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How The Endowment Effect Inspires App Loyalty

Attracting users — and keeping them — requires knowing why people place more value on things they already have.

Sandwiched between the gleaming walls of an LA Fitness club and a giant grocery store in Seattle’s Ballard neighbourhood is a baffling sight.

A tiny, nondescript house — dubbed the “Up” house, after Pixar’s 2009 movie of the same name — stands engulfed on three sides by a shopping mall. It belonged to Edith Macefield, an octogenarian and unwilling hero of the anti-gentrification movement. In 2006, developers offered her $1 million to move. (The house was appraised at around $120,000.) They even proposed to find her a similar place elsewhere, plus home care. She refused.

The building development went ahead anyway. Or rather, around.

Macefield held out until her death on June 15, 2008. The 1,050-square-foot home is now set to be demolished; real estate agents say water damage and an unsound roof make it unsalvageable.

But the legend of the little old lady who stuck it to The Man lives on. Intrigued onlookers wonder why Macefield was so adamant about not selling. The block she lived on had long been deserted. Rapid commercial build-up made the surrounding area noisy and chaotic. Most chalk it up to sentimental value — she had, after all, been living in the same house since 1952.

Behavioral economists call it something else: the endowment effect.

People who own something tend to value it more than if they didn’t own it. The longer they possess it, the more they value it. By the same token, people often demand a higher price to give up a good they already own than they would be willing to pay for it. This surprising discrepancy was first coined ‘the endowment effect’ by Richard H. Thaler in 1980. Since then, hundreds of experiments have been carried out to confirm its existence.

In probably the most famous experiment of them all, one group of students were endowed with coffee mugs. After awhile, they were given the option to trade it for a Swiss chocolate bar. A second group was given the chocolate bars. They too were told they could swap it for a coffee mug. A third group, the control group, was endowed with neither. They were simply told to choose between the mug or the chocolate.

The control group was fairly indifferent between the two choices: 56% chose the coffee mug, while 44% chose the chocolate bar. This seemed to suggest that, given a choice, roughly half of those who had been given the mug would trade it for the chocolate, and vice versa. But that’s not what happened.

Instead, the students initially endowed with something showed significant preference for the endowed good. Of the students given the coffee mug, 89% chose to keep the mug and 11% chose to trade it for the chocolate bar. Similarly, only 10% of the students handed the chocolate first exchanged it for the mug.

In another experiment, a group of participants received ballpoint pens, while another group received $4.50. A series of offers they could accept or reject were then made. The result? The pens were worth more to the people who started with them than to those who started with cash.

This flies in the face of neoclassical preference theory, which predicts that notions of value are independent of initial endowments or commitments. In fact, the ubiquity of the endowment effect is so great, it’s been used to explain why Henry Kissinger refused to pull out of the Vietnam War in 1969; why bidders end up paying more in frenzied eBay auctions; why investors will hold onto loss-making stocks; and why you’re more likely to buy something just because you’re shopping on an iPad.

To wit: People aren’t as rational as traditionally assumed. But how does knowing this help us when it comes to designing apps, attracting users and keeping them?

Not all apps are created equal. Only those that are sufficiently addictive and encourage regular engagement thrive. Given 35% of mobile app engagements last less than a minute, being able to harness behavioral phenomena — like the endowment effect — can be key to boosting user loyalty in a severely attention-deficient world.

Applying what we know about the endowment effect, apps can incorporate certain design elements to gain long-term traction:

Ownership

There’s a reason why ‘freemium’ apps like Spotify and Pokémon Go are so popular — they minimise people’s perceived cost of being locked into something they may not want to pay for. However, it also induces ownership, making it less likely that the user will abandon the product when the freebies max out.

There’s the endowment effect to thank for that. Even partial ownership (think: free trials) causes people to think twice before they hit the ‘Cancel’ button. And because people place more value on something they own than if they didn’t own it, some might be willing to shell out more for a product after experiencing a free trial than they would if they had to pay for the product without it.

Conditional rewards

Successful apps make good use of conditional rewards (think: level-ups, points, badges and prizes) that risk being lost if users don’t return frequently. The endowment effect tells us this capitalises on people’s tendency towards loss aversion, the tendency for us to feel the pain of loss more strongly than pleasure at an equal gain.

For task management app Todoist, conditional rewards takes the form of a ‘Karma’ system that rewards points for productivity (completing tasks on time) and deducts them for the opposite (missing deadlines).

Endowed progress

In a slight twist to the endowment effect, giving people even just the feeling of progressing towards a distant goal can make them more committed to achieving that goal. This is known as the endowed progress effect. Some of us have experienced it when handed a coffee loyalty card that requires ten purchases for a free drink — with two of them already pre-stamped.

Educational apps often exploit this form of artificial endowment by designing the first level to be easier so that users feel they’ve made progress, spurring them to continue onto the next. The challenge is finding the right balance between making tasks reasonably achievable, but not so achievable that people quickly lose interest.

All the neurological insights in the world couldn’t save an app perceived to lack fundamental user value. However, design that taps into the powerful nuances of the endowment effect can augment a good one in terms of greater product adoption, user retention and app loyalty.

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