Learn to rent out assets to derive full value
Posted by: Uma Shashikant on Jun 05, 2017, 06.30 AM IST
By Uma Shashikant
We love to own things. To have something that we can call our own, to admire, appreciate and hold on to, is important to many of us. We spend serious money on acquiring things that we want to own.
We are quite willing to allocate wealth and even more willing to give up liquidity. Since personal finance is about the assets we acquire and the use we put them to, it might help to pause and think about why we own stuff, and whether we overdo it.
There are ancestral homes that remain unsold, because the owners do not see it as brick and mortar. They associate memories with the house, and they perceive a value that they believe cannot be measured in money.
Psychologists point out that ownership is deeply ingrained too early in life, and we develop a sense of ownership over things we control, things we shape, things we participate in creating, and things we associate with positive memories, with people we love, respect or admire.
Rationally speaking, there should be no market for old LP records in this age of digital music; and there should be no demand for physical books when reading can be accomplished more efficiently online. But people associate memories and experiences with the physical touch of these objects. That makes up the market for collectibles and antiques.
Our psychological connection with objects makes it tough for us to equate the dog-eared copy of our favourite book with its Kindle edition. We feel a bat autographed by a star batsman has somehow acquired a quality of his, to be cherished and valued.
Experiments have shown that children resent the idea of exchanging their favourite toy for a replica. Or students, who seemed indifferent to picking up either a coffee mug or a bar of chocolate as a reward, were mostly unwilling to return or exchange what they first chose, for the other. Behavioural scientists refer to this enhanced love for what we own, as the endowment effect.
The endowment effect explains why we do not sell an underperforming stock, almost falling in love with it after buying it. That may be true of our home, jewellery, clothes, cars and other assets that become special to us, or more valuable than anything that may be equivalent, simply because we own them. They are better because they are ours.
What is wrong in this desire for ownership? On the positive side, owning something makes it always accessible to us, available to us whenever we need it. To own an asset is like having the guarantee that its use will be perpetual. To see the disadvantages, we have to splice the use of the asset even better.
If it is the experiences, memories and associations with the object that create the satisfaction from ownership, we have to ask if the object and the emotions associated with it can be separated.
Researchers studying the Tanzanian Hazda hunter-gatherer tribe found that they did not suffer from the endowment effect. Or the behavioral limitation of assuming that what they owned was more precious. The primary reason for this attitude was that they were an egalitarian community that shared most things.
In the modern world of individual space, privacy, motivation and incentive, it is tough to switch to a model of common ownership. We may have travelled too far from that ideal, and the failure and collapse of Communism has sealed the notion of collective ownership in most minds.
However, the markets for human experiences have been growing very fast. How we use our time and resources has dramatically altered. We are able to use online searches and services to find out what might come close to the experience we are seeking- whether it is a trek to the hills, a run in the morning, a trip to an exotic place, or a meal at a specialty restaurant. This market for experiences and the presence of a large number of service providers might modify the economics of ownership.
Renting out what we need, and being able to enjoy an asset only for the time period we need it, is serving the purpose of optimising our user experience with the asset. Those who lease cars are not only able to upgrade their vehicles more frequently, but are also able to escape the pains of maintenance and resale.
Those who own homes are now seeking renters who are willing to pay for the spare bedroom, renting it online after checking a dynamic calendar for availability.
The onslaught of renters is likely to do two things, among others. First, the associations built with objects are likely to become weak. A house that has been occupied by hundreds of daily renters is likely to be valued for its accessibility, space and comfort, than for its ancient design and décor.
Second, if a stable income stream from rents is established as the reward for ownership, the illiquidity of the asset is likely to become less important compared to its earning capability. The focus will thus shift from future value to current income. This will revive the market for sale of assets that reluctant owners were unwilling to part with earlier.
It will be interesting to see how these conflicting positions unravel. On the one hand would be the psychological pull of ownership and its strong desire to see value in nostalgia, antiquity and association. On the other would be the digitalised separation of experiences from ownership, enabled by a large market of service providers who open up the use of assets to non-owners.
What would we choose to be? Would we be the ones to bundle away ancestral jewellery in the lockers in fond memory? Or the ones who would bring it out and give it out on rent to those who love to wear such period pieces? Would we be the ones who return to our second homes by the sea, just to savour the conversations with loved ones? Or would we place the picture on the web to open up the balcony to hundreds who can romaticise about the sunset over the sea? My bet is that many are making that transition from owning to renting already, and that would finally modify the markets for owning assets.
In a world were people are willing to pay for experiences and not things, it might be more efficient for property management businesses to own homes, rather than individuals who juggle too many things anyway. In that glorious world, people may begin to prefer financial assets over physical assets.
(The author is Chairperson, Centre for Investment Education and Learning.) This article appeared in Economic Times dated Jun 05, 2017, 06.30 AM IST