The story of Tesla’s senior executives falling into the “IKEA effect”. Why you should know about it? What are the lessons?

Michael Norton – a Harvard Business School professor- asked senior Tesla executives to put together Lego sets meant for three-year-olds – really big blocks, not the little ones intended for the older kids.

The fifty-year-old executives assembled a Lego car, duck, frog, or rocket in less than a minute; cynicism was writ large on their facial expressions. They may have thought that the professor was insane.

The professor then said "Okay, we're done with that. Can you please take them back apart and turn them in?"

There was an audible gasp from the room and they were suddenly protective about their little duck or little car and they were really upset it had to be taken apart and given back.

Why?

These people could buy all the Legos in the world. It's not a cost thing. It's only after having made it that suddenly you look at it and you say, this duck, there's really something very special about this duck.

It is partly we invest our time and energy into them and then partly there's it's mine. It's more valuable now because it has part of me in it and I'm amazing. Therefore, the things I make are also amazing.

The IKEA effect is a cognitive bias in which consumers place a disproportionately high value on products they partially create. The name refers to Swedish manufacturer and furniture retailer IKEA, which sells many items of furniture that require assembly.

What are the lessons?

1.     Businesses can benefit by involving customers to customize the products or services and they will be willing to pay more for it.

2.     Beware of sunk cost effects, which occur when managers continue to devote resources to sometimes failing projects they have invested their labor in. The effect is also related to the "not invented here" (or "NIH", or even "NIH syndrome"), where managers disregard good ideas developed elsewhere, in favor of (possibly inferior) internally developed ideas.

3. Think about the “IKEA effect” when paying a premium for hand-crafted products.

There are many more but you get the gist of the "IKEA effect".

That is it for today, see you next time.

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