The IKEA Effect and Your Financial Plan
If you've ever lived in an apartment in a large city, chances are you had some Ikea furniture rounding out your mismatched accoutrements. I can't tell you how many times I have been given a tour of a friends place in Toronto and every fourth word out of their mouth is in poorly pronounced Swedish.
The Ikea effect is a cognitive bias where people place a higher value on things they have created. Like, you know, a DYFJORD dresser or an ASKVOL bed.
From the Harvard Business School working paper (11-091) where the term was coined:
the impact of labor on valuation suggests that [..]when people imbue products with their own labor, their effort can increase their valuation
Now the usual question..."Ken, what does this have to do with financial planning?"
I'm so glad you asked. When you set out to work with a financial planner, they will give you projects to do. I ask my clients to complete a net worth on their computer which sits on their MICKE desk, sit down and figure out their annual expenses, using bills they keep in their FJÄLLA desk organizer and complete a risk assessment using their MÅLA pencils.
With all the work that you put into gathering information, you should feel a little pride in the fact that all those numbers basically represent you. The more you can discover by yourself, be that you spend too much on coffee or that you have a lot of equity in your home, the more empowered you feel. The more you value your efforts. That's what proper financial planning in all about; helping you feel in control of your financial life now, and in the future. Call my office to set up a meeting so I can assign you your homework.
Kenneth Coombs CFP CHS RRC
Ken has 13 years experience in the financial services industry, is a Registered Retirement Consultant and a Certified Financial Planner. Ken has written financial planning columns and has been a guest on financial radio and podcast programs.
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For me, it was the PAX system of wardrobes. My bedroom had a regular size closet with 2 mirrored sliding doors. It was a pain to get things into and out of. What we decided to do was purchase a few PAX wardrobes and insert them into the closet...kinda like a built in. Being a handy guy, I cut the closet to the precise size (don't look too close though), built the PAXs and slid them in. If you've been to my house, you've seen them. That's the first stop on the tour.