Thursday, May 08, 2008

*** Predictably Irrational by Dan Ariely

Behavioral economics is the science of truly analyzing how humans react to economics. Most economists assume that we are 100% rational, yet none of us are. Perhaps that is why economics is derided as the dismal science? Ariely reveals many humbling truths about our decision making. Bear in mind that the circa 50,000BC hardware and software that we run was built for a different environment than modern society, and our brains are still stuck in that mode.

We are not only irrational, but predictably irrational – that our irrationality happens the same way, again and again… In conventional economics, the assumption that we are all rational implies that we compute the value of all options that we face and then follow the best path. If we make a mistake and do something irrational, traditional economics states that market forces will sweep down on us and swiftly set us back on the path of righteousness… We are really far less rational that std economics theory assumes, and more over these irrational behaviors are neither random nor senseless. pXX

Decoy marketing

To explain the decoy effect, let me give you the $275 Break Maker example from Williams&Sonoma…Flustered by poor sales, the manufacturer brought in a marketing research firm, which suggested a fix: introduce a larger and even more expensive bread maker (by at least 50% higher). Now sales began to rise for the original bread maker, while the new one (decoy) languished. Why? Simply because consumers now had 2 models to choose from. Since one was clearly larger and much more expensive… people would say “I’d rather have the smaller one for less money”. P14

Decoy dating

What if you’re single? My advice would be to bring a friend who has your basic physical characteristics (similar coloring, body type, facial features), but is slightly less attractive than you. Why? Because the folks you want to attract will have a hard time evaluating you with no comparables around. However, if you are compared to your decoy friend, you will appear much better, not just to the decoy, but in general… Of course don’t just stop at looks, be sure to pick a friend who can’t match your wit and smooth conversation. By comparison you’ll sound great. Now that you know this secret be careful: when a similar but better looking friend asks you to accompany him/her for a night out. P15

Always do better than your brother in law

HL Mencken said a Man’s satisfaction with his salary depends on “Whether he makes more than his wife’s sister’s husband.” Why? This is a comparison that is salient and readily available. Now that you know this fact, and assuming that you’re not married, take this into account when you search for a soul mate. Look for someone who’s sibling is married to a productivity challenged individual. P18

Want to feel rich? Move to Mississippi

People who move to a new city generally remain anchored to the price they paid for housing in their former city. People who move from inexpensive markets to moderately priced markets don’t increase their spending to fit the new market. Rather, they spend an amount similar to what they were used to in the previous market, even if that means having to squeeze into smaller or less comfortable homes… People who move from LA or NY, don’t generally downsize their spending much once they a lower market: they spend an amount similar to what they were used to… The only way out of this box is to rent a home in the new location for 1 year. P31

First impressions are important, whether they involve remembering that our first DVD player cost much more than such players today or remembering when gas cost $1.00, which makes every trip to the gas station a painful experience. In all of these cases, anchors that we encountered and were swayed by, remain with us long after the initial decision itself. P36

Are you Starbucked?

Have you fallen for Starbucks and bumped yourself up to a new level of consumption? Once you’ve left your old café with its bottomless cup of house brew for the $3.50 variety at Starbucks, it’s hard to go back. Worse, it is easy to move from $3.50 to a Venti or to lateral moves like a Caffe Americano, Macchiato, Frappuchino, etc. If you stopped to think about it, it would not be clear whether you should be spending all of this money on coffee at Starbucks instead of getting a cheaper coffee elsewhere (like free at most offices). But you don’t even think about these tradeoffs anymore. You’ve already made this decision many times in the past, so you now assume that this is way you want to spend your money. [And you couldn’t been wrong all those other times.] So you’ve herded yourself – lining up behind your initial experience. P38

So why do you like Starbucks so much? It’s not the coffee actually. The shops are fragrant with the smell of roasted beans. They showcase alluring snacks. The ambience is that of an upscale European café. The language is also continental with Grande, Venti, Caffe Mistro, etc. Starbucks does everything in its power to make the experience feel different than the coffee houses that preceded it. You’re not buying the coffee, you’re buying the experience. P39

Ben’s suggestion: buy a cheap cup of coffee somewhere else, and enjoy drinking it inside a Starbucks. You can even kick it up a notch by sprinkling some of the complementary flavors, additions that Starbucks provides.

