380. Hacking Human Psychology: Leveraging the IKEA Effect in Business (Refreshed Episode)

Welcome to episode 380 of the Brainy Business Understanding the Psychology of why People Buy. Today's episode is all about the IKEA Effect. Ready? Let's get started. You are listening to the Brainy Business podcast where we dig into the psychology of why people buy and help you incorporate behavioral economics into your business, making it more brain friendly. Now, here's your host, Melina Palmer. Hello. Hello everyone. My name is Melina Palmer and I want to welcome you to the Brainy Business Podcast. Today's episode is all about the IKEA effect. I love talking about the IKEA effect. It's one of those names that makes people laugh. They kind of get it when you say it and they always enjoy the full definition, which you will of course hear all about in today's episode, which originally aired in August of 2020. I really debated whether or not to refresh this one today or next week because shortly after I decided to do this one, leading into Friday's episode with Therese Houston discussing her book let's Talk, I found out that Michael Norton had a new book coming out called the Ritual Effect, and he is one of the original researchers that did the work on and chose the name for, you guessed it, the IKEA Effect. By sheer happenstance, his book comes out next week. And so that episode on rituals and the Ritual Effect is number 383. While I could have delayed this a week to line up with his episode, I decided it was still a great fit here. And because he also features work in the book from Nick Hobson, I could refresh that one next week and have a longer intro into the awesomeness of Rituals and Mike's work. So why does the IKEA Effect tie in so well to Teresa's work and why refresh it now? Let's Talk is all about how to make effective feedback. Your superpower. There is so much to it, of course, but letting the other person in on the conversation, letting them be part of shaping their own experience, makes them more engaged and increases the chances of success. That's the IKEA effect in action. So as you listen today, I want you to think about all the times you told someone to do something and it didn't go well. Or when you were told to do something and immediately rejected it, even if it was actually a good idea. Also consider the opposite. A time when you let someone be part of the process and it surprisingly went really well. Or when you were allowed to be part of forming your own development plan and stuck to it with amazing results. Have those experiences in your mind as you listen and learn about the IKEA effect today so you can understand why it might have worked or not, and how you could make your next conversation even more effective. Don't forget, there are links for everything, including your IKEA Effect freebie worksheet related past episodes, books and articles all waiting for you in the Show Notes for this episode, which are found within the app you're listening to and at the brainy business.com 380 all right, let's talk about the IKEA Effect. As I've already mentioned, the core of this concept is that when people have an opportunity to build something themselves, when they put some effort in, they will value that thing higher than something they didn't build. This concept gets its name, of course, from IKEA furniture which you assemble yourself, and looking at my own wonky table, I would value it higher than something built by someone else, but because I'm aware of the work that went into creating it, and it doesn't really matter if theirs technically looks better or is more expertly assembled, as you'll hear with some of the examples and studies throughout this episode. Some studies have attributed this to the pride felt when assembling something yourself, and that's part of it, but it isn't the whole story. This is also different than the Power of Touch, which has its episode linked in the Show Notes and from the Endowment Effect, which I have touched on in the episodes on Change Management Management. What is value? And it's also closely related to loss aversion, as I've been doing a lot more presentations on change management in the brain recently, do keep an eye out for episodes on the Endowment Effect and the Status Quo bias very soon. For our purposes here, there is a link to an article in the Show Notes called Anomalies the Endowment Effect, Loss Aversion, and Status Quo Bias, which was authored by Nobel laureates Kahneman and Thaler along with Jack Netch. The Endowment Effect is the phenomena in our brains where simply owning something causes us to find more worth in it than what other people see in it or its stated price. The example from the study talks about a group of participants. Half were given $2 cash and the other half were given a lottery ticket worth $2 and they were assigned completely at random. After a period of time in which the lottery tickets were not cashed, the participants were given the opportunity to switch and very few did. Why? If you were given the lottery ticket, your brain has started to factor in the potential winnings into calculation of how much that item is worth to you this potential means it exceeds the two dollar price tag. If you were given the cash, you see that as a solid stable amount. You know what you can do with $2 and what it can get for you. The lottery ticket has a very slim chance of being worth anything. It's most likely a worthless piece of paper, whereas your cash