When we sell something, we usually expect a higher price than we would be willing to pay as a buyer. This is called the endowment effect, and when applied to markets it “distorts market prices and reduces trade,” says a new study from the University of Chicago.
Why? Emotional pain. We feel attached to the things we sell, so we tend to give them a higher value than if we were buying the same thing. Fortunately, for professional sellers anyway, this effect is deadened by practice. The more you sell, the less you care about what you’re selling, and the better you are a demanding a fair price, instead of an emotionally inflated one.
In the experiment, the University of Chicago team compared financial traders with normal, empathic humans. Traders are previously known to have a reduced susceptibility to the endowment effect, so they were put into an fMRI machine to check how their brains function while performing a trading-based exercise. They were compared to trading newbies, aka normal folks, and also to non-traders who had been desensitized by two months of buying and selling on eBay.
In the experiment, participants with and without trading experience were asked how much they would pay for a certain item and then how much they would want if they sold it.
The results showed that in experienced traders, the right anterior insula of the brained showed reduced activity. This part of the brain is also associated with “anticipating and avoiding losses,” says the report. In regular folks, this lit up, suggesting that they had some kind of loss-aversion reaction, even to objects that weren’t their own.
Then another group was tested. These were people without trading experience, but who had been “desensitized” to the endowment effect with two months of buying and selling on eBay. This time the results showed that these newly minted “traders” also showed a diminished response in the right anterior insula. That is, even a small amount of selling practice can make you better, or at least more objective, when it comes to selling. In personal terms, it could help you avoid wasted time when you try to sell your old junk on FleaBay, or even prevent you from hoarding old, useless possessions.
Interestingly, the study found that professional traders are no better than the layperson at making buying decisions. When the parts of the brain that are associated with product preferences and buying decisions were compared, they found no difference. So while the professionals are indeed better at selling in a cool, calm frame of mind, when it comes to buying, they’re just as likely to mess it up as the amateurs. If you have any friends who are financial traders, and you’ve seen the Trump-like way they furnish their homes, then this last fact won’t surprise you one bit.
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