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Wednesday, August 29, 2012

September Review - Predictably Irrational

1.      Opening Thoughts
2.      Table of Contents
3.      Further Reviews and Summaries
4.      Quotes from the Book

Predictably Irrational
Opening Thoughts

If you have been following my book reviews you will know if have a preference for books on helping me understand how my mind works…or does not work.  Dan Ariely adds a twist to the mix as he seeks to explain how our logical minds are not only no logical but can be “predictably irrational” at times.  His stated goal is to challenge your presuppositions as to what makes people “tick.”  His work in behavioral economics places him in a special role of trying to understand what motivates the decisions we make.  Part of his premise is that this irrationality is predictable, given the same circumstances we can accurately predict that all most all people will end up making that same choice.

What frightens me is to the degree science has been able to isolate these issues and to the degree that commerce is able to capitalize on them.  For instance, if you want people to “choose” a certain price you simply bracket that by two other prices…most people choose the middle.  Hedonic Adaptation is the process of becoming used to your environment.  This is why moving up to that bigger and better house soon loses its thrill as we adapt to the “new” standard.  The same goes with other things like fuel prices, food prices, cars, travel etc.  Our brains need context in order to compare things. 

…we are always looking at the things around us in relation to others. We can’t help it. This holds true not only for physical things—toasters, bicycles, puppies, restaurant entrĂ©es, and spouses—but for experiences such as vacations and educational options, and for ephemeral things as well: emotions, attitudes, and points of view.

Ariely reinforces much of what I have read in other books.  While we think our conscious mind is the King of the Brain, in fact, it is more akin to the Prime Minister.  It does not make independent choices uninformed from the unconscious mind where the King really resides.  Understanding why we do what we do can help us gain greater control of feeding information into the unconscious.  Because it is the unconscious that builds up the narrative of our life and the uses that narrative to inform and sometimes, force decisions on us.  It is all very true, what goes in comes out: but not in the way you think.  As we absorb the world around us our narrative that guides much of our actions is constantly being adjusted, challenged, reinforced and/or changed. 

This is a good read!

Table of Contents

Introduction How an Injury Led Me to Irrationality and to the Research Described Here

Ch. 1 The Truth about Relativity: Why Everything Is Relative  
Ch. 2 The Fallacy of Supply and Demand: Why the Price of Pearls - and Everything Else  
Ch. 3 The Cost of Zero Cost: Why We Often Pay Too Much When We Pay Nothing  
Ch. 4 The Cost of Social Norms: Why We Are Happy to Do Things,  
Ch. 5 The Influence of Arousal: Why Hot Is Much Hotter Than We Realize  
Ch. 6 The Problem of Procrastination and Self-Control   
Ch. 7 The High Price of Ownership: Why We Overvalue What We Have  
Ch. 8 Keeping Doors Open: Why Options Distract Us from Our Main Objective
Ch. 9 The Effect of Expectations: Why the Mind Gets What It Expects  
Ch. 10 The Power of Price: Why a 50-Cent Aspirin Can Do What a Penny Aspirin Can't
Ch. 11 The Context of Our Character, Part I: Why We Are Dishonest
Ch. 12 The Context of Our Character, Part II: Why Dealing with Cash Makes Us  Honest  
Ch. 13 Beer and Free Lunches:   Where Are the Free Lunches?  

Reflections and Anecdotes about Some of the Chapters 245
Notes 341
Bibliography and Additional Readings 345
Index 355

Further Reviews and Summaries

Short Review in the New Yorker

Quotes from the Book

Moreover, these irrational behaviors of ours are neither random nor senseless. They are systematic, and since we repeat them again and again, predictable.  

..humans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly.

Let me start with a fundamental observation: most people don’t know what they want unless they see it in context.     

But Sam also knows that given three choices, most people will take the middle choice    

It’s this: we not only tend to compare things with one another but also tend to focus on comparing things that are easily comparable—and avoid comparing things that cannot be compared easily.

RELATIVITY HELPS US make decisions in life. But it can also make us downright miserable. Why? Because jealousy and envy spring from comparing our lot in life with that of others.

This might just be the toughest commandment to follow, considering that by our very nature we are wired to compare.

The Fallacy of Supply and Demand    

The basic idea of arbitrary coherence is this: although initial prices (such as the price of Assael’s pearls) are “arbitrary,” once those prices are established in our minds they will shape not only present prices but also future prices 

This, then, is what we call arbitrary coherence. Initial prices are largely “arbitrary” and can be influenced by responses to random questions; but once those prices are established in our minds, they shape not only what we are willing to pay for an item, but also how much we are willing to pay for related products (this makes them coherent). 