has remained the same. So it wouldn't be worth the gamble to give up the sure thing for the lottery ticket. Being endowed with something, owning it causes people to see value in its potential, which meant how much it was worth in their mind exceeded the price. And the potential cost of giving it up and settling on the other item would be a loss. And as we know, people are averse to losing things. It may seem on the surface like the IKEA effect is just an extension of the endowment effect. But studies have been done and shown that they are actually different. Even when people built something and were told they could not keep it, they still valued the item they made higher than those made by someone else. In one study, people were tasked with making origami cranes or frogs. There was one group of builders who had as much time as they needed to build their origami and they were all novices. So these were not fancily put together origami frogs or cranes. After completion, they had an opportunity to bid on what they would pay for it. And a standard way groups will pretty much learn the value is to say that you can bid up to to a certain amount. In this case it was $1. And then a random number will be drawn with all the possible valuations. If your bid is equal to or higher than that number, you get to keep it. If your bid is less, you can't have it. So the one group built their origami and had a chance to write down their bid for the item. There was a second group of non builders who went through the same bidding process for the items built by the novice builders as well as some origami made by expert folders. To do a comparison, the non builders valued the Expert Origami at 27 cents on average and the ones built by the non experts at a mere 5 cents. Basically a worthless piece of paper. But what did the builders think of their own creations? They valued them nearly five times higher than non builders. The average value was 23 cents, which was almost as much as the non builders were willing to pay for the expertly folded origami. A separate group was tested to ensure the results weren't just based on a willingness to buy something they wanted to keep for themselves versus True value When asked what they thought others would pay for their creations, this second group predicted that people would pay 21 cents, which is much higher than the meager 5 cents people would actually pay. This phenomenon makes it clear why people think their own artwork is worth more than people are willing to pay for it, or why they ask for a lot more money than their home is worth if they put a lot of sweat equity into creating it. We tend to think that our effort ties into the direct value and that something we spent a lot of time on is worth more to everyone else as well. Studies have shown that people expect to get higher grades for papers they spent more time writing. While there is often a correlation between these two items and effort can result in a higher grade, that isn't always the case. Maybe someone really got a concept and wrote a great paper quickly, while in another week they had a really hard time understanding the concept and they were struggling to make leaps between items, so it took them longer to understand the foundation. Many students have argued with a professor saying something like but I worked so hard, how could I possibly get a C? The reason behind this is the Ikea effect, and it's been found that we use effort as a guide for value even when we're not the ones putting in the work. This is known as the effort heuristic, which has found that even when we don't have direct memory of the work in question, for example, we don't do it ourselves, we still connect effort and quality together. A research paper linked for you in the Show Notes did a series of tests with various pieces of art, poems, paintings and suits of armor. When people believed that a poem took 18 hours to complete, they thought it was better and worth more money than people who were showed a poem that they told took only four hours. It was the same poem in both conditions and the duration of time to create it was were not the only facts they were told. They were assigned to take notes about the name of the author, his age at the time of writing the poem, the title, and the time it took to write, which was the only thing that changed between the conditions. In the four hour condition people said the value was $50 while the 18 hour version they valued nearly double at $95 for the same exact poem. I found it interesting that the liking score was not proportionately higher in the high effort condition. People rated the quality of the four hour poem as 5.84 on a scale of 1 to 11 and it went up to a 6.43 for the 18 hour version. That means that while you were doubling in the value of what they thought people would pay for it, people didn't necessarily like it that much more. Though it was a higher liking score, it was nowhere near as high as the difference between the amount that they thought someone would pay for it. In the second study, they had participants compare two paintings from the same artist, 12 lines and big Abstract. They were told the paintings took either 4 or 26 hours to complete and the assignment of the time to complete was at random. So half were told that big abstract took 4 hours and 12 lines took 26 hours and the others were told the opposite. Again, whichever painting they were told took more time to complete was the one people tended to like