Confessions of a market skeptic: endowment effect edition

Jonathan Halket recently wrote about a variation of the endowment effect and I just wanted to throw my two cents in on the original endowment effect topic. I am not particularly well researched on the endowment effect theory and I don’t expect any of these thoughts to be groundbreaking, but I think they can be relevant to the pursuit of an improved team.

In a nutshell, the endowment effect posits that once somebody is given a commodity, he/she immediately values it more than he/she would have before acquiring it. That is to say that we’d never be able to make a deal with ourselves because we wouldn’t be willing to pay our own asking price, and we’d never accept our own offers.

First, I reject this theory on, perhaps, its most fundamental grounds. My feeling is that one’s unwillingness to sell a commodity for its market value is not compelling evidence that the commodity’s owner has any delusions about the value of the commodity. Let me support this assertion by stating two fairly incontrovertible principles.

1. In any chain of transactions from producer through ultimate consumer, profit is derived from the gap between what an item is worth to the seller and the buyer’s interpretation of that commodity’s value, either intrinsically or on a secondary market.
2. The value of all commodities is fluid and subject to context, to varying degrees.

The reluctance to swap a commodity for what one perceives to be its fair value is entirely rational in respect to the actual workings of a market, especially for an individual commodity. Remember, nobody is producing a factory of Ryan Brauns and a fantasy team does not sustain itself by commerce, but by the return on investment it makes in its players. As owners, we are not mandated to move any units, ever. The question is not what Ryan Braun is worth to me, or even by the general market consensus. The question is what any individual in your league may be willing to pay for him.

I’ll reiterate more simply. It is not your goal to determine a price point at which you can sell an inventory of Ryan Brauns. Your goal is to extract the greatest disparity of value in your favor from a single transaction.

As a part of the sneaker enthusiast community, this is a dynamic I’m very familiar with. Individuals who sell extremely rare sneakers at consignment boutiques often price them astronomically. Recently, I had read a discussion on a message board where some of the more savvy collectors were complaining that this phenomenon sets entirely false valuations of these commodities. They were talking about the endowment effect without referring to it as such. But, the fact is that without the endowment effect, there’d be almost no secondary market for collectible or limited edition goods, a category whose general qualities apply to a player like Braun. I might only be willing to pay $500 for a pair of Entourage edition Air Force Ones, but if I had a pair I wouldn’t sell them for anything below two and half times that price. Why?

One, for $500, I’d simply rather keep the kicks. (Yeah, I know this sounds pathological, but just substitute sneakers for whatever equally inane and frivolous material vice you indulge in and delude yourself into thinking is culturally superior to rubber and leather.)

Two, I don’t care about the fair market price. I only care about the “one dumb schmuck” price.

Three, the $500 doesn’t replace the sneakers it just gives me a different commodity that may be valued differently by an entirely different demographic of people. And, further, if I do want to replace the sneakers, I must combat the endowment effect again and therefore I know that I will not be able to acquire that commodity for what I perceive its actual value to be.

The lesson here is that when it comes to elective transactions, the general laws of the market aren’t necessarily material.

The first two points above relate to the first of my original two premises in fairly obvious ways. The third point relates more to the second premise.

Quite simply, there is no objective value for any player. Well, perhaps there is, in a vacuum, but those are not the values the prospective seller and buyer are considering when making the transaction. All players’ values are relative to their own teams. The best way to get a trade done is to trade surplus of one asset class to somebody who is deficient in asset class for a largely distinct asset class, of which the other owner has a surplus. Simply, you trade a player that is worth less to you, and in the context of your team, than he is to another owner for a player who is worth less to that owner than he is to you. This is hardly rocket science.

In fantasy baseball, a commodity’s value is very much contextual. When Ariely and Carmon ran their experiment to establish the gap between what a Duke student would pay to go to the Final Four versus the price at which he/she would be willing to sell that ticket, the assumption was that the students didn’t have tickets prior to being presented with the opportunity to acquire one and that they would no longer have one once they sold it. Well… that’s not exactly how the trade market works in fantasy baseball, is it?