They become anchors when we contemplate buying a product or service at that particular price. That’s when the imprint is set. From then on, we are willing to accept a range of prices—but as with the pull of a bungee cord, we always refer back to the original anchor.

It happens when we assume that something is good (or bad) on the basis of other people’s previous behavior, and our own actions follow suit.

But what are the main lessons from these experiments about our lives in general?

Descartes said, Cogito ergo sum—“I think, therefore I am.” But suppose we are nothing more than the sum of our first, naive, random behaviors.

We should also pay particular attention to the first decision we make in what is going to be a long stream of decisions (about clothing, food, etc.).

but in fact the power of the first decision can have such a long-lasting effect that it will percolate into our future decisions for years to come.

Perhaps it’s time to inventory the imprints and anchors in our own life.

It’s no secret that getting something free feels very good. Zero is not just another price, it turns out. Zero is an emotional hot button—a source of irrational excitement.   

I believe the answer is this. Most transactions have an upside and a 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? I think it’s because humans are intrinsically afraid of loss. The real allure of FREE! is tied to this fear.

WHEN CHOOSING BETWEEN two products, then, we often overreact to the free one.   

The difference between two cents and one cent is small. But the difference between one cent and zero is huge!

Here is the main point: because both products were discounted by the same amount, their relative difference would be unchanged.

This is how the pattern of choice should look, if the only forces at play were those of a rational cost-benefit analysis. The fact that the results from our experiments are so different tells us loud and clear that something else is going on, and that the price of zero plays a unique role in our decisions.

As Margaret Clark, Judson Mills, and Alan Fiske suggested a long time ago, the answer is that we live simultaneously in two different worlds—one where social norms prevail, and the other where market norms make the rules. The social norms include the friendly requests that people make of one another.

When we keep social norms and market norms on their separate paths, life hums along pretty well.

A FEW YEARS ago, James Heyman and I decided to explore the effects of social and market norms.

There are many examples to show that people will work more for a cause than for cash.

When money was mentioned, the lawyers used market norms and found the offer lacking, relative to their market salary. When no money was mentioned they used social norms and were willing to volunteer their time.

Are gifts methods of exchange that keep us within the social exchange norms?

As it turned out, all three experimental groups worked about equally hard during the task, regardless of whether they got a small Snickers bar (these participants dragged on average 162 circles), the Godiva chocolates (these participants dragged on average 169 circles), or nothing at all (these participants dragged on average 168 circles

The conclusion: no one is offended by a small gift, because even small gifts keep us in the social exchange world and away from market norms.

They reacted to the explicitly priced gift in exactly the way they reacted to cash, and the gift no longer invoked social norms—by the mention of its cost, the gift had passed into the realm of market norms.

THESE RESULTS SHOW that for market norms to emerge, it is sufficient to mention money

thinking about money in this manner be sufficient to change the way participants behave?

Thinking about money, then, made the participants in the “salary” group more self-reliant and less willing to ask for help.

Indeed, just thinking about money makes us behave as most economists believe we behave—and less like the social animals we are in our daily lives.

SO WE LIVE in two worlds: one characterized by social exchanges and the other characterized by market exchanges. And we apply different norms to these two kinds of relationships. Moreover, introducing market norms into social exchanges, as we have seen, violates the social norms and hurts the relationships.

But once the fine was imposed, the day care center had inadvertently replaced the social norms with market norms. Now that the parents were paying for their tardiness, they interpreted the situation in terms of market norms. In other words, since they were being fined, they could decide for themselves whether to be late or not, and they frequently chose to be late.

This experiment illustrates an unfortunate fact: when a social norm collides with a market norm, the social norm goes away for a long time. In other words, social relationships are not easy to reestablish.

Here are some answers. Asking a friend to help move a large piece of furniture or a few boxes is fine. But asking a friend to help move a lot of boxes or furniture is not—especially if the friend is working side by side with movers who are getting paid for the same task. In this case, your friend might begin to feel that he’s being used. Similarly, asking your neighbor (who happens to be a lawyer) to bring in your mail while you’re on vacation is fine. But asking him to spend the same amount of time preparing a rental contract for you—free—is not.

What’s the upshot? If you’re a company, my advice is to remember that you can’t have it both ways. You can’t treat your customers like family one moment and then treat them impersonally—or,

My feeling so far is that standardized testing and performance-based salaries are likely to push education from social norms to market norms.