more and they valued it higher. And in this condition they also brought in self identified art experts to participate separately from novices and they had the same effect. The experts also changed their valuations of which were higher quality based on the effort they were told it took to to complete the painting. When looking at Big Abstract, the valuation would have made a big difference to the bottom line of the artist. When people thought it only took four hours to complete, it was valued at $650. When people thought it took 26 hours to complete, they valued it at 1500, nearly triple what they thought when it took only four hours. The last study in this paper looked at medieval suits of armor. They were actually being shown the exact same armor both times. But one version had a crystal clear image so you could see all the detail and extra etching. The other one they saw was a little blurry, so the detail was hidden. And people were either told it took 15 hours or 110 hours to complete. So one person might have seen the low resolution image and was told it took 1110 hours. Another person saw the low res image and was told it took 15 hours. The next would see a high res image and was told it took 110 hours. And the final saw the high res image and was told it took 15 hours. The clear images got higher ratings of value. But this part of the study was also looking at how ambiguous quality would impact the valuations, making effort to even more important. So let me explain what that means. When the image being shown is of high resolution, you can see the quality and so that can impact the valuation. In addition to the number of hours you were told it took to create. People rated the 15 hour condition of the high resolution image with a quality rating of 6.16 compared to a 6.4. When they thought it took 110 hours. Not a huge move between them, but still a positive momentum. When the same suit of armor was shown in a low res image, so all the fine etching was lost in the picture. People rated IT as a 4.18 on the quality scale when they were told it took only 15 hours to create. So that's a full two points lower. So from 6.16 down to 4.18 when it's the 15 hour condition. But when they were told it took 110 hours, it jumped to a 5.64. Much closer to the high resolution images quality scores. When the quality can't be easily determined by our eyes, other pieces of information will guide the brain's determination of value. And in this case, the perception of effort makes people think there must be more quality. This series of experiments shows that we believe that effort results in higher quality even when we didn't put in that effort ourselves. I really love that the article went on to include a story about Jackson Pollock. Personally, I'm a huge fan of his paintings. But his drip method wasn't impressive to the art critics and public of the 1940s. When he emerged on the scene, many people hated them and thought they were not really art or a painting, that there was no technique shown in them. And people thought incorrectly that they or their children could recreate them in a few minutes with some loose paint and a license to wave their arms without regard for the mess that they would be making. As the article says, what many assumed was the result of thoughtless splattering of paint onto canvas was in fact a slow, deliberate and exhausting process, often requiring weeks, even months of hard work. And the most important thing for our discussion here is that effort was used to defend its quality. And as the noted historian Leo Steinberg put it, questions as to the validity of Pollock's work, though they remain perfectly good in theory, are simply blasted out of relevance by these manifestations of Herculean effort, this evidence of mortal struggle between the man and his art. Insight into the intense process changed people's minds about Pollock and his artwork. This is the effort heuristic in action. And it is important to note here that as this episode is mostly about the IKEA effect, the effort heuristic is not exactly the same thing. As you can hopefully see from the discussion here, the IKEA effect says that we value things higher when we put effort into them. So the effort heuristic is present with our own IKEA effects. But when someone else is putting in the work it can trigger the effort heuristic without being the IKEA effect. Before moving on to some other examples, I want to give you some tips for how this can be used in your business. In my opinion, this helps to show why it's so difficult to bill by the hour. When you break down your project into individual hours, it's often going to be less than where someone might think. It's a Herculean effort like our Pollock painting. When you're exchanging dollars for hours, it reduces the effort to each 60 minute increment on a project. People can make their own assumptions of the total number of hours included in getting the work done, which makes may be based on how long it took them to do something themselves in the past. So if it takes me four hours to go in and do my accounting stuff in a way that's incredibly agonizing and has additional mental toil outside of the direct work, so it's really more like eight wasted hours each month. If someone was to say they could do this for me for $250 a month or 500 or whatever, I can look at my own time and opportunity costs to determine if it's worth it for me. When they say, oh, that'll only take me two hours to complete and