One of the factors that makes divorce negotiation so difficult is the cognitive bias known as the “Endowment Effect. Sometimes also referred to as “Divestiture Aversion.” This is often attributed to the Nobel-prize winning behavioral economist Professor Richard Thaler. The “Endowment Effect” essentially means that we tend to over-value items we possess. That is because humans tend to be overly sensitive to “loss aversion.” Said another way, losing something we “own” tends to hurt more than gaining something we do not. And what is divorce?–if not the loss or fractional loss of many things each party believes they “own.”
Endowment Effect and Divorce Negotiations
Consider a couple with a million dollars invested in a taxable brokerage account in both their names. In a divorce, each may walk away with half a million dollars. Each party will view this, however, as having “lost” half a million dollars. Even if their attorney was able to negotiate, against all odds, at obtaining $750,000.00 from this account, their client will still view the negotiation as having “lost” a quarter of a million dollars. And perhaps this example provides a bit of insight into why my job is difficult!
In a marriage, most couples view all the money as their own. They do not take the value and divide it by two, and in marriage you are not really encouraged to view money that way. But now with a divorce, all you can see is loss: you only get to see your children half the time, you are only entitled to half the value of the marital home, you are only going to receive half of your retirement accounts, even the one’s solely in your name. The only potential gain is when you get to divide the marital debt in two, and suddenly now that makes all the sense in the world. Yes, finally some justice!
Not More is Better…MINE is Better!!!
Wikipedia defines the “endowment effect” as: “The finding that people are more likely to retain an object they own than acquire that same object when they do not own it.” Think of a toy your young child owns. And…has not played with for months. Yet they now buck at the idea of donating the toy or letting their sibling play with it. And though we may want to think otherwise, our own adult impulses are often not much different.
That is why people are often willing to pay less for an object they do not own than the amount they are willing to accept for the same object that they do own. Aside from my experiencing this phenomena in my job as a divorce lawyer, I also noted it at a young age in playing fantasy football. It was hard to make trades, as everyone tended to overvalue their own players. You essentially had to take a loss to make a trade happen. I now understand this is a result of the “endowment effect.”
Traces of the endowment effect go back to ancient times, where Aristotle wrote: “For most things are differently valued by those who have them and by those who wish to get them: what belongs to us, and what we give away, always seems very precious to us.” Or as stated by way of the comedian George Carlin: “have you noticed that their stuff is shit and your shit is stuff?”
Loss Aversion
As Professor Amos Tversky noted to fellow Nobel Laureate Daniel Kahneman on Loss Aversion.
“The greater sensitivity to negative rather than positive changes is not specific to monetary outcomes. It reflects a general property of the human organism as a pleasure machine. For most people, the happiness involved in receiving a desirable object is smaller than the unhappiness involved in losing the same object. A high sensitivity to losses, pains, and noxious stimuli also has adaptive value. Happy species endowed with infinite appreciation of pleasures and low sensitivity to pain would probably not survive the evolutionary battle.”
As noted in Michael Lewis’s book “The Undoing Project” about these two esteemed professors, When framed as a loss, people are more likely to gamble than when confronted with a gain. And as those going through a divorce tend to view everything as a loss, as there is really nothing much to “gain” as both parties already view themselves at already possessing everything, then it makes them more likely to want to push and gamble rather than settle.
Endowment Effect and Divorce Emotions
And this too, along with all the other emotions inherent in a divorce, make settlement difficult to achieve. It also leads to buyer’s remorse for those who do ultimately settle. After a divorce is finalized, it is not uncommon for both parties to the agreement to believe the other side got over on them.
Conclusion
It is important to try and keep these biases in mind when going through your divorce. Particularly while negotiating. We may want to believe we are not subject to such cognitive biases, but they are near universal. One of the best things a divorce lawyer can do for their client is to be a steady voice of reason in the whirlwind that is the divorce. That may not always be admired by the client, but it is often in their best interests. To view divorces as rationally as possible is to give yourself the best chance at a positive outcome. Whether you can ultimately view it as one or not.
Partner with Carl Taylor, Esq.
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