THE ENDOWMENT EFFECT: THE NATURAL SELECTION OF TECHNOLOGY ADOPTION?

Educator and physicist Richard Feynman observed, “For a successful technology, reality must take precedence over public relations, for Nature cannot be fooled.” So explains the fundamental problem that innovators of technology face: for new technology to be adopted, consumers must not only overwhelmingly perceive the new technology as a significant gain over their status quo, but it must actually deliver on that promise.  Economists explain this behavior as the “Endowment Effect.”

Many developers of technologies that never made it off the ground, wonder why their technology didn’t take off.  Harvard professor and consumer behaviorist, ,John Gourville explains the gap between an innovator’s opinion of their product and the consumer’s as the “9x rule.”  The math works out like this: Innovators overweight the new product’s benefits by a factor of three, while consumers overweight the incumbent product’s benefits by a factor of three.  The multiplication of those factors creates a gap that a new technology must overcome that is 9x better than a current method or product.  Companies launching new products spend countless time, energy, and money on how can they can “better educate” the consumer to understand & adopt their current technology. But 99.9% of the time, Nature (and consumers) will not be fooled, as Richard Fenynman so eloquently stated. Instead of trying to figure out how to advertise or “position” their new product, the question for these companies should be,  “How can we get this product to bridge the 9x gap?”  Too many companies take the easy way out by opting to simply communicate (often euphemistically referred to as “repositioning” or “rebranding”) their product benefits in a way that is more favorably received by the consumer, rather than doing the hard work of producing a more compelling product.

When researching this topic for this blog, I came across several articles on the psychology of the Endowment Effect.  But they just raised more questions for me. Is the Endowment Effect a bad thing? Does it help or hinder innovation?  Are we missing out on the next big thing because we can’t take a leap of faith? Or, does it describe a natural selection process the best technologies must survive in order to take their place in the pantheon of better products?

Take the Segway, for example.  For a decade, the personal people mover’s inventor, Dean Kamen, tested and tweaked his invention, and thought it was going to the biggest innovation in transportation since the automobile. The first, vague details of Kamen’s super secret project were leaked to the press in January 2001. But because Kamen wasn’t ready to talk about his invention, people were left to guess and dream about the great innovation he would unveil.  Was it a space-age hovercraft? A personal jet-pack? I remember wading through the commercial teasers and watching the unveiling on “60 Minutes” with eager anticipation in late 2001. And when the story was over, I thought…this is it?

Despite mixed initial reviews, Kamen believed 2002 would be the year that his Segway Transporter launched a transportation revolution. First, corporations like FedEx would buy them in bulk and then orders from the mass market would follow.   In his mind, the Segway as not merely faster than walking for getting from here to there, but it was also as solution to urban congestion, air pollution and dependency on fossil fuel. And that’s the way he was marketing it. The Segway wasn’t even a few months old before bad news started rolling in. In rationalizing the lukewarm reception, Kamen insisted his creation suffered from inflated expectations created by his silence. Granted, his strategy did inadvertently create superficially high expectations that were not fulfilled in the minds of consumers, and which would later make the product launch an uphill battle.  But that was marketing. There were more important issues – product issues — that proved to be the real mountain his creation had to climb. For starters, the price was too high. The $12,000 price tag signaled that this was a rich man’s toy. After all, at that price, it was only a few thousand dollars less than a car, and a car would keep you dry on a rainy day. And it was a lot more expensive than walking, along with some other time-honored alternatives, like the bicycle. And the price point wasn’t the only problem; the vehicle weighed more than 80 pounds, so it wasn’t exactly portable if it wasn’t moving under its own power, and yet it only traveled around 11 miles (depending on terrain) on a single charge. In 2003, the price for a Segway was dropped from the initial $12,000 to just under $5,000. But that still a hefty price for middle class America to pay for a super scooter from the future. In the end, the Segway was a solution for a problem no one really had. Yes, it was cleaner and greener than an automobile, easier to operate than a bicycle, and it beat walking, certainly, but was it 9X better than those other alternatives? Consumers said no.

But even though that natural selection of the Endowment Effect got the better of the Segway, perhaps that’ll be the impetus to develop a leaner, meaner, cheaper, more robust version. And what will evolve from that process just might just have the profound impact on day-to-day transportation patterns Dean Kamen originally envisioned.

Let us hear from you!  We think the process of manufacturing is ripe for a 9x improvement. That’s why we’re here. But what about you? What other processes or products do you think are just waiting for the 9x improvement if and when the right new technology is introduced?

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