Behavioral New World
September 1, 2022
Short and Swedish—the IKEA effect
The IKEA effect is the tendency to value something more highly if we have created or built it ourselves. It refers to IKEA products, especially furniture, which typically are purchased in a “flatpack” and assembled by the buyer with maybe just a screwdriver and an Allen wrench (I’m guessing many of you have had this experience). So that Ektorp sofa that you spent a whole day putting together? That was a lot of sweat equity right there – though you should have finished it in 2.5 hours. You are very happy with it anyway because you used your own talents to put the thing together, even if there is a left-over screw (should there be a left-over screw?).[1]
The IKEA effect strengthens the endowment effect, our inclination to value something more highly when we already possess it. We know of the endowment effect through laboratory and classroom experiments in which people demand a higher price for, say, a Stenklover duvet set that they already own than the price they are willing to pay for it if they do not own it. (See the August 2020 newsletter for a more detailed description of the endowment effect.)
How important is the IKEA effect? It depends on the circumstances. If you try to sell your Ektorp sofa at a garage sale, you might overprice it. No-one will fully appreciate the effort you put into assembling it (which, at this point, is a sunk cost—see the April 2022 newsletter). Maybe not a big deal.[2]
But consider the case of the founder of a successful company who wants to sell it. Of course she wants as much money as possible, but the IKEA effect will increase the chances that she will hold out for an inappropriately high valuation. An impartial third party, e.g., a business valuation expert, will help mitigate this tendency. But will she say, “No, I don’t need anyone to tell me figure out how much this company is worth, because I built it from the ground up over 20 years and know it better than anyone. It’s my creation!” That’s when the IKEA effect becomes so potent it encourages not just the endowment effect, but also overconfidence – a toxic triple whammy.
Feel free to use the Comment icon to share stories about your confrontations with the IKEA effect.
Are you now expecting me to make an IKEA joke to end this newsletter? Sorry, you’ll have to make it yourself.
[1] No.
[2] Do Swedish meatballs that you make at home taste better than those you buy at IKEA? Either way, the world doesn’t really hang in the balance.
Interesting. Hadn't heard of this before.
Nearly perfect summary (sometimes there are leftover screws;-)), thank you!