Models and financial arrangements: the charms and sirens of "Do-It-Yourself"
With the capricious fall weather, some young and not so young people will undoubtedly return to indoor hobbies such as model making. Although seemingly harmless, this type of activity gives the opportunity to reflect on the management of our personal finances. In this field too, the "do-it-yourself" dimension can play a role in the way we value things. Let's discover this bias that we call the "effort heuristic"...
Effort is priceless!
What a pleasure, after long hours of work, to be able to admire one’s finished model. This one has no price! Indeed, it is difficult to imagine asking a model making enthusiast how much they would pay for their work, as they gets their satisfaction from the creation and not from any income.
On this topic, an interesting experiment(1) was attempted in 2011 by three researchers (M. Norton, D. Mochon and D. Ariely). They split the study participants into two groups: members of the first group were given a storage box that they had to assemble while those in the second group were given the same box but which had already been assembled by a third party. In order to keep the finished product, participants were asked to propose a purchase price. The results showed that the members of the first group were willing to give 63% more than those who had received a box already assembled! The researchers also looked at the LEGO® blocks, a common indoor toy for children, and grouped the participants into pairs. They received either two identical pre-built objects, or two objects to build and keep, or two objects to build and destroy. As a result, the creators estimate the price of their own object (0. 84$) twice as much as the same object made by his partner (0.42$). If they destroyed it in the meantime, the difference is less (0.14$) and if this object had been given to them already built, the difference is almost nil (0.06$)!
It is easy to understand the interest in the Do-It-Yourself trend, both from consumers and companies. As far back as the 1950s, the story goes(2) that in order to increase sales of its Betty Croker brand of instant cake mixes, the General Mills company followed an astonishing piece of advice from the psychologist Ernest Dichter: modify the recipe so that an egg had to be added to the mix and the cook had the impression of making "your own" pastry! By adding a little complexity, consumers felt more invested in the recipe... and sales took off!
"Do-it-yourself" applied to one's finances: a risk of immobility
The above experiments highlight the value placed on what results from our own involvement, our efforts. This is known as the effort heuristic and is referred to by some as the "IKEA® effect", named after the famous do-it-yourself furniture seller. This tendency should not be confused with the endowment effect, in which individuals place more value on a good or service when it is owned.
Several explanations have been proposed for the attraction of Do-It-Yourself products. For example, successfully assembling a product confers a sense of competence, or a sense of saving money and making smart consumer choices. In any case, there is a relationship between perceived effort and the value placed on the consumer good.
Personal finance is no exception to this trend: there is a great danger of placing too much value on the current situation if you have had to put in the effort, for example, to spend time selecting stocks or building an initial asset allocation with your banker or, possibly more time-consuming, on your own. The more you have been involved in past decisions, the more reluctant you are to change, the more likely you are to succumb to the "charms" of not changing, even if the lack of change is detrimental to your finances. So stay alert, regardless of your past efforts!
This article was not pre-written... so I'm attached to it, but your comments are always welcome!
(1) The IKEA effect: When labor leads to love, Michael I. Norton, Daniel Mochon, (2011)
(2) Something from the Oven: Reinventing Dinner in 1950s America, New York: Viking, Shapiro, Laura (2004)
WARNING
This document is an advertisement and has no contractual value. Its content is not intended to provide an investment service, nor does it constitute investment advice or a personalised recommendation on a financial product, nor insurance advice or a personalised recommendation, nor a solicitation of any kind, nor legal, accounting or tax advice from any entity under the responsibility of Société Générale Private Banking.
The information contained herein is provided for information purposes only, is subject to change without notice, and is intended to provide information that may be useful in making a decision. Past performance information that may be reproduced is not a guarantee of future performance.
Before subscribing to an investment service, financial product or insurance product, the potential investor (i) must read all the information contained in the detailed documentation for the service or product in question (prospectus, regulations, articles of association, key investor information document, term sheet, information notice, contractual terms and conditions, etc.), in particular those relating to the associated risks; and (ii)consult his legal and tax advisors to assess the legal consequences and tax treatment of the product or service being considered. His or her private banker is also available to provide further information, to determine with him or her whether he or she is eligible for the product or service under consideration, which may be subject to conditions, and whether it meets his or her needs. Accordingly, no entity within Société Générale Private Banking can be held responsible for any decision taken by an investor solely on the basis of the information contained in this document.
This document is confidential, intended exclusively for the person to whom it is given, and may not be communicated or brought to the attention of third parties, nor may it be reproduced in whole or in part, without the prior written consent of Société Générale Private Banking. For more information, click here.
The sale of a business: Key issues and best practices?
Hospitality is a vibrant sector that’s always on the move and influenced by a multitude of economic, social and...
When it comes to personal finance, we’re usually advised to keep a little distance, figuratively, from our financial...
Returning from vacation, this article draws a connection between the beauty of archaeological sites and that of a vacuum...
The sun is out and so are the lawnmowers. Cue the friendly banter between enthusiasts of the walk-behind mower, the...