The Endowment Effect (Cognitive Bias)

Posted by Doc
Jan 29 2010

A couple of weeks ago, I was in Sandusky, Ohio for CodeMash One of the keynotes was delivered by Andy Hunt (co-author of “The Pragmatic Programmer” and co-founder of The Pragmatic Bookshelf). Andy was talking about some of the material related to/from his book “Pragmatic Thinking and Learning: Refactor Your Wetware”.

One of the things that Andy talked about was Cognitive Bias. I found it fascinating, as he reiterated some of the research and findings that I’d just read about in “Predictably Irrational: The Hidden Forces That Shape Our Decisions“.

What got me was when he talked about the endowment effect. Simply stated, “a hypothesis that people value a good or service more once their property right to it has been established. In other words, people place a higher value on objects they own than objects that they do not.”

This got me to thinking about the resistance we meet when we introduce Agile concepts and practices to product development teams. After all, while I understand that change is hard and frightening, sometimes it still surprises me how much energy people put into resisting change, especially when they are suffering.

At one client I worked with recently, we had the group split into two teams, and had each team do a process doodle. As part of the exercise, each group explains their doodle. Both teams that participated explained that they spend something like 60% of their project time developing requirements and generating the various design documents. Add to that that they spend something like another 20% of their time on QA and UAT, and they spend 20% or less of their project time on actually building the product. They expressed frustration at the amount of overhead and the difficulty of getting things done. Finally, they explained that at each phase of the project, there are specific percentages by which they are allowed to be off in their estimates. That is, during requirements gathering and writing, they can be off by 50%. When they get into design, it goes down to 30%. And so on.

There’s such a powerful expression of lack of confidence in this that it amazed me. They have institutionalized their lack of confidence in both their system and their approach. And yet, there are way too many of “them” who hang onto this approach for dear life!

Let’s look at the endowment effect. “…people often demand much more to give up an object than they would be willing to pay to acquire it.

Here’s my Agile Adoption Resistance Endowment Effect: If I know how my system works, and I know how to work my system, then even in the face of something that appears to work better and will probably ease my pain, I will demand more assurance of success and ease of adoption than I am willing to offer for the system I am currently using.

I’m going to spend more time on this stuff – cognitive bias – with thought toward how it applies to the training and coaching we do. There are some powerful lessons in there.

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