The Endowment Effect, HODLing and the Impossible Self-Appraisal

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This episode is sponsored by Nexo.io.

This time on Bitcoin, reporter George Frankley shares another surprising look at the flaws in human behavior and what we can learn from them.

In this episode we explore the impact of endowments, the phenomenon of collectible cryptocurrency wallets, and more.

credits

This episode was written, edited, and performed by George Frankley, with additional production assistance from Adam B. Levine. Music for this episode was provided by gritty beats and Jared Robbins. Art for this episode was created by Adam B. Levine / Pixelmind.ai

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Hey there – I’m George Frankley and I’m going to take a look at how even the best and smartest people can make really stupid decisions and terrible predictions – and what we can learn from them. This dares to be stupid.

This Time About Daring To Be Stupid: The Impossible Self-Assessment, or “From Hummens to Hoddle”

Soon, radio and amateur Twitter analyst Jesse Kelly sighed at the smoothness of modern men. “I can’t believe there are men who don’t know how to work with their hands!” Tweeted. “I woke up this morning and built a shed for the backyard.”

Firm stance on traditional masculinity principles or whatever. At least, as strong and masculine as a plastic rubber storage box the size of a phone booth. Before he quietly deleted the tweet and the photo and shuffled it away, several commenters were happy to note that his 6-square-foot, Suncast-branded plastic utility shed was available for two of Home Depot’s adorable vehicles and featured “easy to assemble within minutes.”

But let’s not laugh so funny at one person’s manhood, for there it is but for God’s grace we all go. Everyone shares delusions of inflated self-evaluations of value and utility…even though some of us are probably more than others. When we do something with our own hands, as this form of testosterone has done, we will always appreciate the results… very highly.

Value valuation is vital not only to trade or business, but to every type of decision-making. Whether we’re putting antique furniture on Craigslist or deciding between two career opportunities that will change our lives, we value values ​​and value them against others. It wouldn’t surprise anyone to hear that the average person can’t make a proper mental risk assessment, but it might surprise you how reliable we all subvert our assessments in the same ways. From second-hand IKEA furniture to long-term cryptocurrency wallets, a mental measure of value and importance is linked to some of the global human failings.

Even money, no matter how far we go into a pure medium of exchange, is completely replaceable, it germinates human traits when it passes through human hands. You don’t have to be a meticulous numismatist to notice that old and misprinted coins become more than just their paper value. Even as money abandons its physical form and ascends to the crypto-spirit realm, the effects of the inability to go wrong still remain. Bitcoin is Bitcoin Bitcoin, but movements of values ​​create differences. Even when cryptocurrencies are not sequential and devoid of individual demarcation, their destinations themselves become more than the sum of their parts.

The addresses of the wallet themselves are being commoditized beyond their explicit asset value. casascius coins, physical bitcoins, public addresses marked on the front and private keys embedded under the tamper seal. Revealing all public addresses means anyone can freely track the contents of all physical coin wallets, but as long as the coin has not been tampered with, a hand-to-hand exchangeable unit of cryptocurrency can be—literally trading an entire wallet with the cash inside of it—that is. These coins are now collectible in two entirely different contexts: coins that have not been tampered with with their crypto-value and collectible tokenization, and then the broad secondary market for coins that have been tampered with as antiques. They are literally hacked wallets – the private key is known by any previous owner. It’s a safe interest-free hollow coin – but it’s still digitized and limited from the crypto history, and it holds an inexplicable collectible value.

Context will always be key – this context can be the global baggage of immovable coins under scrutiny or personal curiosity for keys to an empty kingdom. The nature of cryptography is to keep the ledger, the history of every move, and I can’t think of a better way to define ‘history’ than ‘context and baggage’.

Let’s go back and talk about IKEA furniture. At this very moment, I’m blessed with a new home and overburdened an IKEA Hemnes secretarial desk with Matching Hutch. There is no place for the latter within the first. It’s time to put it up for sale. long thing. It is heavy. Other people ask about two hundred such pieces. But our country is in good shape. I installed extra shelves, some coat hooks along the top, and made cutouts in the back for cables and outlets.

My wife listed it for a hundred and fifty. Excuse me?

“I have to reveal the crap I tied it in and the bits I cut,” she says, taking pictures of my handiwork for listing. “I really want to sell it.”

And damn, she’s right. Nobody cared how much time I spent pulling flat bags, piecing them together, realizing the cage was sold separately and buying that, realizing it would block the outlet and require a cutout, adding an extra shelf without looking at it, finding the hooks to match the color and the handles well enough to blend in.