We should probably first rethink school curricula, and link them in more obvious ways to social goals (elimination of poverty and crime, elevation of human rights, etc.), technological goals (boosting energy conservation, space exploration, nanotechnology, etc.), and medical goals (cures for cancer, diabetes, obesity, etc.) that we care about as a society. This way the students, teachers, and parents might see the larger point in education and become more enthusiastic and motivated about it.

MONEY, AS IT turns out, is very often the most expensive way to motivate people.

The answer, I believe, is not to re-create society as Burning Man, but to remember that social norms can play a far greater role in society than we have been giving them credit for. If we contemplate how market norms have gradually taken over our lives in the past few decades—with their emphasis on higher salaries, more income, and more spending—we may recognize that a return to some of the old social norms might not be so bad after all.

Beset by this nightmarish vision, Robert Louis Stevenson screamed in his sleep in the early hours of an autumn morning in 1885. Immediately after his wife awoke him, he set to work on what he called a “fine bogey tale”—Dr. Jekyll and Mr. Hyde—in which he said, “Man is not truly one, but truly two.”

In Freudian terms, each of us houses a dark self, an id, a brute that can unpredictably wrest control away from the superego.

every one of us, regardless of how “good” we are, underpredicts the effect of passion on our behavior.

A better strategy, for those who want to guarantee that teenagers avoid sex, is to teach teenagers that they must walk away from the fire of passion before they are close enough to be drawn in. Accepting this advice might not be easy, but our results suggest that it is easier for them to fight temptation before it arises than after it has started to lure them in. In other words, avoiding temptation altogether is easier than overcoming it.

But to make informed decisions we need to somehow experience and understand the emotional state we will be in at the other side of the experience. Learning how to bridge this gap is essential to making some of the important decisions of our lives.

We need to explore the two sides of ourselves; we need to understand the cold state and the hot state; we need to see how the gap between the hot and cold states benefits our lives, and where it leads us astray.   

IN CHAPTER 5 we discussed how emotions grab hold of us and make us view the world from a different perspective. Procrastination (from the Latin pro, meaning for; and cras, meaning tomorrow) is rooted in the same kind of problem. When we promise to save our money, we are in a cool state. When we promise to exercise and watch our diet, again we’re cool. But then the lava flow of hot emotion comes rushing in: just when we promise to save, we see a new car, a mountain bike, or a pair of shoes that we must have. Just when we plan to exercise regularly, we find a reason to sit all day in front of the television. And as for the diet? I’ll take that slice of chocolate cake and begin the diet in earnest tomorrow. Giving up on our long-term goals for immediate gratification, my friends, is procrastination

What do these results suggest? First, that students do procrastinate (big news); and second, that tightly restricting their freedom (equally spaced deadlines, imposed from above) is the best cure for procrastination. But the biggest revelation is that simply offering the students a tool by which they could precommit to deadlines helped them achieve better grades.   

Interestingly, these results suggest that although almost everyone has problems with procrastination, those who recognize and admit their weakness are in a better position to utilize available tools for precommitment and by doing so, help themselves overcome it.

students—failing over and over to reach our long-term goals. Why? Because without precommitments, we keep on falling for temptation.  

It seems that the best course might be to give people an opportunity to commit up front to their preferred path of action. This approach might not be as effective as the dictatorial treatment, but it can help push us in the right direction

What’s the bottom line? We have problems with self-control, related to immediate and delayed gratification—no doubt there. But each of the problems we face has potential self-control

WHAT OTHER PROCRASTINATION problems might precommitment mechanisms solve?

A few years ago, for instance, I heard about the “ice glass” method for reducing credit card spending. It’s a home remedy for impulsive spending. You put your credit card into a glass of water and put the glass in the freezer. Then, when you impulsively decide to make a purchase, you must first wait for the ice to thaw before extracting the card.

But this caveat aside, we still believed that in general the ownership of something increases its value in the owner’s eyes.

tickets—so dramatically?   OWNERSHIP PERVADES OUR lives and, in a strange way, shapes many of the things we do.

The second quirk is that we focus on what we may lose, rather than what we may gain.

Our aversion to loss is a strong emotion,

The third quirk is that we assume other people will see the transaction from the same perspective as we do.

CHAPTER 8 Keeping Doors Open Why Options Distract Us from Our Main Objective

Xiang Yu explained to his troops that without the pots and the ships, they had no other choice but to fight their way to victory or perish. That did not earn Xiang Yu a place on the Chinese army’s list of favorite commanders, but it did have a tremendous focusing effect on his troops: grabbing their lances and bows, they charged ferociously against the enemy and won nine consecutive battles, completely obliterating the main-force units of the Qin dynasty.

