I like having money to spend. I try not to spend it, but just having money and knowing that I could spend it if I wanted to feels good to me. I don’t think that I’m alone in feeling this way, either. Money affects people in physical ways and I recently stumbled onto proof that this is true.
In 2009, Kathleen Vohs of the University of Minnesota conducted an experiment disguised as a “dexterity study.” In the study, she had one group of students count a stack of $100 bills while another group counted a similar-sized stack of blank pieces of paper. Then, both groups of students stuck their fingers into very hot water. The students who counted the real money reported feeling significantly less pain from the hot water than the students who didn’t handle the money.
The effect was so pronounced that Ms. Vohs tried the experiment in reverse: She asked some subjects to make of list of their monthly expenses and another group to write about the weather. The group who listed their bills felt more pain from the hot water than the group that wrote about the weather.
Cash is so compelling as a means of exchange that antiques dealers keep plenty of it in their pockets when they go on buying trips. I’ve never conducted an estate sale where a dealer said to me “I’ll write you a check”; they always pull a wad of bills out of their pocket and unfold them slowly so that I get a good look at them. And you know what? The technique works. The cash looks good to me and all of a sudden I’m willing to make a deal. Most of my other estate sale customers pay by check or by plastic.
Here’s an interesting corollary: Dealers may leverage their purchasing power with cash, but many of the same dealers will sit on their inventory purchases “forever” rather than trade them for more cash. Why is that?
Last month, I attended a festival in Southwestern Virginia and while I was there I stopped by a favorite antiques store. It was almost like going home. The larger pieces of furniture were in the same spot they were in on my last visit. In fact, even some of the smaller inventory items were in the same spot they had been in for the five years that I’ve lived in this area. Most museums change their displays more often than this store.
Since I’m on friendly terms with the owner, I teased him about a vintage secretary that held a display of dolls.
“Are you selling your fixtures?” I asked.
With a big grin, I said “Because there’s a price tag on this secretary. It’s been here so long I thought it was a fixture.” (You can say almost anything if you grin real big.)
I think I embarrassed him. The excuses (er, uh, I mean “reasons”) that the secretary was still unsold came pouring forth: “I have too much into it”; “I’m not just going to give it away”; and “I’d rather keep it than sell it cheap” all seemed to run together into one big sentence. I acquiesced and the conversation moved on to the town festivities.
The truth is, holding on to inventory too long is very common in the antiques trade. Even when faced with compelling financial data (like inventory turns and profits) dealers still hold on to their beloved inventory. I’ve never understood it, until recently.
Interesting reading for any business owner is a book entitled “Priceless: The Myth of Fair Value and How To Take Advantage Of It” by William Poundstone (Hill and Wang, 2010). Buried among the discussions of behavioral decision theory and research on pricing strategies, I found that there is a psychological basis for antiques dealers wanting to hang on to their inventory: it’s called “loss aversion.” This particular loss aversion has nothing to do with losing money on an item; it’s a psychological driver.
I’ve heard of loss aversion, but I’ve never before considered its impact on retail pricing. The essence of loss aversion is that simply owning something increases its value (to us). We don’t like losing something once we own it. Antiques dealers are also collectors, and they tend to get attached to the items the buy.
To demonstrate, Poundstone described a classroom experiment that is regularly conducted by Eric Johnson of the Columbia University School of Business: The class is divided into two groups. The first group is shown a coffee mug, and asked how much they would be willing to pay for it. Most of the time the answer is around $4. The individual members of the second group are each given a coffee mug that is identical to the first mug, and then asked how much they would be willing to sell it for. The members of the “selling” group generally want, on average, about $8 each for their mugs.
Do humans have a built-in markup calculator? Not likely, but it’s interesting that the experiment always shows the same result: that there is a considerable difference between how much we are willing to pay for an item and how much we would be willing to sell it for once we own it. Auctioneers and estate buyers deal with this issue regularly. How much money one paid for an item has nothing to do with how much it will sell for.
This discrepancy is called the “endowment effect” and the theory states that people place a higher value on objects they own relative to objects they do not own. One of the reasons I like to watch “American Pickers” is to watch collectors with barns full of junk (er…”collectibles”) agonize over parting with just a few items, even when offered a fistful of cash.
Reading “Priceless … The Myth of Fair Value” has led me to the conclusion that we are not antiques dealers; we are psychologists with an interest in antiques.
Previously published in Antique Trader Magazine