they're at $125 an hour, it feels like there might be less work going into it and we can conveniently forget all the hours of training that got them their level of expertise. I'm actually paying for two hours, plus the countless hours of training and knowledge that they've gained over the years. Nikki Rauch, whom I interviewed on episode 96, has a great story about a little red wrench. I've linked to the full story in the show notes. But essentially a cruise ship isn't able to get out of port. The captain is panicked and worried about giving all these passengers their money back. So he tells the crew to call the retired engineer and pay him anything he wants to get the engine running. The engineer shows up with no toolbox, just a small red handled wrench in his shirt pocket. He looks and listens for five minutes, then takes the little red handled wrench and taps three times on the engine. He tells them to try again and to everyone else's surprise, the ship starts fast forward to the invoice showing up, which was for $13,000, which the captain thinks must be a mistake. He was told by the crew it took the engineer only five minutes, so he asks for an itemized bill and it returned with two line items. One red handled wrench $5 2. Knowing where to tap $12,995 for things like artwork, there's a lot of hidden time and talent that goes into the piece, something people might think they could have done themselves due to overconfidence bias and optimism bias. When someone's buying a crafted item, being able to call out how long it took to make can help justify the value. Just like Jackson Pollock. Using simple words like handcrafted or that a wedding dress is all hand beaded or that something is assembled by hand all help to trigger the effort heuristic and can work in your favor. People value the time someone puts in more than machines in many cases. But when you're putting a value on your time, it's it's really hard to get individual hours to reflect your expertise and the true effort you've put into your career. The value you provide is often in the time you're saving them. Knowing what that is worth is a better way to find what you should charge than your total number of hours put in, especially as your rates increase. This can be more difficult for people than a project value, where they don't know the exact number of hours going in. So to sum all of that up, it's just important to know when you're thinking about your pricing strategy. Just look at what type of business you're in and how the value of time can either work for you or against you as you determine how you're pricing and setting things up for your clients. The other side of the Ikea effect is knowing that people actually like to put in effort for things. We tend to assume that people would prefer to do nothing, get everything fully assembled and complete. And they would likely tell us that on a survey, because people don't really know what they want most of the time. But as it turns out, when you remove all the effort, sometimes people will rebel and not buy. Have you ever wondered why you need to add an egg and oil to instant cake mix today? We might say, why can't they find a way to include everything in the box? The truth is, they did, and no one would buy them. When instant cake mix was first introduced back in the 1950s, there was nothing to add but water and housewives didn't want them. It made it too easy, their skills were undervalued and it felt like a lie. They, of course, couldn't consciously articulate that this was the problem, but when it didn't sell, the company looked back to see what they should do to change this. Removing the powdered egg from the mix, so people had to add it themselves. Did the trick and soon box cake mix became the norm. And most people don't even know how to make cakes from scratch. It still feels like you're making cake or cookies when you use a box, but not quite as much as when you do it from scratch. And we value when people make things from scratch higher, which is why we will pay more for them than if people were selling boxed cake mix cakes at a bakery. As an avid baker myself, I'm always inclined to say I made something from scratch. When that's the case, the effort feels like it needs to be rewarded. Humans aren't the only animals who value putting in effort when presented with two food options. One that's just an open, easily accessed bowl and another that requires some level of work to get their food. Rats and birds will choose the work over the freely accessible bowl. We're motivated by feeling like we did something, like we earned it, whatever it is. We still like convenience to a point, but when it's all done for us, we don't value the thing as much. Consider Build a Bear, which was a great example from one of the academic articles in the show notes. Build a Bear Workshop puts the labor of creating the bear on the customer. Logically, it should cost less if you put it together yourself, but people actually pay more for the custom bear they create than one that's produced on a factory line or others who pay to take on someone else's job for a week. Those adult camps essentially where you're doing the work of a farmer or a chef, paying for the opportunity to make things yourself. Look at the box meals that have become popular in recent years like HelloFresh or Blue Apron. The company is able to buy the ingredients in bulk, so it costs much less than if I was to buy them myself, and the amount they send me is a smaller