Posted on Jul 17, 2018

Predictably Irrational Summary

PDF, Chapters & Review of Dan Ariely’s Book

Predictably Irrational

Author: Dan Ariely

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Chapter 1: The Truth About Relativity

We always seek to draw comparisons, and we are often unaware as to how seemingly irrelevant factors such as the simple presentation of options, actually influence what we select.

Thus, given three choices, A, B (very distinct, but equally as attractive as A), and A- (similar to A, but inferior), we will almost always choose A, because it is clearly superior to A-.

  • Say we are trying to decide on a vacation between two choices: a Paris trip with free breakfast and a Rome trip with free breakfast. We cannot decide between the two because we love Paris and Rome equally.
  • Simply adding a third option – an “A minus” version of one of the options, will cause us to pick the A version, over the equally attractive B version.
    • Thus, the simple addition of a third “A-” option, “Paris without a free breakfast”, will cause us to choose “Paris with a free breakfast”, the “A” option, over “Rome with a free breakfast”, the equally attractive “B” option.

    • Similarly, had the third option added been “B minus” – “Rome without a free breakfast”, we would have selected that “B” option – “Rome with a free breakfast”.

This is irrational behavior because in the presence of two equal options, we couldn’t decide between the two, and the presence of a third, inferior option, shouldn’t cause us to suddenly prefer one of the two.

  • Ariely did an experiment where he used photos of undergrads to test this; 75% of research subjects chose choice A over choice B.
  • When Williams-Sonoma introduced bread machines, sales were slow. When they added a “deluxe” version that was 50% more expensive, they started flying off the shelves; the first bread machine now appeared to be a bargain

Tversky and Kahneman conducted the following experiment

  • When contemplating the purchase of a $25 pen, the majority of subjects would drive to another store 15 minutes away to save $7
  • When contemplating the purchase of a $455 suit, the majority of subjects would not drive to another store 15 minutes away to save $7
  • The amount saved and time involved are the same, but people make very different choices

Watch out for relative thinking; it comes naturally to all of us.

 

Chapter 2: The Fallacy of Supply and Demand

Anchoring has a major long-term effect on our willingness to pay.

Savador Assael, the Pearl King, single-handedly created the market for black pearls, which were unknown in the industry before 1973. His first attempt to market the pearls was an utter failure; he didn’t sell a single pearl. So he went to his friend Harry Winston, and had Winston put them in the window of his 5th Avenue store with an outrageous price tag attached. Then he ran full-page ads in glossy magazines with black pearls next to diamonds, rubies, and emeralds. Soon, black pearls were considered precious.

Ariely, Prelec, and Loewenstein conducted an experiment in “arbitrary coherence” at the Sloan School. Students were asked to write down the last two digits of their SSN and consider whether or not they would pay that amount for certain items.  Then they bid on those items.

  • For every product, those with an 80-99 SSN were willing to pay more than those with a 00-19 SSN…by nearly 3X.

Simonsohn and Loewenstein found that people who move to a new city remain anchored to the prices they paid in their previous city. People who move from Lubbock to Pittsburgh squeeze their families into smaller houses to pay the same amount. People who move from LA to Pittsburgh don’t save money, they just move into mansions.

In another set of experiments, even attempts to switch anchors failed; those who started off with higher anchors always demanded a higher price than those who started off with lower anchors, even after both groups had been exposed to exactly the same prices (albeit in a different order)

Herding: Assuming that something is good (or bad) on the basis of other people’s previous behavior

  • Example: People wanting to go to a restaurant where people are waiting outside
  • Example: Going back to Starbucks because you recall enjoying yourself on your previous visit
    • At that point, you no longer ask yourself if you’d be better off with the cheaper coffee at Dunkin Donuts, or with the free coffee at your office

Starbucks itself is a case of producing a new anchor.  Schultz made Starbucks as different as possible from the traditional coffee shop to convince shoppers to establish a new anchor, rather than saying, “This is a fancy, expensive Dunkin Donuts.”