In the context of today’s world, we work just as feverishly to keep all our options open.

In running back and forth among the things that might be important, we forget to spend enough time on what really is important.

What is it about options that is so difficult for us? Why do we feel compelled to keep as many doors open as possible, even at great expense? Why can’t we simply commit ourselves?

HOW CAN WE unshackle ourselves from this irrational impulse to chase worthless options? In 1941 the philosopher Erich Fromm wrote a book called Escape from Freedom. In a modern democracy, he said, people are beset not by a lack of opportunity, but by a dizzying abundance of it. In our modern society this is emphatically so. We are continually reminded that we can do anything and be anything we want to be. The problem is in living up to this dream.

But even stranger is our compulsion to chase after doors of little worth—opportunities that are nearly dead, or that hold little interest for us.

In our experiments, we proved that running helter-skelter to keep doors from closing is a fool’s game. It will not only wear out our emotions but also wear out our wallets. What we need is to consciously start closing some of our doors. Small doors,

We have an irrational compulsion to keep doors open. It’s just the way we’re wired.

CHAPTER 9 The Effect of Expectations Why the Mind Gets What It Expects

a series of simple experiments to explore how previously held impressions can cloud our point of view.

The moral, as you might expect, is that if you tell people up front that something might be distasteful, the odds are good that they will end up agreeing with you—not because their experience tells them so but because of their expectations.
When the coffee ambience looked upscale, in other words, the coffee tasted upscale as well.

WHEN WE BELIEVE beforehand that something will be good, therefore, it generally will be good—and when we think it will be bad, it will bad.

AS YOU SEE, expectations can influence nearly every aspect of our life.

That’s what marketing is all about—providing information that will heighten someone’s anticipated and real pleasure.

Whenever a person received a squirt of Coke or Pepsi, the center of the brain associated with strong feelings of emotional connection—called the ventromedial prefrontal cortex, VMPFC—was stimulated. But when the participants knew they were going to get a squirt of Coke, something additional happened. This time, the frontal area of the brain—the dorsolateral aspect of the prefrontal cortex, DLPFC, an area involved in higher human brain functions like working memory, associations, and higher-order cognitions and ideas—was also activated. It happened with Pepsi—but even more so with Coke (and, naturally, the response was stronger  

It is also interesting to consider the ways in which the frontal part of the brain is connected to the pleasure center. There is a dopamine link by which the front part of the brain projects and activates the pleasure centers.

EXPECTATIONS ALSO SHAPE stereotypes. A stereotype, after all, is a way of categorizing information, in the hope of predicting experiences. The brain cannot start from scratch at every new situation. It must build on what it has seen before. For that reason, stereotypes are not intrinsically malevolent. They provide shortcuts in our never-ending attempt to make sense of complicated surroundings.

In one notable study, John Bargh, Mark Chen, and Lara Burrows had participants complete a scrambled-sentence task, rearranging the order of words to form sentences

Those who had worked with the set of polite words patiently waited for about 9.3 minutes before they interrupted, whereas those who had worked with the set of rude words waited only about 5.5 minutes before interrupting.

CHAPTER 10 The Power of Price Why a 50-Cent Aspirin Can Do What a Penny Aspirin Can’t

PLACEBO COMES FROM the Latin for “I shall please.” The term was used in the fourteenth century to refer to sham mourners who were hired to wail and sob for the deceased at funerals. By 1785 it appeared in the New Medical Dictionary, attached to marginal practices of medicine. One of the earliest recorded examples of the placebo effect in medical literature dates from 1794. An Italian physician named Gerbi made an odd discovery: when he rubbed the secretions of a certain type of worm on an aching tooth, the pain went away for a year.

The truth is that placebos run on the power of suggestion. They are effective because people believe in them.

IN GENERAL, TWO mechanisms shape the expectations that make placebos work. One is belief—our confidence or faith in the drug, the procedure, or the caregiver.

The second mechanism is conditioning. Like Pavlov’s famous dogs (that learned to salivate at the ring of a bell), the body builds up expectancy after repeated experiences and releases various chemicals to prepare us for the future.

In the case of pain, expectation can unleash hormones and neurotransmitters, such as endorphins and opiates, that not only block agony but produce exuberant highs (endorphins trigger the same receptors as morphine).

