Remember when you were a kid and your folks made you work for those expensive sneakers you had to have? Or maybe after saving your paper route bucks, you finally had enough money to buy your first used car. Did you take care of that car like it was a Bentley? It turns out there was more going on than your parents teaching you the value of a dollar.
There is a cognitive bias at work, and not only is it gaining traction with marketers and engineers, it gives valuable insight to organizational culture and employee engagement.
Think about what the following brands have in common:
I’ll give you a hint: IKEA is another brand that would fit in that group and they share a psychological phenomenon that is actually named after IKEA.
Converse: Customers can customize their own shoes online.
M & M’s: Customers can personalize candies with images or text.
Build-a-Bear: Children can design their own teddy bear.
Betty Crocker: Customers can create and decorate their own cake.
The IKEA effect is a fascinating aspect of our psychological wiring and explains how we tend to place more value on things we make ourselves. One of the best examples of the IKEA effect is found in real estate. Think about the couple who buy a house. They work hard to customize it and make it their home with faux painting, wild wall paper, tile work and odd fixtures. It was a labor of love and they were proud of what they had created. When they decide to sell it, they place greater value on the home because of that work.
Unfortunately, that value doesn't always translate to the buyers. In a recent HomeAdvisor poll, more than 40% of those surveyed would be discouraged to buy a home if they didn't like the decor.
It’s why kids will eat more vegetables if they are involved in planting or cooking them, and that picture you painted could hang in a museum. It boosts our sense of self-efficacy, and this fulfills a deep psychological need.
It explains why consumers would rather interact rather than simply consume. We don’t want to just read a blog post; we want to comment on it. We don’t want to just watch that latest Netflix series episode; we want to tweet our reviews. We don’t just want to enjoy a meal at that new restaurant, we want to post a photo of it on Instagram.
The IKEA effect is simple: you’ll value something more if you have to work for it. If you want to be happier, do things for yourself. If you want to make people happy, help them do the same.
The term “IKEA effect” was coined by US researchers Michael I. Norton, Daniel Mochon, and Dan Ariely. In 2011, they published a paper entitled When Labor Leads to Love to explain their experiments and implications for marketing and organizations more generally.
In the first experiment, they asked people to assemble IKEA storage boxes. After the boxes were assembled, they asked the participants how much they would pay for them and compared their responses to a control group. Those who had assembled the boxes said they would pay a significantly higher price than those in the control group. The work they had invested in assembling the boxes increased their appreciation of the product.
The researchers then repeated the experiment with other objects like origami figures and LEGO kits. Each experiment gave the same results. In the origami study, the people who had made the figures priced their creations five times higher than the comparison group.
One key discovery they made was that the psychological process by which labor leads to love requires consideration of an additional crucial factor: The extent to which one’s labor is successful. Participants who built and then unbuilt their creations, or were not permitted to finish those creations, did not show an increase in willingness-to-pay.
One key discovery in the study: Only when people successfully complete a labor-intensive task do they come to value the fruits of that labor.
In 2017, a team of researchers from the United Kingdom and Germany published a study which found that kids as young as five are biased by the IKEA effect, hinting that this psychological quirk is hardwired into our thought process.
When Amazon delivers that new bookcase (some assembly required), it's just a box of parts. But when you put it together, it's more valuable because you made it. It represents your time, focus and ability.
From the Consumer to the Employee
This trend in research exploring the psychology underlying consumer involvement (i.e, viewing customers as co-creators of value and the consumer experience rather than simply recipients of value) has shifted to implications for company culture. If we apply the IKEA effect to the psychology of employee engagement, it makes sense that employees who are actively involved in creating an initiative, solution, or product will not only value it more than passive employees; they will work harder to ensure its success. It explains why top-down directives and change efforts are rarely embraced and largely resisted.
Also, the overvaluation that occurs as a result of the IKEA effect contributes to another bias: sunk cost effect. Also known as “throwing good money after bad,” the sunk cost effect explains why leaders often continue to devote resources to failing projects. The initial investment of time, money and energy creates a false sense of value.
Perhaps the most famous example of the sunk cost fallacy was coined the Concorde fallacy. In 1956, the Supersonic Transport Aircraft Committee met to discuss building a supersonic airplane that could travel from New York to London in around three and a half hours, clocking 1,350 miles per hour. The Concorde was estimated to cost almost $100 million.
Long before the project was over, it was clear that estimate fell way short. Hidden expenses and increasing costs would not offset the financial gains of the plane. Nevertheless, the project continued because of the significant financial investments and time they had already put into the project. Ultimately, the plane was completed after millions of dollars were wasted. The Concorde was retired after only 27 years in operation.
A close cousin to the IKEA effect is the endowment effect. Being connected in some way to an item often distorts the valuation we assign it. The difference between the two concepts is that the endowment effect suggests that feeling connected to an object increases its value, while the IKEA effect suggests that spending effort on something increases its value.
Endowment effect: Taking a car for a test drive significantly influences your desire to own it and increases how much you’re willing to spend on it.
IKEA effect: Rebuilding the engine significantly influences the value you place on the car and increases how much you’re willing to sell it for.
Daniel Kahnerman, Jack Knetsch and Richard Thaler conducted an experiment where participants were given a mug and then given the opportunity to sell their mugs or to trade them for other objects of equal value. They discovered that once people had accepted the mugs and established ownership, the amount participants wanted to sell them for was twice as high. This was in sharp contrast to the amount they were initially willing to pay to acquire the mug.
So, it turns out that those lessons Mom and Dad taught us about valuing something more when we have to work for it were steeped in science. Mom and Dad were right again!