Ariely then ran another experiment.  He read from “Leaves of Grass,” and then asked his students the following:

  • 1/2 of the students were asked if they would be willing to pay Ariely $10 for a 10-minute poetry recitation
  • 1/2 of the students were asked if they would be willing to listen to a 10-minute poetry recitation if Ariely paid them $10
  • The students who were asked if they were willing to pay offered $1 for a short reading, $2 for a medium reading, and $3 for a long reading.
  • The students who were asked if they’d accept pay demanded $1.30 for a short reading, $2.70 for a medium reading, and $4.80 for a long reading.
  • This is known as the “Tom Sawyer” effect.  Quote Twain: “There are wealthy gentlemen in England who drive four-horse passenger coaches 20 or 30 miles in the summer because the privilege costs them considerable money, but if they were offered wages for the service, that would turn it into work, and then they would resign.”

Knowing the impact of anchoring, you should train yourself to question your repeated behaviors.  You should also pay particular attention to the first decision in a long stream of decisions.  It may seem like it is just one decision, but that first decision may have an impact on future decisions for years to come.

The bigger picture is that supply and demand are not independent; supply-side variables like MSRP can impact willingness to pay.  Price “memory” can also have a major impact. Doubling the price of milk and halving the price of wine would have a major short-term impact, but it’s unlikely to have a long-term impact on consumption patterns. And if you induced amnesia about the previous prices, it might have nearly no impact at all.

Chapter 3: The Cost of Zero Cost

Why we often pay too much when we pay nothing

Zero/free is a source of irrational excitement.  This is called the “zero price effect.”

 Ariely, Shampanier, and Mazar conducted an experiment using Lindt truffles and Hershey’s Kisses.

  • When a truffle was $0.15 and a Kiss was $0.01, 73% of subjects chose the truffle and 27% the Kiss
  • When a truffle was $0.14 and a Kiss was free, 69% chose the kiss and 31% the truffle
  • According to standard economic theory, the price reduction shouldn’t lead to any behavior change (relative price and expected pleasure should be equal between the two experiments)

The same experiments were conducted with Kisses going for $0.02, $0.01, and free…and free again made a huge difference.

Ariely’s theory is that for normal transactions, we consider both upside and downside. But when something is free, we forget about the downside.

“Free” makes us perceive what is being offered as immensely more valuable than it really is

  • Humans are loss-averse; when considering a normal purchase, loss-aversion comes into play
  • But when an item is free, there is no visible possibility of loss

Ariely conducted a variation, where people were offered a choice between items.

  • He gave kids (and students) 3 Kisses and offered to trade 1 Kiss for a small Snickers, and 2 Kisses for a large Snickers.
  • The subjects overwhelmingly chose the large Snickers (which is rational, given the weights of the candies)
  • When he instead offered to trade 1 Kiss for a large Snickers, or let the person take a small Snickers for free, the subjects overwhelming went for the free offer.
  • The zero price effect applies even when money is not involved.

In the real world, this effect was demonstrated by Amazon’s free shipping.

  • After Super Saver shipping was introduced, Amazon saw sales increases everywhere except for France
  • It turned out that the French division offered 1 franc ($0.20) pricing instead of free pricing.
  • When this was changed to free, France saw the same sales increases as elsewhere
    • Another real-world example: People will wait in line for absurdly long times to get something for free.
    • Free is one of the most powerful ways to trigger behavior

Chapter 4: The Cost of Social Norms

Why we are happy to do things, but not when we are paid to do them.

Imagine the scene if, after Thanksgiving dinner at your mother-in-law’s house, you pulled out your wallet and asked, “How much do I owe you?”

Clark, Mills, and Fiske theorize that we live in two worlds; one where social norms prevail, and another where market norms make the rules.

  • Social norms such as reciprocity are warm and fuzzy, with no explicit quid pro quo
  • Market norms are explicit and hard–you get what you pay for
  • Example: You can’t mix social and market norms where sex is involved. You can’t wine and dine a woman and then say, “You know, this relationship is costing me a lot of money.”  As Woody Allen said, “The most expensive sex is free sex.”

Ariely and Heyman conducted the following experiment. Subjects were asked to use a computer to drag circles from one side of the screen into a square. They were instructed to drag as many circles as the could in 5 minutes (Ariely notes that this is very boring).