Breaking the habit

Ask yourself what amount of pleasure you will be getting out of this purchase. Is this pleasure as much as you thought you would get? Could you cut back a little and better spend the remaining money on something else? With everything you do, in fact, you should train yourself to question your repeated behaviors… And as for coffee – rather than asking which blend you will have today, ask yourself whether you should even be having that habitual cup of expensive coffee at all. P44

What is it about ‘free’ that’s so enticing? Most transactions have an upside and downside, but when something is free we forget the downside. Free gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is. Why? Because humans are so intrinsically afraid of loss. The real value of free is tied to this fear. P54

Ever seen those buy 1 get 1 for $1.00 or even 1 penny deals? Bad idea. Stick with free. Amazon had a shipping campaign that charged just 1 franc for shipping ($.20). Sales didn’t increase. But by making it free, France saw a dramatic sales increase. P59

Oil and water: social and market norms

We live simultaneously in two worlds – one where social norms prevail, and the other where market norms rule… When we keep social and market norms on their separate paths, life hums along pretty well… When social and market norms collide, trouble sets in. A guy takes a girl out for dinner and a movie. They go out again and again, and he keeps paying the bill. At this point, he’s hoping for at least a passionate kiss. His wallet is getting perilously thin, but worse is what’s going on in his head: he’s having trouble reconciling the social norm (courtship) with the market norm (prostitution). On the 4th date, he casually mentions how much this romance is costing him. Now he’s crossed the line. She calls him a beast and storms off. You can’t mix social and market norms – without in this case implying that the lady is a tramp. As Woody Allen said, the most expensive sex is free sex. P69

Ask for volunteers...

There are many examples to show that people will work more for a cause than for cash. The AARP asked lawyers if they would offer less expensive services at $30/hour to needy retirees. The lawyers said no. Then the program manager had a brilliant idea: he asked the lawyers if they would offer services for free. Overwhelmingly the lawyers said yes. What is going on here? When money was mentioned, the lawyers used their market norms and found the $30/hour offer lacking. When no money was mentioned they used social norms and were willing to volunteer. P71

But give them small gifts of appreciation

Experiments prove that no one is offended by small gifts, because even small gifts keep us in the social exchange world and away from the market norms. P73

Don't cross the line, and if you do, there's no going back

When a social norm collides with a market norm, the social norm goes away for a long time, and it is not easy to re-establish. An experiment where a child care center started to impose a fine for late pickups, quickly discovered that this encouraged parents to pick up children late, since they could easily justify the additional cost versus the added convenience. Prior to the fine, the parents felt guilty by inconveniencing the workers. After the child care center went back to the honor system, the tardiness continued unabated. P77

For companies that strive for social relationship with their customers, a hefty late fee – rather than a friendly call from the manager – is not only relationship killer; it’s a stab in the back. Consumers will leave angry and spend hours complaining. No matter how many cookies, slogans, and tokens of friendship, one violation of the social exchange means that the consumer is back to the market exchange. P79

If companies want to benefit from the advantages of social norms, they need to do a better job of cultivating those norms. Medical benefits are among the best ways a company can express its side. But what are most companies doing today? Demanding high deductibles and reducing benefits. P82

Should give someone cash or a gift worth the same amount? Think of it this way; who do you suppose is likely to work harder – someone who is getting $1000 in cash or someone who is getting a personal gift worth that amount? P83

We should rethink school curricula, and link them in more obvious ways to social goals, technological goals, and medical goals that we care about in society. This way students, teachers, and parents might see the larger point in education and become more enthusiastic and motivated about it… We should stop confusing the number of hours students spend in school with the quality of the education they get. P86

Mr. Hyde lurks inside us all

An experiment of sexually aroused men revealed that under arousal that their behavior and choices were vastly different than from those in an unaroused state. When unaroused, they respected women; they were not particularly attracted to odd sexual activities; and they expected that they always would use a condom… No matter how we looked at the numbers, it was clear that the magnitude of underprediction by the participants was substantial. They revealed in their unaroused state that they themselves didn’t know what they were like once aroused. Prevention, protection, conservatism, and morality disappeared completely. They were simply unable to predict the degree to which passion would change them. How much of difference for a group of undergraduate men:

100% more likely to being attracted to a 12 year old girl

229% more likely to being attracted to a 60 year old woman

167% more likely to engage in beastiality

125% more likely to not stop having sex after your date says no

420% more likely to slip a drug to increase the chance a woman would have sex

See Appendix to Chapter 5 for the complete results. P97

And you thought DUI was dangerous, try DU20: Driving while being under the age of 20

Imagine you’re a teenager driving a car full of laughing friends, with the CD player blaring, and the driver’s right hand is searching for the French fries or his girlfriend’s knee. Who’s thinking about risk in that situation? A recent study found that a teenager driving alone was 40% more likely to get into an accident than an adult. With one other teenager in the car the percentage is twice that – 80%, with a third teenage passenger it is doubled again to 160%. P102

