By Justin A. Reckers
I purchased a ticket for the Mega Millions California Jackpot for the first time yesterday. How could I not with the Jackpot at $355,000,000? I convinced myself spending $20 for 20 individual chances at winning $355,000,000 was a rational decision even though my odds of winning were somewhere near 1 in 176,000,000. My decision was made based on the idea that the expenditure was an entertainment expense because I obviously didn’t plan on winning.
OR DID I?
After I left 7-11 with my wife and kids in the car and California Lottery tickets in my pocket we began discussing what we might do if we won. Would we take the lump sum payout? If so, how much would that be. How much would we have to pay in taxes? Ultimately we decided we might have about $135,000,000 to spend after discounts for taking the lump sum and paying taxes. Then we started talking about how we would spend it. Maybe we would buy a bigger house on the beach in our current neighborhood. But not a disgustingly huge one, that would be a waste.
Finally the time came to check to see if we had won. Unfortunately, the answer was no. In fact, no-one won the Jackpot in California. I was actually disapointed. I knew the odds were against me from the second I contemplated buying a ticket. So why did I have an emotional reaction to the realization that I was not a winner?
I had developed a feeling of Endowment or ownership in the jackpot. The mere act of fantasizing what we might do with the winnings led me to create an emotional attachment to the fantasy. It was only natural that I would be disapointed when I realized I was not a winner and the fantasy was taken away.
Endowment Effect refers to the human tendency to place a higher value on objects we already own compared to those we do not even in situations where the two objects are identical. People often demand much more to give up an object than they would be willing to pay to acquire it. Dan Ariely proved this theory in experiments using coffee mugs. These economic anomalies occur because a person’s Endowment in an object often comes with emotional attachment. I created an emotional attachment to the California Mega Millions Jackpot the moment we started fantasizing about how we would spend it. The fantasy created a feeling of endowment in the winnings that I would never receive.
I suspect the marketing team at the Mega Millions office is well aware of Endowment Effect. It is a very powerful marketing tool. Just sit back and imagine all the wonderful things you could do with $135,000,000. Now go out and buy your tickets.
Justin A. Reckers, CFP, CDFA, AIF is Director of Financial Planning at Pacific Wealth Management www.pacwealth.com and managing director of Pacific Divorce Management, LLC www.pacdivorce.com, in San Diego.