To everyone else on the Internet, my Hemnes secretarial desk with Matching Hutch looks like every Hemnes Secretary Desk with Matching Hutch for sale, save for some sticky bullshit. My sense of effort is meaningless versus the nearly identical effort each of them requires at one time or another. It just seems important, enhanced, or impressive… to me.

For mercy, I’m not alone. The results of a truly bizarre set of social experiments in 2011 by joint researchers from Harvard, Yale, and Duke explained what the authors called the “IKEA effect.” Also known to boring people as the “giveaway effect,” this was a behavior that arose when test subjects were asked to create various educational projects, from LEGO to origami, to IKEA furniture, yes. Once completed, the majority of subjects evaluated the value of their creations on an equal footing with experts and professionals. Many have seen that their IKEA furniture and storage boxes are worth a lot more than the retail price tag for the unassembled merchandise. They did not see the same things as being of equal value when someone else put them together.

The truth is that while work and effort will always be sources of value, we have overwhelming biases towards our efforts and our work. Investing our time and sense of control into building these products provides them with a tragically illiquid and irreplaceable emotional talent.

Even stranger, this extra cost can be used against us. The “IKEA Effect” allows us to sell “experiences” for an additional cost, using the labor required as an added value. The researchers were happy to point to this role reversal by having the Build-a-Bear Workshop, a place where kids can do all the work of assembling and stuffing a plush animal for four times the price of a pre-assembled animal. I can only imagine the pain these noble economists felt years later when they built their own lightsaber at Disneyworld.

If you feel like these are backward and counterintuitive habits, well, I’m sorry but it’s only getting worse. There are signs of a link between provisions of the endowment effect and the Dunning-Kruger effect. This is a cognitive bias where the less a person has experience with a subject, the more they overestimate their skills in it. It’s the inevitable end point of “How hard can it really be?” The more inexperienced a hobbyist is with a new task or craft, the greater the risk of grossly overestimating his output. For example, anyone who has no experience building things with their own hands, for example, might think that putting together a quick plastic storage shed is a very important victory worth sharing with the world.

These are all widgets and doodads, although they are things with ambiguous and qualitative values. When you’re trying to get into the real economy for that, the way we approach objectively measurable assets is rather poor.

In a way, when given options of equal quantitative value, the human brain still lags behind emotional bias—specifically, we will tend to overestimate the assets we actually own more than potential gains of equal value. This is especially evident in collector’s markets, where a valuable asset – a thousand dollar beginner’s card, a ten thousand dollar vintage wine – cannot simply be given up for known fixed values. The satisfaction and security of owning the asset is worth more than cash equivalents.

This was demonstrated empirically on a micro-scale by economist John List, with volunteer researchers assigning random five-dollar gifts at the start of events and then giving them the opportunity to trade in at the end. Among the typical attendees, four out of five refused to even think. However, among volunteers with experience in commodity trading, this rate rose to almost fifty. Obviously, unless people train themselves to depersonalize assets, they will find themselves attached to it.

The struggles that the daily crypto worker faces provide some insight into this struggle. On the one hand, you can explain some of this behavior through the classic rules of opportunity cost: When you sell, you sacrifice potential future earnings.

But that’s rarely the case – it’s a fact that you pull out of the fight. You quit the game, and you rip your ticket to the money train. No amount of cash on hand will determine how much you will lose your share of the trip. Some people have desensitized themselves to that hidden cost, but many of us still find it hard to get rid of it.

This is not an indictment of emotional decisions, nor does it highlight the chumps we all deserve to laugh about. The depth and degree of these biases will vary, but we all share them. It’s a human cost, and surprisingly, it’s not a weakness.

There is a connective thread behind many of these habits that hasn’t always been obvious – it’s hard to measure, but it goes something like this;

What is the strongest feeling? The satisfaction you would get from earning a $5,000 raise, or the frustration of a $5,000 salary cut? When faced with equal objective benefit value at stake, are emotional risks equal also?

For the majority of humans, they simply aren’t. The annoyance of losing is consistently greater than the pleasure of equal gain. The human brain* by nature hates loss. * Our biology has been trained to be vigilant, gather resources, value our time, and take our losses more personally than we gain.

It’s not something to be ashamed of: Be proud of your victories, watch out for failures, and enjoy the ride. Just make sure you get out of your shoes from time to time; You’ll be a better negotiator, a better person, and everywhere less likely to hold playkool over your head and declare yourself He-man.

Thank you for listening. As always, I’d like to remind you that all of my job titles come with the word “armchair”. If you’re an expert and get it wrong, I’d love to hear from you.

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