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Predictably Irrational

The hidden forces that shape our decisions

Dan Ariely

"If I were to distill one main lesson from the research described in this book, it is that we are pawns in a game whose forces we largely fail to comprehend. We usually think of ourselves sitting in the driver's seat, with ultimate control over the decisions we make and the direction our life takes, but unfortunately, this perception has more to do with our desires, with how we want to view ourselves, than with reality."

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Subscriber offer for Economist magazine: 3 choices:
online only $59
print mag only $125
print mag + online $125
and of course nearly everyone chooses option 3 bc seems like getting online for free. In fact when asked students which one they'd pick, the split went 16-0-84

but 'print-only for $125' is a decoy, bc no-one will ever select it. When you take it away, 68 choose option 1 and only 32 choose option 3. Choices are still the same, but when the decoy is removed, radical change in what we pick. What's happening is that we much prefer to compare similar things if we can. So if the choice is between a week in Rome and a week in Paris, it's a toss-up. But if choice is between Paris, Rome with a free breakfast, or Rome, then Paris immediately drops out of the comparison.

Downside of our comparison bias is jealousy and envy. Companies made companies publicize salaries they paid to top execs in hope that it wd shame them into restraint. But the opposite happened - all CEO's compared their salaries to the rest.

We're familiar with the idea of 'imprinting' - a gosling will follow for the life the first moving object it sees after it hatches, even if it's a human being instead of its mum.

Anchoring is similar - get people to think of a number (actually got them to write down last 2 digits of their social security number), then write that number down as dollars beside a list of 5 items. Then beside that they had to write down the maximum price they wd pay for that item. (And then asked "Do you think you'd be influenced by the fact that you wrote down yr SS number?" "NO WAY!"). But in fact when split group into 5 bands depending on their SS number, the top band (SS numbers 80-99)offered to pay average $56 for one item, whereas bottom band (01-20) offered an average of $16.

When Howard Schultz started Starbucks he had a problem - you cd get much cheaper coffee at Dunkin' Donuts, or free at the office. So separated by ambiance - experience a continental coffee shop with the smell of fresh beans roasting, comfy chairs etc. Once you've tried it, you had a new anchor price - the cheapest cup at Starbucks - so quite easy to move you up to a bigger cup or a snack.

We have this idea of rational markets, governed by supply and demand, but demand (what customers are prepared to pay) can be quite easily manipulated.

FREE is irresistible
Expt with chocolates - you cd have a very high quality choc for 15 cents, or you cd have a Hershey kiss for 1 cent. Most people [75/25] took the expensive one for 15 cents (you cd only buy one). Then took 1 cent off the price for each. Luxury choc was now 14 cents, but the Hershey kiss was free. Now the choice reversed: 30/70. The relative price of each was the same, and expected pleasure from each unchanged, so in theory behaviour shdn't change.

But FREE makes us irrational. Given choice between a free $10 voucher (Amazon or whatever) or a $20 voucher for $7, most choose the free one even though better value to buy the $20 one.

Free day at the museum. But then you get the crowds, and you don't get as good an experience, but still most people choose this option.

Zero is not another discount. Difference between 2 cents and 1 cent is small, but difference between 1 cent and 0 cents is huge.

We live in 2 separate worlds - one where social norms apply, and one where market norms make the rules.

eg sex - free warm and emotionally nourishing in the social context, and market sex, on demand, for a fee.

AARP asked lawyers if they'd work for the elderly at discount rate of $30 hr. All refused. Then asked if wd offer their services free to needy retired folk; all agreed. When money was offered, the lawyers applied market norms and found the offer lacking; when no money, applied social norms and happily volunteered.

Scrambled sentences expt - original one used 'old age' words to prime subjects who then walked more slowly down hall. Second version with money words made people much less likely to ask for (social) help in next task.

This is where child care came in - Israel tried to introduce fines when parents late collecting kids, but this just gave them permission to be late, and pay a fee. Guilt was actually a lot more effective, but this social norm was removed by fine. But when the daycare dropped the fee and tried to go back to the old system, lateness actually got worse - they'd taken away both social and market mores.

Businesses like banks often try to have it both ways - run ads that push social mores buttons. But the problem is that as soon as you step out of line by going O/D or miss a payment, they hit you with a financial penalty based on market norms. This is even worse because customers take it personally. When it's always a commercial relationship, customers understand the rules. But when the banks try to give impression of personal, family/friend relationship, and then give you a bill, it's just like inviting someone to dinner and then trying to charge them.

We are all Jekyll and Hyde - no matter how 'good' we think we are, once we are Hot (aroused/angry/afraid) all our PC answers go out the window. We grossly underestimate the effect of passion on our decision-making. Not just that our 'cold' predictions of our 'hot' behaviour are wrong; they are wrong by a big margin.

This has two major consequences
1. regarding the 'Just say no' sexual abstinence campaign
2. insight into other 'hot' states like road rage and fright

We need to teach kids more sociology and less biology - they need strategies to deal with the emotions that accompany sexual arousal. And need to teach them the need to walk away before passion aroused.

