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Perceived-Ownership Effect

 

Explanations > Decisions > Perceived-Ownership Effect

Circles of ownership | The concession illusion | The risk-aversion effect | So what?

 

Why do some people rack up such terrible debts on credit cards and more? Why will other people refuse to gamble on an almost dead cert? It's something like a child's perception where 'If I have it in my hand, then it is mine.'

Circles of ownership

So why do people get into such debt? Why can they not control their spending on ownership of credit cards? The credit card debt problem, by the way, is a modern variation on debt addiction that has happened over many, many years.

In particular, it has to do with what we consider to be disposable income - that is, the cash we can happily spend.

The first circle: cash

Consider the cash you have in your pocket or purse. It is probably not an enormous sum. Perhaps enough for a few groceries or drinks. You look at it and know that it is yours. You also probably perceive it as disposable - that is, you can spend it on pretty much what you want, without worrying about whether you need it to pay off the car, house or other debt.

The second circle: savings

Now think about the money you also own, but is somewhere other than in your hand. Perhaps it is in the bank. It's not as easy to spend as cash, but nevertheless, it's quite easy to come by.

So do you now consider this to be disposable income? Although the more prudent of us would think twice about this, many still would spend it happily on holidays, hi-fi or some other luxury. We thus are a bit more cautious and thoughtful about spending this money, and like to keep some by for a 'rainy day' or maybe our retirement.

There are people also who do not have any such savings. These are the people who view this money as just as disposable as money in the hand. If they have cash, they will spend it. Like a small boy with his Christmas-money burning a hole in his pocket and a desperate need to impress his friends with the latest games, all thought of future and savings are ignored.

The third circle: credit

Now we come to credit. Whilst many of us do not like owing money and will work hard to pay off any debt we have, others are not driven by the same values.

A surprising number of people see credit being within the same circle as other disposable income. Once they have got a credit limit, it seems that the money is all theirs. And as they have a no-savings view, the money is to be spent.

The concession illusion

This effect happens during negotiation where, for example, one person offers something to the other person as a concession. The other person cognitively perceives that the offered thing has moved into their ownership space and acts as if they now own it. They have effectively closed on ownership.

Lost goodwill

One effect of this is that when someone makes a concession as an act of goodwill, the other person does not reciprocate, as they perceive the item given now as their own, without any consideration of where it came from.

Fishing games

This effect may be used by a tricky negotiator, who offers something as a concession, waits until the other person has cognitively closed on it, and then demands a concession in return with the threat of taking away their concession. To the other person, this seems like the item is being stolen back from them and they become emotional and hence easier to manipulate.

The risk-aversion effect

The effect also happens differently to some people when they compare a certain gain with a potential loss. If they have won a stack of chips in a casino, then they compare the win with the potential loss and take the win. Casinos need not worry, however, as people with this risk aversion will probably not be in a casino in the first place.

So What

Try offering something to the other person and watch for the emotional effect. If it looks like they are closing on it before you have agreed that they should have it, then you can use this effect in your bargaining.

See also

Psychological Accounting, Regret Theory, Risk Preference

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