We just can't help being late

Students who were offered to choose their own deadlines for papers did better than those who were offered no deadlines and thus could turn in their projects on the last day of class. However, students who were compelled by the teacher to deliver their papers at specific times, did best of all. What do these results suggest? First, that students procrastinate; second tightly restricting their freedom is the best cure for procrastination. P115

Ice Glass Savings Method

Put your credit card into a glass of water, and then put that glass into the freezer. When you impulsively decide to make a purchase, you must first wait for the ice to thaw before extracting your card. Often your compulsion had subsided. Warning! Don’t think about putting your card in the microwave or you’ll destroy the magnetic strip. P122

When students had camped out for a right to purchase final four tickets had a chance to either buy or sell those tickets, the students who didn’t own a ticket were willing to pay $170/ticket… Those who owned a ticket demanded about $2400/ticket. Not a single person was willing sell a ticket at a price that a person who was willing to buy. Remember these students moments earlier, also didn’t have a ticket. In an instant after winning the drawing for a right to purchase the ticket, an emotional chasm formed between those who imagined the glory of the game and those who imagined what else they could buy with the price of the ticket. P132 This is called the Endowment Effect.

Nature has given us an ability to become instantly attached to what we have…We focus on what we may lose, rather than what we may gain… We also assume other people will see the transaction from the same perspective as we do… Our aversion to loss causes to make bad decisions. P134

Branding the Brain

Taking the Coke and Pepsi challenge while in an MRI demonstrated that when told that you’re drinking a coke or a pepsi, the emotional center lights up. However, only coke also lights up your prefrontal cortex, the area involved in higher brain functions… The advantage of Coke over Pepsi was due to Coke’s brand, which activated the higher-order brain mechanisms. P167

A better way to settle arguments

The perspective of each side is presented without the affiliation – the facts are revealed, but not which party took which actions. This type of blind condition might help us better recognize the truth. P172

When Lincoln lay dying, it is said his physician applied mummy paint to the wounds. This was made from ground up Egyptian mummies and was believed to remedy epilepsy, fractures, paralysis, and many other things. As late as 1908 it could be ordered from Merck pharmaceuticals. P177

Try the generic Veladone

In an experiment to demonstrate the power of placebo effect in conjunction with the price of the drug, experimenters presented drug – Veladone – as an analgesic (painkiller) to subjects who would undergo a series of mild painful shocks before and after taking the drug. Almost all participants reported less pain… This was very interesting since Veladone was just a capsule of Vitamin C… Suppose we discounted the price of Veladone from $2.50 per dosage to only $.10, would our participants react differently?... Only ½ of them experienced the pain reduction now… The price relationship was strongest with subjects who had most recently suffered from pain and taken pain medications. We believe that you get what you pay for. P184

Consumers who stop to reflect about the relationship between price and quality are far less likely to assume that a discounted product is less effective… These results suggest a way to overcome the relationship between price and the placebo effect but also suggest that the effect of discounts is largely an unconscious one to lower prices. P187

Quackery or surgery, is there difference in this country?

In the US, very few surgical procedures are tested scientifically. For that reason, we don’t really know whether many operations really offer a cure or whether they are effective merely because of their placebo effect. P191

There should be a cop inside every company

In 2004, the total cost robbery, larceny, burglary, and auto theft as $16B. But consider this: every year employee theft and fraud is estimated at about $600B… Each year insurance fraud alone exceeds $24B. The IRS estimates about $350B in losses for tax fraud. The retail industry loses about $16B just to customers who buy clothes and return them after wearing them “wardrobing”. P196

From our experiments, it is clear that oaths and rules must be recalled at, or just before, the moment of temptation… Also, once professional ethics have declined, getting them back won’t be easy. P214

In this electronic and credit/debit card age, the days of cash are coming to an end… The question is how can we control our tendency to cheat for money when we are brought to our senses only by the sight of cash – and what can we do now that cash is going away? P230

Your tastebuds will suffer if you want to be unique

If people choose menu items that nobody has chosen just to convey uniqueness, they will probably end up with an item that they don’t really want or like. And indeed our experiments proved this. Those who made menu choices aloud were not as happy as those who made their selections privately without taking other’s opinions into consideration. The exception to this rule was the first person to order obviously. They did fine in either scenario. P236

We found a correlation between the tendency to order different items from what others ordered and a personality trait called ‘need for uniqueness’. In essence, individuals more concerned with their own uniqueness were more likely to select an item not yet ordered in an effort to demonstrate that they were one of a kind. What these results show is that people are sometimes willing to sacrifice the pleasure they get from a particular consumption in order to project a certain image… In essence, people with a high need for uniqueness may sacrifice personal utility to gain reputational utility. P237

1 comment:

Versoyance said...

Do you think marriage is reduced to nothing but an Ikea Effect?