We all react to stereotypes, even about ourselves. Expt where gave Asian/American women a math test. Before test reminded one group that Asians good at math, and reminded other group that women are weak at math. Predictable results - group that had been reminded that they were women did much worse than group reminded that Asian.

Lesson from this is that if you want to resolve a culture-based conflict such as Palestine or Yugoslavia, need to table the facts blind, without labels as to who committed the deeds - otherwise get completely contaminated by individual expectations.

Several operations that used to be commonplace now almost never done because found that the exact same results achieved by just anaesthetising the patient, cutting him open and then just sewing him up again without actually doing anything. These included a heart op to increase blood flow, a knee op to relieve arthritis and an op to remove scar tissue in the abdomen.

Our health strongly affected by belief and conditioning. Sometimes just the doctor paying attention to us is enough to start the internal healing processes. If we're conditioned to expect pain relief from a drug or treatment, our body produces endorphins and opiates.

Price is impt - a $5 pill is far more effective than same drug when we're told it only cost 5 cents.

2004 total cost of all robberies in US $525 million. But cost of employee crime at work $600 billion Plus each year, individuals add bogus $24 billion to insurance claims.

Seems to be 2 types dishonesty - one involves stealing money and other involving goods.

Gave a group of Harvard students a multichoice test and promised them 10 cents for each correct answer - split into 4 groups:
1. test marked by someone else - cdn't cheat
2. marked own test, and it was possible to change yr answer if you wanted to cheat
3. shred test answers; verbally report yr score
4. just go to a jar of coins and take what you thought you deserved

Control - group 1 - scored average 32 out of 50
groups 2, 3 and 4 all averaged 36 out of 50

ie the majority of people cheatesd, and they all cheated a little bit
got same results all over the country

Next phase was to divide students into 2 groups first. One group asked to recall list of 10 book titles; second group to learn the 10 commandments. Then spread 2 groups across 4 types of test marking systems. Those who'd learned book titles cheated (a little) as usual. But the ones who'd learned commandments didn't cheat at all.

So is it religion that's responsible? Another test, this time the second group simply had to sign a bit of paper that said "I understand that this study falls under the MIT honor system." Turned out that this second group didn't cheat either, which is all the more remarkable when you understand that MIT doesn't have an honor code.

So people cheat (a little bit) when they can, but once they think about honesty, they stop cheating completely.

Article in London Sunday Times 1 June 2008

Professor Dan Ariely is carving a reputation in the relatively new field of behavioural economics, a science that examines the way we behave during life's everyday transactions: plodding around the supermarket, arranging a pension, even finding a new lover.

The bad news is that we don't behave very sensibly. According to conventional economists, people act rationally in their own self-interest; yet in a new book, Predictably Irrational (HarperCollins), Ariely says that we are anything but rational. We are creatures of impulse, emotion and - above all - habit. Confronted by complex choice, we bluster and waver and often do nothing at all (see Cheesy Wotsits, above). The good news is that we can change.

Let us first assess the depth of our flakiness. Ariely teaches at the Massachusetts Institute of Technology's business school, the students of which can expect to join the hard edge of US industry. Surely if anybody can assess product value, these are the people. Yet apparently not.

One day Ariely asked a group of them to note down the final two digits of their social security numbers. He then asked if the students would pay this amount for various products - including a bottle of Cotes du Rhone and some Belgian chocolates. In a subsequent classroom auction of these products, he discovered that the students with the highest social security numbers went on to make the highest bids.

In other words, once a number picked at random was associated with a product, that became the guide price. "This is known as the power of first decision," he says. "Once people start thinking of something having a specific value, they do so not once but repeatedly." It's why we might moan about the price of a fashionably skinny latte coffee but rarely look for a cheaper alternative.

This, of course, assumes that we know what we want in the first place. And the more choice we have, the more difficult it becomes. At an upmarket grocery store in California, a team of scientists set up a display of jams. Sometimes there were six different types of jam, sometimes there were 24. If you tasted one of the jams, you got a discount voucher to buy any jam in the store.

You would think, wouldn't you, that the bigger the choice, the higher the sales. Yet just the opposite happened. "The choice had been made so complex that people fell back on the default position of their regular shopping - to buy no jam," says Ariely. "Jams are hardly complex things, but people saw 24 stacked together and thought, 'I have no idea how to deal with this'."

Too little choice can be just as bad. When a kitchen equipment store decided to introduce a bread-making machine to its range, sales were poor. The answer proved simple: they introduced a more expensive machine to sit alongside it. "Sales began to rise, simply because consumers now had two models to choose from," says Ariely. "Since one was clearly larger and more expensive, people didn't have to make their decision in a vacuum."

Behavioural science also has invaluable advice to anybody in search of sex. Just as we're more likely to buy a bread machine if there is something to compare it with, we're apparently more likely to get lucky in love if we go out looking with a similar but slightly less attractive friend.

How do you live your life the rational Ariely way? You should certainly think more about some of the complex decisions of life, such as mortgages and investments, he says, and be wary of any sudden impulses.

Above all, try not to get too emotional: "When emotions take over, it's basically too late. If you go to the supermarket and they pump in the smell of fresh baked bread - and then they let you taste a few little things - then the battle is over."

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