It was found that the proposed selling price of the ticket was inordinately higher than the proposed buying price. But, how would that change if the subjects had two tickets to a game and were only asked to sell one? What if I’m only asked to sell my courtside seat, but I would still be left with a mezzanine level seat. I can only presume the gap between what you think the objective value of that seat it and what you’d be willing to sell it for would shrink considerably.

As a potential trader in a fantasy league, I’m generally only actively in the market for certain types of commodities at different times and I’m naturally more reluctant to make certain types of transactions. I feel that the endowment effect is profoundly at play only in fairly limited types of transactions. For example, if I own Alex Rios, am offered Justin Upton, and refuse, then that’s likely the Endowment Effect. These are two fairly similar commodities in the sense that they are five-tool outfielders and in this case I would be getting the better player, but subject to the endowment effect, which drowns out the fact that Rios is overproducing.

However, if you offered me something like Carl Crawford for Kendry Morales, that may just not be a great fit for my time and I might decline for that reason.

Surplus value in the form of stats beyond what it takes to win a category or quality bench players who can’t crack your starting line-up are materially worthless; I say “materially” because their value exists but in the form of depth, insurance, or flexibility. So, once again we return to the theme of absolute value being less meaningful than optimal distribution of value across asset classes.

Thus, the endowment effect is only necessarily detrimental to the extent that it prevents you from trading a player you feel like you have to trade – if you are too attached to your surplus value. And, once you recognize said asset as surplus value, chances are your attachment to said asset wanes therefore decreasing one’s sense of endowment. In the absence of this scenario, the endowment effect may be either beneficial or detrimental depending on whether you can find somebody willing to pay your price – not a market, but a single buyer.

It does bear repeating that value is only one part of the equation when making a deal; asset class often trumps small differences in absolute value. While I agree that all players have a price and that you should be open to trading any of your players at any given time, for the right offer, I think that point is actually a bit rhetorical. Your team is assembled the way it is for a reason. There’s a balance of asset classes that is important to maintain and there’s risk involved in simply making any deal that nets you more value because there is no guarantee that you can swing the next trade that would be needed to restore that balance.

Savvy owners recognize when another team has an imbalance of assets and will refuse to give you fair value when they see you are backed into a corner. When making a deal the key is to determine how valuable the player you are targeting is to his team. I used to play in a league that I dominated by drafting a disproportionate number of closers and selling them off after amassing a big lead. If the league would have stonewalled me, it would have been very difficult to win. Many owners, however, focused exclusively on the value of my closers to their teams without considering what would have happened to my team had I been unable to deal those closers.

Now, from a seller’s perspective I only needed to find a few buyers at different points throughout the year, so even if the majority of the market is just waiting while I dig my own hole, all it takes it one guy to say, sure, I’ll trade you Dan Haren for Mariano Rivera for me to solidify my title.

From the buyer’s perspective, he’s getting a valuable commodity and the more the rest of the league avoids my closers, the more valuable it becomes to him to add one. But he’s only offering fair value because he believes that my commodity’s market value reflects its value to my team and that the market for my player is competitive relative to that market value. In reality, that wasn’t the case.

And, with that, I’ll pose this question to the readers: You have a deal on the table that will help your team, but it may help a team that is already ahead of you even more. Should you make this deal? Of course, this is a very general question. So, take it where you wish.

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  1. Tommy Bennett said...

    This is interesting but I am not sure I see exactly how it gets at the endowment effect. Although there are (increasingly more) empirical studies calling into question the existence of such an effect. However, a significant chunk of the literature shows the effect to be true even if a person doesn’t actually own the asset, but rather just imagines what it would be like to do so. Even then, the buying price/selling price gap persists.

    See, e.g., here:

  2. Nutlaw said...

    At this point in the season, I would do whatever I can to make my own team better even if it would end up helping out another team more. Standings can change a heck of a lot over the latter 2/3rds of the season. With a month or a month and a half left, I’d be more careful about trading with the top ranked teams.

    Also, sneaker enthusiast community?