  • The rewards given for the task were: $5, $0.50, and zero
    • $5: 159 circles
    • $0.50: 101 circles
    • Zero: 168 circles
    • Participants worked harder under non-monetary social norms than for payment!
  • A real-life example: The AARP asked lawyers to participate in a program where they would offer their services to needy employees for a discounted price of $30/hour. No dice. When the program manager instead asked if they’d offer their services for free, the lawyers overwhelmingly said they would participate.
  • Conclusion: Market norms drive out social norms.

The Zen example: A sensei taught a free class.  The students felt bad, and asked the master if they could pay him. He replied that if he charged them, they couldn’t afford him.

  • To follow up on the experiment, they ran it again, this time with the rewards of a box of Godiva chocolates (worth ~$5), a Snickers bar (worth ~$1), and zero
    • $5 (Godiva): 169 circles
    • $0.50 (Snickers): 162 circles
    • Zero: 168 circles
    • Conclusion: Small gifts don’t constitute a market norm, and keep things in the social realm

One more variation: The experimenters described the gifts as a $5 box of chocolates and a $0.50 candy bar. The results were the same as with the cash rewards. They reacted to explicitly priced gifts in exactly the same way they reacted to cash.

“People are willing to work free, and they are willing to work for a reasonable wage but offer them just a small payment and they will walk away.”

Vohs, Mead, and Goode: Participants were asked to unscramble sentences that were either neutral (“It’s cold outside”) or related to money (“High-paying salary”). Then they were asked to solve a puzzle. The experimenter left the room, and the subjects were allowed to go to him for help.

  • “Salary” participants waited 5.5 minutes to ask for help; “neutral” participants waited only 3 minutes
  • Thinking about money made people more self-reliant and less willing to ask for help.
  • On the other hand, they were less willing to help others.
  • The conclusion is that thinking about money puts one in a market frame of mind. Subjects were:
    • More selfish and self-reliant
    • Wanted to spend more time alone
    • Were more likely to select individual tasks rather than those that required teamwork
    • Chose to sit farther away from others

Gneezy and Rustichini studied the effect of fining parents who picked up their children from daycare late

  • Imposing a fine had long-term negative effects. Without a fine, parents felt guilty about being late (Ariely dryly notes, “In Israel, guilt seems to be an effective way to get compliance”). Imposing a fine inadvertently replaced social norms with market norms. Parents decided to since they were being fined, they could decide whether or not to be late, and frequently chose to be late.
  • A few weeks later, the daycare center removed the fine, but the situation worsened. Rather than reverting to social norms, parents now concluded that there was no penalty for tardiness.
  • Conclusion? “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. Once a social norm is trumped by a market norm, it will rarely return.”

Companies that try to market based on social norms (“like a good neighbor…”) but fail to follow through (e.g. imposing nuisance fees) end up in a worse position. Consumers take personal offense when a relationship framed as a social exchange turns out to be a market one.

“If you’re a company, you can’t have it both ways. You can’t treat your customers like family one moment and then treat them impersonally (or worse, as a nuisance or competitor) a moment later when this becomes more convenient or profitable. This is not how social relationships work. If you want a social relationship, go for it, but remember that you have to maintain it under all circumstances.”

“If you think you need to play rough, don’t waste money making your company the fuzzy feel-good choice. State what you give and what you expect in return–it’s just business.”

“If companies want to benefit from the advantages of social norms, they need to do a better job of cultivating those norms….It’s remarkable how much work companies (particularly start-ups) can get out of people when social norms (such as the excitement of building something together) are stronger than market norms (such as salaries stepping up with each promotion). If corporations started thinking in terms of social norms, they would realize that these norms build loyalty and–more important–make people want to extend themselves to the degree that corporations need today: to be flexible, concerned, and willing to pitch in.  That’s what a social relationship delivers.”

“A salary alone will not motivate people to risk their lives. Police officers, firefighters, soldiers–they don’t die for their weekly pay. It’s the social norms–pride in their profession and a sense of duty–that will motivate them to give up their lives and health.”

“Money, as it turns out, is very often the most expensive way to motivate people. Social norms are not only cheaper but often more effective as well.”