We tried this in a series of experiments, and found that consumers who stop to reflect about the relationship between price and quality are far less likely to assume that a discounted drink is less effective

In AD 800, Pope Leo III crowned Charlemagne emperor of the Romans, thus establishing a direct link between church and state. From then on the Holy Roman emperors, followed by the kings of Europe, were imbued with the glow of divinity. Out of this came what was called the “royal touch”—the practice of healing people. Throughout the Middle Ages, as one historian after another chronicled, the great kings would regularly pass through the crowds, dispensing the royal touch.

But, there is nothing “just” about the power of a placebo, and in reality it represents the amazing way our mind controls our body. How the mind achieves these amazing outcomes is not always very clear.* Some of the effect, to be sure, has to do with reducing the level of stress, changing hormonal secretions, changing the immune system, etc. The more we understand the connection between brain and body, the more things that once seemed clear-cut become ambiguous. Nowhere is this as apparent as with the placebo.

But we’ve seen that the perception of value, in medicine, soft drinks, drugstore cosmetics, or cars, can become real value.

CHAPTER 11 The Context of Our Character, Part I Why We Are Dishonest, and What We Can Do about It

Sigmund Freud explained it this way. He said that as we grow up in society, we internalize the social virtues. This internalization leads to the development of the superego. In general, the superego is pleased when we comply with society’s ethics, and unhappy when we don’t.

we want to be honest. The problem is that our internal honesty monitor is active only when we contemplate big transgressions, like grabbing an entire box of pens from the conference hall. For the little transgressions, like taking a single pen or two pens, we don’t even consider how these actions would reflect on our honesty and so our superego stays asleep.

What especially impressed me about the experiment with the Ten Commandments was that the students who could remember only one or two Commandments were as affected by them as the students who remembered nearly all ten. This indicated that it was not the Commandments themselves that encouraged honesty, but the mere contemplation of a moral benchmark of some kind.

So we learned that people cheat when they have a chance to do so, but they don’t cheat as much as they could. Moreover, once they begin thinking about honesty—whether by recalling the Ten Commandments or by signing a simple statement—they stop cheating completely. In other words, when we are removed from any benchmarks of ethical thought, we tend to stray into dishonesty. But if we are reminded of morality at the moment we are tempted, then we are much more likely to be honest.

I said in Chapter 4 that when social norms collide with market norms, the social norms go away and the market norms stay. Even if the analogy is not exact, honesty offers a related lesson: once professional ethics (the social norms) have declined, getting them back won’t be easy.

Another path is to first recognize that when we get into situations where our personal financial benefit stands in opposition to our moral standards, we are able to “bend” reality, see the world in terms compatible with our selfish interest, and become dishonest.

CHAPTER 12 The Context of Our Character, Part II Why Dealing with Cash Makes Us More Honest

 When we look at the world around us, much of the dishonesty we see involves cheating that is one step removed from cash.

When we deal with money, we are primed to think about our actions as if we had just signed an honor code.

But look at the latitude we have with nonmonetary exchanges. There’s always a convenient rationale. We can take a pencil from work, a Coke from the fridge—we can even backdate our stock options—and find a story to explain it all. We can be dishonest without thinking of ourselves as dishonest. We can steal while our conscience is apparently fast asleep.

CHAPTER 13 Beer and Free Lunches What Is Behavioral Economics, and Where Are the Free Lunches?  

But, as the results presented in this book (and others) show, we are all far less rational in our decision making than standard economic theory assumes. Our irrational behaviors are neither random nor senseless—they are systematic and predictable. We all make the same types of mistakes over and over, because of the basic wiring of our brains.

Behavioral economists, on the other hand, believe that people are susceptible to irrelevant influences from their immediate environment (which we call context effects), irrelevant emotions, shortsightedness, and other forms of irrationality (see any chapter in this book or any research paper in behavioral economics for more examples).

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 as sitting in the driver’s seat, with ultimate control over the decisions we make and the direction our life takes; but, alas, this perception has more to do with our desires—with how we want to view ourselves—than with reality.

Visual illusions are also illustrative here. Just as we can’t help being fooled by visual illusions, we fall for the “decision illusions” our minds show us. The point is that our visual and decision environments are filtered to us courtesy of our eyes, our ears, our senses of smell and touch, and the master of it all, our brain. By the time we comprehend and digest information, it is not necessarily a true reflection of reality. Instead, it is our representation of reality, and this is the input we base our decisions on.

A second main lesson is that although irrationality is commonplace, it does not necessarily mean that we are helpless. Once we understand when and where we may make erroneous decisions, we can try to be more vigilant, force ourselves to think differently about these decisions, or use technology to overcome our inherent shortcomings.