kahneman’s research on the “endowment effect,” we predicted that when we own something—whether it’s a car or a violin, a cat or a basketball ticket—we begin to value it more than other people do.
Think about this for a minute. Why does the seller of a house usually value that property more than the potential buyer? Why does the seller of an automobile envision a higher price than the buyer? In many transactions why does the owner believe that his possession is worth more money than the potential owner is willing to pay? There’s an old saying, “One man’s ceiling is another man’s floor.” Well, when you’re the owner, you’re at the ceiling; and when you’re the buyer, you’re at the floor.
To be sure, that is not always the case. I have a friend who contributed a full box of record albums to a garage sale, for instance, simply because he couldn’t stand hauling them around any longer. The first person who came along offered him $25 for the whole box (without even looking at the titles), and my friend accepted it. The buyer probably sold them for 10 times that price the following day. Indeed, if we always overvalued what we had, there would be no such thing as Antiques Roadshow. (“How much did you pay for this powder horn? Five dollars? Well, let me tell you, you have a national treasure here.”)
But this caveat aside, we still believed that in general the ownership of something increases its value in the owner’s eyes. Were we right? Did the students at Duke who had won the tickets—who could now anticipate experiencing the packed stands and the players racing across the court—value them more than the students who had not won them? There was only one good way to find out: get them to tell us how much they valued the tickets.
In this case, Ziv and I would try to buy tickets from some of the students who had won them—and sell them to those who didn’t. That’s right; we were about to become ticket scalpers.
THAT NIGHT WE got a list of the students who had won the lottery and those who hadn’t, and we started telephoning. Our first call was to William, a senior majoring in chemistry. William was rather busy. After camping for the previous week, he had a lot of homework and e-mail to catch up on. He was not too happy, either, because after reaching the front of the line, he was still not one of the lucky ones who had won a ticket in the lottery.
“Hi, William,” I said. “I understand you didn’t get one of the tickets for the final four.”
“That’s right.”
“We may be able to sell you a ticket.”
“Cool.”
“How much would you be willing to pay for one?”
“How about a hundred dollars?” he replied.
“Too low,” I laughed. “You’ll have to go higher.”
“A hundred fifty?” he offered.
“You have to do better,” I insisted. “What’s the highest price you’ll pay?”
William thought for a moment. “A hundred seventy-five.”
“That’s it?”
“That’s it. Not a penny more.”
“OK, you’re on the list. I’ll let you know,” I said. “By the way, how’d you come up with that hundred seventy-five?”
William said he figured that for $175 he could also watch the game at a sports bar, free, spend some money on beer and food, and still have a lot left over for a few CDs or even some shoes. The game would no doubt be exciting, he said, but at the same time $175 is a lot of money.
Our next call was to Joseph. After camping out for a week Joseph was also behind on his schoolwork. But he didn’t care—he had won a ticket in the lottery and now, in a few days, he would be watching the Duke players fight for the national title.
“Hi, Joseph,” I said. “We may have an opportunity for you—to sell your ticket. What’s your minimum price?”
“I don’t have one.”
“Everyone has a price,” I replied, giving the comment my best Al Pacino tone.
His first answer was $3,000.
“Come on,” I said, “That’s way too much. Be reasonable; you have to offer a lower price.”
“All right,” he said, “twenty-four hundred.”
“Are you sure?” I asked.
“That’s as low as I’ll go.”
“OK. If I can find a buyer at that price, I’ll give you a call. By the way,” I added, “how did you come up with that price?”
“Duke basketball is a huge part of my life here,” he said passionately. He then went on to explain that the game would be a defining memory of his time at Duke, an experience that he would pass on to his children and grandchildren. “So how can you put a price on that?” he asked. “Can you put a price on memories?”
William and Joseph were just two of more than 100 students whom we called. In general, the students who did not own a ticket were willing to pay around $170 for one. The price they were willing to pay, as in William’s case, was tempered by alternative uses for the money (such as spending it in a sports bar for drinks and food). Those who owned a ticket, on the other hand, demanded about $2,400 for it. Like Joseph, they justified their price in terms of the importance of the experience and the lifelong memories it would create.
What was really surprising, though, was that in all our phone calls, not a single person was willing to sell a ticket at a price that someone else was willing to pay. What did we have? We had a group of students all hungry for a basketball ticket before the lottery drawing; and then, bang—in an instant after the drawing, they were divided into two groups—ticket owners and non–ticket owners. It was an emotional chasm that was formed, between those who now imagined the glory of the game, and those who imagined what else they could buy with the price of the ticket. And it was an empirical chasm as well—the average selling price (about $2,400) was separated by a factor of about 14 from the average buyer’s offer (about $175).
From a rational perspective, both the ticket holders and the non–ticket holders should have thought of the game in exactly the same way. After all, the anticipated atmosphere at the game and the enjoyment one could expect from the experience should not depend on winning a lottery. Then how could a random lottery drawing have changed the students’ view of the game—and the value of the tickets—so dramatically?
OWNERSHIP PERVADES OUR lives and, in a strange way, shapes many of the things we do. Adam Smith wrote, “Every man [and woman] . . . lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.” That’s an awesome thought. Much of our life story can be told by describing the ebb and flow of our particular possessions—what we get and what we give up. We buy clothes and food, automobiles and homes, for instance. And we sell things as well—homes and cars, and in the course of our careers, our time.
Since so much of our lives is dedicated to ownership, wouldn’t it be nice to make the best decisions about this? Wouldn’t it be nice, for instance, to know exactly how much we would enjoy a new home, a new car, a different sofa, and an Armani suit, so that we could make accurate decisions about owning them? Unfortunately, this is rarely the case. We are mostly fumbling around in the