portion than I would have bought myself. It's pre measured for me and I can simply chop and throw it in a pan and some of them make it so you don't even need to chop the ingredients. It feels like I made it all fresh, but I didn't have to do all the work of finding the recipe, which is probably available for free somewhere online, and buying the ingredients at the store. For this luxury, I pay a premium on the ingredients, make it myself, and am happy to pay more for it, but it's important that you don't make it too hard so that the project doesn't get completed. Studies have gone on to show that when people don't finish whatever the project is, whether it's because it was too hard or because they were told to stop and the item was still super easy to finish. Like only two really tiny steps left. The IKEA effect doesn't come into play and can actually have a negative impact, resulting in regret. So you want to ensure your customers will finish whatever they buy from you and that it isn't too difficult. Similarly, taking something apart can completely wash away the effects of the IKEA effect. Building a LEGO set of only 10 to 12 pieces doesn't take more than a few minutes. It's easy to do. When given a set to assemble and a partner was making something else of similar size, people valued their items twice as much as those made by the other person, unless they were told to take them apart first building and then unbuilding. The LEGO made it, so they valued it the same as the other person's build. There's no customization available, and it would have only taken a few moments to put it back together later. But the value of the IKEA effect was completely wiped away once they took the thing apart. Some assembly required on items can help people to feel that they did something, had an opportunity to demonstrate their own competence and value the item they got more highly than if it came fully assembled. The cool thing is, you can go both ways on valuation. I've already shown you how you can use it to make it so people feel good about paying more for their buys than if they got the ingredients themselves themselves, like HelloFresh or build a Bear. This could also be used, say, if you wanted to sell monthly kits with art supplies and instructions for how to complete the project, or any number of conveniences that allow someone to be creative and use a little skill. In these cases, people are often willing to pay more. But you can also go the other way, like the namesake of this concept. And look at ikea. In this scenario, people get to feel like they're smart and savvy shoppers buying at a discount. And they get the benefit of feeling like they did something in assembling their table or bunk beds for the kids or whatever it is that they bought. Whichever model you choose, make sure you give your customers the steps they need to be successful and assume that they're buying a kit for a reason. If they were confident in painting a masterpiece on their own, they wouldn't buy a paint by number. If they knew how to build a custom table, they wouldn't go to ikea. The research shows it's best to give a little creativity along with a lot of guidance to ensure people will complete the task, be more satisfied with the end result, and get the full benefits of the IKEA effect. For the paint by number example, maybe you give recommendations for the colors to use to have it look like the intended work of art, but also provide some random colors with recommendations for changing things up. You could include three versions where an expert painted using their own color combinations to give them some creative examples and to see what they might want to emulate structure and creativity together. This also gives you an opportunity to leverage another concept, Social Proof, which was the focus of episode 87. If you feature creative items that are made by other customers, it shows that you have a lot of people who use and love your kits while helping this new customer to get some guidance and creativity. Win, win, win. And the good news is this doesn't just have to be used for product businesses. As I mentioned at the beginning of the episode, I talk about this concept in my presentations on change management as well. You've probably heard that people are more likely to be on board with projects or opportunities that they had a hand in creating. If you've ever thought that it was silly or wondered why the IKEA effect is a big reason. When you're looking to introduce a change and just throwing it at someone, they have no ownership of it. They didn't put any effort in, so they don't value it that much. When they're able to help build it, even just a little bit, it can make all the difference in whether they are a productive member of the team or a big hindrance you need to help the team get over. And I do want to insert one little caveat here. When you're working on assembling an item, it's okay to have it so that the first steps are completed and the person is completing the item through to the end. With the IKEA effect, if you though have them only start making something and then they don't finish it or someone else finishes that assembly process, it can feel like they didn't get the full benefit of the IKEA effect because they didn't create that final outcome. And this has been shown in children as young as five years old. When you're looking at a work scenario, it's kind of the opposite. So it can be really valuable to let someone have insight