Chapter 5: The Influence of Arousal

Why Hot Is Much Hotter Than We Realize

Ariely and Loewenstein conducted an experiment on Berkeley undergrads (Ariely tried to do this at MIT, but couldn’t get the necessary permissions). They asked them a series of questions. Then they had the undergraduates stimulate themselves to a state of sexual arousal, and asked them to answer the same set of questions.

The results show that people simply don’t realize how different their decision-making is during a state of arousal.  A few representative results

  • Can you imagine having sex with a 60-year-old woman
    • Sober: 7%
    • Aroused: 23%
  • Could you enjoy having sex with someone you hated?
    • Sober: 53%
    • Aroused: 77%
  • Is just kissing frustrating?
    • Sober: 41%
    • Aroused: 69%
  • Would you slip a woman a drug to increase the chance she’d have sex with you?
    • Sober: 5%
    • Aroused: 26%
  • Would you use a condom even if you were afraid that a woman might change her mind while you went to get it?
    • Sober: 86%
    • Aroused: 60%

Implications: Someone may promise to just say no, but that promise is less likely to hold up during a state of arousal

Chapter 6: The Problem of Procrastination and Self-Control

Why We Can’t Make Ourselves Do What We Want To Do

Ariely conducted an experiment on his class.  Students were required to write three papers.

  • Ariely asked the first group to commit to dates by which they would turn in each paper.  Late papers would be penalized 1% per day.There was no penalty for turning papers in early.  The logical response is to commit to turning all three papers in on the last day of class.
  • The second group was given no deadlines; all three papers were due on the last day of class.
  • The third group was directed to turn their papers in on the 4th, 8th, and 12th weeks.

The results?

  • Group 3 (imposed deadlines) got the best grades. Group 2 (no deadlines) got the worst grades, and Group 1 (self-selected deadlines) finished in the middle.
  • Allowing students to pre-commit to deadlines improved performance
    • Students who spaced out their commitments did well; students who did the logical thing and gave no commitments did badly.
  • “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 recommitment and by doing so, help themselves overcome it.”

We have problems with self-control, related to immediate and delayed gratification. But each of these problems has potential self-control mechanisms. If we can’t save from our paycheck, we can take advantage of our employer’s automatic deduction option; if we don’t have the will to exercise regularly alone, we can make an appointment to exercise in the company of our friends. These are tools that we can commit to in advance, and they may help us be the kind of people we want to be.

How can these principles be used to improve healthcare?

  • Charge a $100 deposit, refundable when the patient shows up on time rather than procrastinating.
  • Repackage procedures so that they are predictable and easily done.
    • Ford had issues getting customers to come in for regular maintenance.
    • Many of the parts needed servicing at different times, and the intervals differed by vehicle.
    • Then Ford noticed that Honda had lumped all service needs into one of three intervals: 6 months/5,000 miles, 1 year/10,000 miles, and 2 years/25,000 miles. It was suboptimal from an engineering standpoint, but it made it easy to tell customers when to come in.
    • Ford imitated Honda, and within 3 years, was achieving the same results.
    • Why not make comprehensive physicals simple?  Then layer in a financial penalty for missing them.

What about a self-control credit card that let you decide in advance on certain restrictions on your spending? (Only $60/month on entertainment; no candy between 2 and 5 PM)

Chapter 7: The High Price of Ownership

Why We Overvalue What We Have

The “endowment effect” means that when we own something, we begin to value it more than other people do.

Ariely and Carmon conducted an experiment on Duke students, who sleep out for weeks to get basketball tickets; even those who sleep out are still subjected to a lottery at the end.  Some students get tickets, some don’t.

  •  The students who didn’t get tickets told Ariely that they’d be willing to pay up to $170 for tickets.
  • The students who did get the tickets told Ariely that they wouldn’t accept less than $2,400 for their tickets.
  • Remember, these students were indistinguishable until some won the lottery and some lost.

There are three fundamental quirks of human nature:

  • We fall in love with what we already have.
  • We focus on what we might lose, rather than what we might gain.
    • When thinking about selling something, you think about all the things you’ll miss, rather than the hassles of ownership.
  • We assume that other people will see the transaction from the same perspective as we do.

