The Endowment Effect: Why People Overvalue What They Own, and What It Means for Free Trials and Refunds

Owning something makes it harder to give up

The endowment effect is the tendency to value an item more once you own it than you did before it was yours. Economist Richard Thaler pointed this out in a 1980 paper, noting that people tend to demand more to give up something than they would pay to acquire it.

Free trials and refund guarantees can look like tools built on this tendency. The effect depends on conditions, though, and misusing it can damage trust.

What the research showed

The best-known study is the mug experiment published in 1990 by Daniel Kahneman, Jack Knetsch, and Thaler. Some participants were given a mug and asked the lowest price at which they would sell it. Others, who had not been given one, were asked the most they would pay. Sellers asked for more than twice what buyers offered. By pure logic, owning the mug for a few minutes should not shift its worth that much.

A common explanation is loss aversion, the finding by Kahneman and Amos Tversky (1979) that losses feel larger than equal gains. Giving up an item registers as a loss, so its value goes up.

The evidence is debated. Some researchers report that the effect weakens under different experimental procedures, and studies suggest people with trading experience show a smaller gap. Treat it as a tendency that appears under certain conditions, not as something that always happens.

Using it in a free trial

One reason free trials work is that people begin to feel a thing is theirs once they have set it up. The more settings they configure and the more data they enter, the harder it is to walk away.

A few practices follow:

• Help the person reach a first real result during the trial, not just sign up.
• Show that what they build in the trial carries over if they continue.
• Tell them in advance when the trial ends.

The last point matters most. If the trial converts to a paid plan automatically, show the price and the date clearly and make canceling simple. If that is murky, the design reads as a trap that exploits the effect, and trust suffers. Rules on advertising and disclosure may apply, so check the wording with a qualified professional.

Using it with a refund guarantee

A refund guarantee reduces fear before purchase. Some sellers expect that once buyers feel the product is theirs, many will keep it rather than ask for money back. That is an expectation, not a promised result.

The guarantee has to be stated plainly: the period, what is covered, the procedure, and how the money is returned, all readable before purchase. If you pile on conditions so that refunds are hard to get in practice, the guarantee will be seen as insincere. Laws and contract terms around returns can apply, so consult a professional when setting the conditions.

Turning the lens on your own pricing

The effect works on you as well as on customers. You may rate something you made, or spent a long time on, above what the market would. When you set prices or decide whether to drop a product, it is worth having someone outside check whether attachment is shaping the call.

One way to decide whether to drop a product that does not sell is to ignore the effort already spent and ask, "If I did not have this, would I build it today?"

Other ways to let people try

Beyond free trials and refund guarantees, there are other forms: a small-capacity or time-limited low-price version, free samples, or making one part free for the first order. What they share is that the customer can judge the value at low cost and effort.

The aim is to give people material to judge value, not to make it hard for them to let go. If the value you deliver is small, a trial will not lift purchases.

Another lesson from the debate is to imagine how it feels for customers to let go. The more painful it is to move tools or data you have used for a long time, the harder it is to switch. Rather than using that to lock people in, offer considerate options, such as letting them export their data or retrieve it for a period after canceling. That helps people feel safe trying you.

What to do next

1. Choose the free trial or refund policy you offer or are considering.
2. Write down the steps a customer takes to reach a first real result during the trial.
3. State the trial's end date and the conditions for becoming a paid customer on the sign-up page.
4. Put the refund conditions (period, scope, procedure) on a single page.
5. After a set period, count how many trial users continued and how many asked for refunds, and revise the terms.