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Investments

Investment
• Where user does a bit
of “work.”

• “Pays” with something

of value: time, money, social capital, effort, emotional commitment, personal data ...

Investment is about future rewards that makes the next action more likely.

Labor is love

The IKEA effect
Source: Dan Ariely, Upside of Irrationality

People value their labor

• Value own work almost as much as an expert’s. • Even if other’s don’t.
Source: Ariely, Mochon and Norton, 2012

Labor increases motivation
• People who pick • Assign greater
odds.
Source: Langer, 1975

lottery numbers more likely to play.

Value labor done for us

Source: Buell and Norton, 2011

Others’ labor increases value too
• Search took same
time.

• People “seeing” the
work perceived more value.

Source: Buell and Norton, 2011

As we invest, we endow and tend to overvalue.

The endowment effect
• • • •
When chimps given juice bar and peanut butter, 50/50 preference split. When given PB first, 80% chose to keep rather than exchange. The “endowed” item was preferred Only worked for food

Source: Brosnan et al 2007

Humans endow things
• • • •
Endowed mugs vs pens worth twice as much (Kahneman, Knetsch & Thaler,1990) Endowed final four tickets worth 14 times more (Carmon and Ariely, 2000) Employees worked harder to maintain a provisional bonus than a potential yet-to-beawarded prize (Hossain and List, 2010) Universal behavior across different populations and with different goods (Hoffman and Spitzer,1993) including children (Harbaugh et al, 2001)

Why do we endow?
• Improved bargaining position in bilateral
trades. If I act like I love it, maybe you will too. (Huck, Kirchsteiger & Oechssler 2005) the joy of gaining. (Kahneman and Tversky, 1984) dissonance leads to rationalization.

• Loss aversion. Loosing feels twice as bad as • Need for consistency causes cognitive

Rationalization and commitment

Jesse Schell, Professor of game design, Carnegie Mellon University

The preference cycle
Investment: “Should I ‘spend’ on this?” Confirmation: “Since I spent on it before, and I am not an idiot, it must be good.” Rationalization: “Only an idiot would have ‘spent’ on something not good.”

Little investments, big results
Group 1: 17% accepted Group 2: 76% accepted

Source: Freedman & Fraser, 1966

Adaptive preference formation
• Changing preferences to be
more compatible with the situation.

• We acquire preferences to serve
our need to be consistent. dissonance.

• Relieve pain of cognitive
Source: Jon Esler, 1983

Acquiring taste
• • • •
Think of the first time you tried spicy food or alcohol. Acquiring taste follows similar patterns of rationalization to avoid cognitive dissonance. Change ourselves as we change our preferences. “I’m a ____ drinker.”

Motivating through identity
• • • • •
Registered voters completed survey the day before or the morning of the election. “How important is it to you to be a voter in the upcoming election?” (Noun) “How important is it to you to vote in the upcoming election?” (Verb) Tracked who actually voted. How we see ourselves (the nouns) shape what we do.
“the largest experimental effects ever observed on objectively measured voter turnout.”

Source: Bryan, Walton, Rogers, and Dweck, 2011

In summary:
• We overvalue the results of our labor
(endowment effect)

• But need to rationalize this irrational value
(cognitive dissonance)

• One way to do this is to change our taste
(adaptive preference formation) ourselves (identity shaping)

• And behave in line with how we see

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