  3. Jonathan said...

    Thanks for sparking an interesting follow up with your opinions on the endowment effect. Just to clear a few things up –

    1) I have no stance on whether the endowment effect is a first-order contributor to trades (or the lack there of).  It is a possibility, but certainly many trades do or do not happen for a variety of other reasons (too).

    2) The endowment effect does not rely on any form of objective value.  Indeed the effect does not claim that someone’s subjective value is above an “objective value” but rather that his subjective value rises merely by coming into possession of the good (or just imagining it).

    Any of the factors which you describe – like the rarity of the good, the difficulty in finding a replacement, or the likelihood of finding a dumb schmuck to buy it for more should effect your subjective value of the good both immediately before and after the trade.

    What you have to ask yourself is if any of those reasons are strong enough that you wouldn’t sell your shoes for $501, then would you really be willing to ONLY pay $500 for them?

  4. Derek Ambrosino said...


    If nothing else, your comment reminded me to move “Predictably Irrational” up on my reading queue. It’s suffered too many bumps by “impulse reads” and I’m taking a stand!


    I agree. At this point in the season, I must be confident that I can manage my way to the title. It’s too early to play defense in that respect. As it gets later in the season, that concern becomes more important. But, I still wouldn’t offer another owner market value for his surplus commodity.

    And, they’re more commonly referred to as “sneakerheads” but I don’t identify with that term because I don’t like many of the people who choose to self-identify as such. It just means that I own many, many pairs of sneakers and view them as cultural artifacts. …No different than somebody who collects stamps, comic books, or baseball cards really.


    I actually think the rarity of the object is very important – and more important is the fact that I only have one to sell and am under no mandate to do so. An item is only worth what somebody is willing to pay. I know that somebody is willing to pay a lot more than $500, it just so happens that I am not that somebody. So, if somebody offers me $501, I’d consider it a fair offer but would simply hold out for a better offer, because I know they are out there.

    Now, I couldn’t operate a bakery this way, but I can certainly sell a hyperstrike shoe or Hanley Ramirez this way.

    And, that’s my point. I’m looking to exploit somebody else with a vastly different perception of the value of a rate commodity than mine (or simply way more disposable resources to trade). What appears to be “the endowment effect” could just as easily be me betting on the fact that I can get away with price gouging – the fact that I know there’s somebody out there who wants this ticket, this shoe, or this player A LOT more than I do. There’s nothing irrational about that at all.

  5. KY said...

    I had the same reaction Derek did to the effect.  But I think Jonathan just explained it better.  If I know I can sell the shoes for $530 to a schmuck, then the value to me at the time of purchase is $530.  Even if I buy them for $5.  But if once they are in my possession I no longer will sell them to someone unless I get $540 for them, I have exhibited the effect.  Is that correct?

  6. Jonathan said...

    Exactly KY.  The question is – if you know in advance that you’re going to be looking for the schmuck, then you should value it accordingly. Feel free to figure in a discount on the schmucks value due to waiting costs and so forth.  that’s fine.

  7. Garison said...

    So, for instance, consider Ubaldo Jimenez. It’s fair to say he’s going to be good for the rest of the season even if he doesn’t keep his ERA under 1, or 2; heck, even 3 (see ZiPS RoS ERA: 3.87). Most of his peripherals point to regression, but the questions is how much. Jimenez is not a smoke-and-mirrors type. 

    But how should I value him? I practically stole him from another owner (along with a struggling Lester) in a trade very early in the season, so I’ve already made a tremendous profit. Should I be looking for the “one guy” who is willing to give a king’s ransom for Jimenez? He seems like the type of pitcher who could be vastly overvalued. He has outperformed his 2.71 FIP/3.50xFIP, and he sports a high LOB% and an extremely low HR/FB rate and BABIP (stats before Wednesday’s start). Given his historic performance so far, it’s hard for me not to place an extremely high value on him either. But ZiPS (RoS) predicts a 3.87 ERA. That seems absurd.

  8. Derek Ambrosino said...

    I guess the answer to that question, in terms of the endowment effect, goes something like this:

    If you had Dan Haren, would you trade him for Ubaldo Jiminez?

