Stories influencing value

A study by Dor Morag and George Loewenstein sought to measure the value that participants placed on items before and after they wrote personal stories about how they came into their possession.

Recruiting 1,500 participants through the Amazon MTurk platform, the researchers devised a scenario where they would become the owner of an asset thinking about selling it. Morag and Loewenstein took the assets from the original behavioural finance experiments by Kahneman et al. in the nineties, a mug or a hat.

Two experiments were conducted to examine the participants ‘willingness to accept’ (WTA) a payment for giving up their object. Separated into two groups, they were tasked with either

a) Writing down a list in bullet form of all the characteristics of the item

b) Telling its story of how they came to possess the item

Morag and Loewenstein hypothesised that in writing a narrative about the item, the participant would find it harder to sell than simply listing characteristics.

As a result, those participants within the study who wrote a narrative had higher selling prices, approximately 20-80% higher than those who wrote a list, and higher unwillingness to sell at any cost.

Lowenstein’s earlier experiments examined a phenomenon called “source dependence”, where the value of an object is linked to the sequence of events that led up to its acquisition.

This idea shows up in many situations, for example, spending more on a keepsake at the gift shop before heading home after a beautiful day out. Also, that people show a preference for monetary gifts on their birthdays over gift vouchers, and that are appreciated more, except in the case of an item has a meaningful story behind why it is being given.

The second experiment sought to understand this in more detail by splitting participants into two different categories, one who received the item by chance and the other who received it due to their grade on the MTurk platform.

In this scenario, those that thought they had received it due to their grade had higher WTAs, than those that didn’t. Meaning that they place a higher value on the item.

Marketing is no longer about the stuff that you make, but about the stories you tell.”

Seth Godin

Behavioural economics studies the biases that many of us experience. This study highlights the endowment effect, emotional bias that causes the value of an owned object to be higher, often irrationally, than the value someone else is willing to pay for it,

It also points to why the role of narratives in the pricing of stocks or equities and how some companies have high values compared to others.

Take the FAANG stocks, for example, Facebook, Amazon, Apple, Netflix and Google. Each of these products and services is used by billions of people every day. In many cases, they are intrinsically linked with our lives, but perhaps not only that, but they also have a great story behind them.

Think about Bezos and his origins selling out of his garage, how Facebook started off life on a college campus or how Netflix defeated Blockbuster while very much the underdog. Steve Jobs is widely recognised as beginning the mobile phone revolution with the iPhone.

Morag and Loewenstein found that a story about an item increases its price by 20-80% in their experiments. Given that many of us are using these products and services every day, they not only have a personal significance to us but combined with a great story, it’s no wonder that their stocks command high prices too.

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