• by Lydia Loizides , Op-Ed Contributor, June 7, 2006

Now that I have your attention, the endowment effect, simply defined, is the theory that people will place a higher value on objects they own relative to objects they do not. Derived from economic theory that is related to status-quo bias, and part of prospect theory, the presence of the endowment effect was front and center at a meeting I had last week with a friend who's CEO of a start-up. I will call him Jake.

Jake is a visionary, a marketer and product evangelist. He sees the success of his product as a sure thing because all of the product's success requirements exist in the marketplace: there's the critical mass of broadband; people are watching video online; content owners are creating product for distribution over IP; plus, he has two powerhouse investors. Now, I am not here to discuss whether or not the product will succeed (we can debate that when it launches). What I want to talk about is whether or not Jake overvalues the benefits of his product in the marketplace

For a minute, let's look at products that, despite the presence of consumer market support systems, have either stalled or not progressed as first believed. (For an excellent discussion on this topic, you should read John T. Gourville's work out of Harvard Business School.) From the annals of technology that should have been, I submit for your consideration ReplayTV, the laser disc, the electric car, the Cue Cat, the Segway, and eBooks. Now, on the surface, each one of these products was innovative, improved upon a process or existing technology and should have, by all accounts, been successful with consumers. The question is: why weren't they?

I propose that a significant part of the problem was due to the endowment effect: executives and engineers who were too close to the product and were unable to assess the importance or value of the product vis-à-vis the consumers' mindset. But back to Jake. He believes that, because his product will give consumers access to exclusive content through a direct channel, with extensions like social networking applications on an enhanced delivery and playback platform, these innovations will be enough to drive adoption. He has no consumer research; he intends to control how and who participates in the community that surrounds the content; simply put, he feels he has figured it all out.

Perhaps he has, but what happens if he hasn't? Is he too close to the product? Is he unable to assess the gain/loss that the consumer will experience by adopting the product? Is he able to assess the impact that controlling the socialization of these Netizens will have on the company? Product? Brand?

With any new technology, one must always ask a very simple question: if we build it, will they come? In some cases they will, but in most cases they won't. The subtleties in success lie in being able to neutralize the negative and accentuate the positive, to persuade consumers that your mousetrap is better than the rest, to entice them to change existing behaviors and value perceptions. Moreover, you need to be able to disassociate yourself from the process enough to be able to discern between what you believe the benefit is, versus what the consumer believes. As opposed to falling prey to the endowment effect, Jake should make every effort to mitigate against his own status-quo beliefs. Now, I am not picking on Jake. He is simply a mirror to look into as we think about how to navigate this ever-changing digital environment. Tread lightly and look deeply, friends; it isn't as easy as you think it is.