very early on in a project where they're able to influence where the project goes down the line. And you can still say so and so talked about this thing which we were able to implement in this way. So asking them upfront is actually very valuable. Even if they aren't in that tactical implementation process, they can still be part of that. And it can be productive and a good use of the IKEA effect, but you can also only have them come in at the beginning and still get that value. And if there are people on your team who are particularly resistant to change, look for opportunities to include them as early as possible in the next project and make sure it is something where you can show them that the suggestions they made or ideas they had were included whenever possible. Remember, if you ask them and don't include their feedback, it can actually end up worse than if you don't ask at all, because it would be triggering sort of a confirmation bias that the company doesn't actually care about me or my opinions. And look, they asked, but for no reason, because they wouldn't implement anything that I suggested. So just be selective when you pick the projects that you're asking for feedback on to make sure that you can actually implement the things that those folks are suggesting. And this is another point where social proof can really come into play. At one of my corporate jobs, we used to ask for employee ideas and feedback all the time. And maybe your company does this too. If you as an employee throw ideas into the abyss and no one ever hears about them ever again, it isn't very motivating. Just like that confirmation bias problem I was talking about a second ago. But what about when you suggest an idea and the company makes a big deal about it, celebrating that person for their great idea? We would have postings on our intranet that would say things like thanks so much to Susie Q. Who suggested we switch to this new process, which we estimate will save the company $10,000 this year. Thanks for the great suggestion, Suzy. We love that you're part of this team. That's the IKEA effect plus social proof, which is a big win. And I want to note this is very similar to some examples that Dr. Gleb Sipursky gave when we were talking about incentivizing engineers to participate in a marketing process. Monetary incentives were not the same as being named Employee of the Month when you participated in the marketing efforts. So seeing how you can align incentives is important as well. When you line up your incentives in this way with the IKEA effect and social proof, it can help your employees look for opportunities to bring on change themselves and be more open to changes when they come. Fostering a culture of change doesn't have to be difficult. And the IKEA effect can make it a little easier. So what got your brain buzzing as you learned about the IKEA Effect today? For me, as I said at the beginning of the episode, the IKEA Effect is one of my favorite concepts to talk about, both because of its fun name and because of how important it is in getting customers to buy and employees to buy in. It's fascinating to think about how simply involving customers in the creation process of a product or service can lead to such a strong attachment and sense of ownership. On how involving employees into their development plans, project plans, and change initiatives can have all the difference into whether or not they're all in or all out. This all speaks to the power of involving people in something bigger than themselves and the psychological impact that can have the IKEA Effect is not just a marketing strategy or a change initiative, it's so much bigger than that. It's a reflection of human nature and our desire to feel connected and invested in in what we do and create. As businesses evolve and incorporate more AI and machine learning, it may feel like you can think about this stuff less, but the opposite is true. Human behavior is more important than ever. So as you look to your own company, remember the IKEA Effect and look around for new ways to tap into this powerful force. Remember this coming Friday's episode with Therese Houston talks about how you can use the IKEA Effect and other concepts in a way that will increase the effectiveness of your feedback at work. And next Friday in episode 383, I'm so excited to be talking with Michael Norton about his book the Ritual Effect. And you know, I asked him about the IKEA Effect, how it came about, why it wasn't called the LEGO Effect, and more. You don't want to miss that. If you aren't yet subscribed to the Brainy Business podcast, now is a great time to do so to ensure you never miss an episode. And don't forget, there are links in the show notes for everything, including your free IKEA Effect worksheet, my top related past episodes, books, a timestamp summary of the episode, and more. It's all waiting for you in the app you're listening to and@the brainybusiness.com 380. And just like that, episode 380 on the IKEA Effect is done. Join me Friday for a brand new episode with Dr. Therese Houston to discuss her book, let's Talk. It's going to be a lot of fun. You don't want to miss it. Until then, thanks again for listening and learning with me. And remember to be thoughtful. Thank you for listening to the Brainy Business Podcast. Molina offers virtual strategy sessions, workshops and other services to help businesses be more brain friendly. For more free resources, visit thebrainybusiness.com.