    If no, then you should be willing to trade Jiminez for Haren.

  9. Garison said...

    I understand the logic, and I think that’s a good way for me to think about it.

    In my league, a Haren/Jimenez deal would probably be accepted, but I’m not at all sure Haren will outperform Jimenez for the rest of the season. Albeit, that’s easy to say right now. They’re projected to be similar, but given their performances so far, I’d rather bank on Jimenez outperforming his peripherals (even with regression) than Haren radically turning his season around.

    I haven’t tried to offer Jimenez for Lincecum yet, but maybe this be the optimal time after his consecutive rough starts (that were probably blister-induced anyways).

  10. Derek Ambrosino said...

    I don’t see what would compel a Lincecum owner to swap him for Jiminez. I think you might have a better chance going after a hitter who is anywhere from mildly disappointing relative to his pre-rank, like A-Rod, Utley, or Hanley to dramatically disappointing like Prince or Tex.

    If you got Ubaldo for next to nothing, I would think he would be your free chip to massively improve whatever your team’s biggest weakness is, as opposed to trying to cash him in to gain the marginal value of a slightly better pitcher overall.

    If keep a starter is something you feel you need to do, you could also entertain two-for-ones. For example, it wouldn’t be unreasonable to think you could get a team’s best closer and a top 20-25 starter for him.

  11. Nutlaw said...

    Although I entirely buy the idea of the endowment effect applying to fantasy baseball rosters, I’m also always reluctant to trade even value when another team owner offers me one of his players in particular. I’m nervous that there’s an injury or playing time situation that I may not yet have heard about that he has.

  12. sean said...

    “What appears to be ‘the endowment effect’ could just as easily be me betting on the fact that I can get away with price gouging – the fact that I know there’s somebody out there who wants this ticket, this shoe, or this player A LOT more than I do. There’s nothing irrational about that at all.”

    I think you hit the nail on the head here. What some people perceive to be the endowment effect, to me, is more about the power trip associated with being the market maker for an incredibly scarce (perhaps 1-out-of-1) resource. It’s not as if the owner has some sort of Smiegelian “precious” moment and won’t give the item (player) up under an circumstances; when scarcity is that high, the fair market value automatically becomes the maximum value you can extract for it because there are limited, or no other, comparable alternatives.

  13. Garison said...

    Thanks for the advice, Derek. I’m not seriously going to pursue Lincecum for that reason. I’m strong in every area except saves. I need a roster spot for a returning Brett Anderson, so a 2-for-1 or 3-for-2 deal would be convenient.

    Just a little while ago I sent the offer of Jimenez, Gardner, and Corpas for Broxton and Kemp. What are your thoughts on that? To put it in context, I’m strong in steals (with many players carrying the load, not just one or two), loaded with SP’s and weak in saves (Rauch is my top guy). My offense is pretty solid all around but could use a small boost in AVG and RBI. The manager I sent the offer to doesn’t really have strength in saves either but by my estimation he needs speed and most certainly could use everything Ubaldo has to offer.

  14. Derek Ambrosino said...


    Exactly. I understand that a buyer often focuses on what he is giving up to acquire a commodity while the seller often focuses on the benefits with having such a commodity. So, cognitively speaking, I can see where that comes into play, but that doesn’t necessarily makes the behavior irrational in the context of a rare good market, and I’m not sure we can ascribe the endowment effect to all behavior that appears as such.

    The Ariely experiment, or 4 tweaks to the experiment, were all hypothetical. The students didn’t actually have to sell the ticket. They were simply asked how much they’d have to offered to sell one. Now, if they had real tickets and held out for a ridiculous offer so long that they were unable to sell it and basically didn’t get even fair buyer-perceived market value for it, then they’d have been bitten by the endowment effect. The other problem here is that I think people are generally bad at estimating the value of a commodity in the abstract (especially when the commodity is somewhat rare). As a veteran of the shoe game, I see the delusions of profitability by the prospective reseller all the time. I picture these kids – they’re in college, remember – sitting in their dorms with a can of Natty Light on some Dr. Evil #### – diabolically conjuring – yes, two thousand dollars.

