• Thinking Orange

The Endowment Effect and Waiver Transactions: It’s “Add/Add” Not “Add/Drop”

Updated: Sep 7, 2020

Placing waiver claims can not only force pretty agonizing decisions, they can also provide a chance for quirky mental processing to lead our decision-making astray. One such quirk, called the endowment effect, captures how owning something skews the way we estimate its worth—a worrisome notion in the context of waiver wire transactions.

The Endowment Effect

Timmy wants to go to a football game, and estimates that a ticket would be worth $60 to him. So, obviously, if Timmy finds the ticket for sale at a price less than $60, he would buy it. And if he is behaving as a rational actor, Timmy would sell that same ticket if someone offered him more than $60 for it. This framework for exchanging goods is a central tenet of classic economic theory.

Except people don't actually behave this way. It turns out that people value an item differently depending on whether or not they already own it. Specifically, things tend to be worth more to people when they own them. This phenomenon is called the endowment effect.

If we apply the endowment effect to Timmy, his threshold for buying the ticket is likely quite different from his threshold for selling it. Let’s say Timmy found a great price and bought the ticket for $50, but he really wanted to see the game and would have been willing to pay up to $150 to go. Days later, the game has sold out and Timmy finds that he could resell his ticket online for $300. Does he do it? Probably not.* Even though the ticket was only worth $150 to Timmy when he was a buyer, it would take much more to get him to part with it as a seller.

Another illustration of the endowment effect shows that people do not like to exchange things they own for other things of similar value. In an experiment, people were either given a bar of Swiss chocolate or a coffee mug and then offered a chance to exchange their gift for the other item. People given a bar of Swiss chocolate tended not to exchange it for a coffee mug—and people given a coffee mug tended not to exchange it for a bar of Swiss chocolate!** This shows how people value things more highly when they own them. Even further, it demonstrates how the endowment effect can alter decisions even when people were given an item moments ago and have little emotional attachment to it.

The Strategy: "Add/Add" Not "Add/Drop"

It doesn’t matter what fantasy football platform you play on—when making a waiver wire add you will encounter a screen that prompts you to drop a player.*** This feels like a necessary, unremarkable part of the transaction. However, by highlighting the fact that you have to give an asset away, the “select a player to drop” message activates the endowment effect. This may cause you to over-value the players already on your roster, making it more difficult to drop them and spooking you away from a beneficial transaction.

To avoid this, reframe the question. Do not ask yourself, “Should I drop player A for player B?” Instead, ask, “Should I add player A or add player B?” You could even take it one step further by imagining you are making a recommendation to a friend, and asking yourself which player you would recommend they add. (This combats the endowment effect by mentally removing yourself from the decision).

The key is to take yourself out of a frame of mind where you are giving something away. Remember that your brain weighs losses differently than gains, and that a sound decision process requires both players to be considered on equal footing. So, think about waiver wire choices as if you own neither of the players in the transaction.

* Ziv Carmon, Dan Ariely, Focusing on the Forgone: Why Value can Appear so Different to Buyers & Sellers", Journal of Consumer Research, Vol. 27, No. 3 (2000), pp. 360–370.

** Kahneman, Daniel; Knetsch, Jack L.; Thaler, Richard H. (1991). "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias". The Journal of Economic Perspectives. 5 (1): 193–206.

*** Unless you happen to have an open roster spot, of course.

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