    I do have an example of the endowment effect in fantasy sports, though, and I may have shared it here before. Years ago, my friend lost our basketball league because he refused to trade Allen Iverson despite the fact that he had pretty much an unassailable lead in “points.” All he really needed was to shore up his big men cats – reduce TOs, improve FG%, add some blocks and I think we would have cruised to the title. But, he kept feeling as if he was being lowballed for AI and even though plenty of those offers probably would have been enough, he didn’t take them.

    I mean, basically if you get your price then you’re a genius and if you don’t and hurt your team because of it, you played yourself.

  15. Derek Ambrosino said...


    If you could pull that deal off, why wouldn’t you. You’d be getting a first round worthy player and the best closer in fantasy baseball for a pitcher who is likely to regress to the mean, a late round flier pick and a guy who was likely claimed off waivers.

    Now, where they were picked doesn’t really matter as how valuable they are, but my point is that players like Gardner are usually luxuries to their teams, because I doubt his owners were depending on him to be such a great source of runs and steals, so I assume they have other solid contributors there (unless they suffered injuries).

    I mean, look at this way. Even if Jiminez finishes with numbers like Greinke did last year, that still means he pitches at roughly a 3.00 ERA clip for the rest of the year. Even if somebody told me that Jiminez was going to replicate Greinke’s 2009, I still make this trade, so long as losing Gardner wouldn’t plummet me in the SB dept.

  16. Garison said...

    Good news: the trade was accepted. Even better news: it is with the last place team in the league (I’m in first, for now). So I don’t have to worry too much about how Ubaldo does for the remainder of the year, except when I face that manager in a head to head matchup.

    I’ve always loved Kemp. Ironically I traded for him last year too, but in the preseason. And I’ve been a Broxton fan since before he took the job from Saito a few years ago. Only question with Kemp is, what the heck is going on on the basepaths? 6-for-14 in steals? He’s projected for something like 15 more, so all I can assume is that it’s a fluke. Selecting Kemp and Broxton makes me look like a Dodgers fan, but I’m actually a Braves fan. So you can imagine the mixed feelings I had about Jimenez’s no-hitter vs. Atlanta.

    To bring it back to the endowment effect, it was a reluctance to sell Jimenez that was preventing me from improving my team. In my mind, and in many others’ minds, he’s been indispensible. You felt like you were selling your soul if you even entertained a trade. It’s just not true in my case. Sometimes you just have to stop smelling the roses before their scent starts to fade.

  17. Derek Ambrosino said...

    Still smelling quite good though… As I write this Ubaldo has hung 7 scoreless (w/ 8 Ks) on San Fran and is on his way to besting Lincecum. Still, Jimninez’s stock can’t really go up much higher, so you might as well cash in if you can really get a bounty, which you did.

    I’m not all that worried about Kemp on the bases, mainly because the past two seasons saw him succeed at efficient rates. He may not get to 30 this year, but I doubt he’ll be deprived the opportunity to run.

  18. Garison said...

    I love the irony of how Jimenez is coming to and leaving my team on complete game shutouts. I received him in the early season trade just in time to have him throw the no-hitter. Now he goes out with 9 bagels and 9K cream cheese. The trade finalizes in an hour. Parting is such sweet sorrow.

    But it’s not as sorrowful when I wonder how much the early-season usage could catch up to Ubaldo. I mean, he threw 130 pitches tonight and threw 129 in the no-no. In order of his eleven starts his pitch counts look like this: 99, 116, 129, 122, 95, 120, 104, 115, 92, 101, 130. If you’re keeping track, that’s 6 outings of at least 115 pitches and 4 of at least 120 pitches. It’s not even June yet, and it’s like he’s doing an impression of pre-2010 Livan Hernandez (except with good results). Or maybe Jim Tracy is doing an impression of Dusty Baker. I know Jimenez has thrown 200 innings or so two years in a row, so he’s no stranger to a heavy workload; but do the high pitch counts raise any red flags for you?

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