Peculiarities of ownership:

  • The more work you put into something, the more ownership you begin to feel for it (The “IKEA effect”)
  • We can begin to feel ownership even before we own something (The “eBay effect”).
  • This is why trials and money-back guarantees work so well! People hate to downgrade.
  • These ownership quirks apply to ideas as well as things…which is why we end up with ideologies that no longer seem rational.

To counteract the endowment effect, try to view all transactions as a non-owner. (Editor’s note: This explains the efficacy of one of my favorite questions: “Assuming you hadn’t done X, would you still do it now?”)

 

Chapter 8: Keeping Doors Open

Why Options Distract Us from Our Main Objective 

In 210 BC, Xiang Yu led an army against the Ch’in Dynasty.  While his troops slept, he burned his ships and smashed all the cooking pots.  He explained to his troops that they had to either fight their way to victory or die.  His troops won 9 consecutive battles.  Eliminating options improved the focus of his troops.

We feel compelled to preserve options, even at great expense, even when it doesn’t make sense.

Ariely and Shin conducted an experiment on MIT students. They devised a computer game which offered players three doors: Red, Blue, and Green. You started with 100 clicks. You clicked to enter a room. Once in a room, each click netted you between 1-10 cents. You could also switch rooms (at the cost of a click). The rooms were programmed to provide different levels of rewards (there was variation within each room’s payoffs, but it was pretty easy to tell which one provided the best payout).

  • Players tended to try all three rooms, figure out which one had the highest payout, and then spend all their time there. (These are MIT students we’re talking about).
  • Then, however, Ariely introduced a new wrinkle: Any door left unvisited for 12 clicks would disappear forever.  With each click, the unclicked doors shrank by 1/12th.
    • Players jumped from door to door, trying to keep their options open.
    • They made 15% less money; in fact, by choosing any of the doors and sticking with it, they could have made more money.
  • Ariely increased the cost of opening a door to 3 cents; no change–players still seemed compelled to keep their options open.
  • Ariely told participants the exact monetary payoff of each door; no change.
  • Ariely allowed participants as many practice runs as they wanted before the actual experiment; no change.
  • Ariely changed the rules so that any door could be “reincarnated” with a single click; no change.

“Players just couldn’t tolerate the idea of the loss, and so they did whatever was necessary to prevent their doors from closing, even though disappearance had no real consequences and could be easily reversed.”

“What we need to do is to consciously start closing some of our doors….We ought to shut them because they draw energy and commitment from the doors that should be left open–and because they drive us crazy.”

“Even when you get down to two doors, choosing is still difficult. Choosing between two things that are similarly attractive is one of the most difficult decisions we can make.”

When we focus on the similarities and minor differences between two things, we fail to take into account the consequences of not deciding. Flip a coin and move on.
Editor’s note: This particular irrationality is covered well in “The Paradox of Choice” (alas, no outline yet).

Chapter 9: The Effect of Expectations

Why The Mind Gets What It Expects

Previously held expectations can cloud our point of view.

Ariely, Lee, and Frederick conducted yet another experiment on MIT students. They let students taste two different beers, and then choose to get a free pint of one of the brews.  Brew A was Budweiser.  Brew B was Budweiser, plus 2 drops of balsamic vinegar per ounce.

  • When students were not told about the nature of the beers, they overwhelmingly chose the balsamic beer.
  • When students were told about the true nature of the beers, they overwhelmingly chose the Budweiser.
  • If you tell people up front that something might be distasteful, the odds are good they’ll end up agreeing with you–because of their expectations.

Ariely, Ofek, and Bertini then conducted another experiment, this time on Sloan students. They offered students a free cup of coffee and asked them to indicate how much they liked the coffee, and how much they’d be willing to pay for it. They also set out a table of condiments, some usual, some unusual (cloves, nutmeg, cardamom, etc.).

  • None of the students used the unusual condiments.
  • When the condiments served in fancy containers (versus white Styrofoam cups), the students were much more likely to say that they liked the coffee, and were willing to pay more for it.  “When the coffee ambiance looked upscale, the coffee tasted upscale as well.”

When we believe something will be good, it generally will be good, and when we think it will be bad, it will be bad.  But does finding out the truth after the experience change one’s mind?

Ariely conducted the beer experiment again, but with a twist.  The students would taste the beer first.  Only then they would be told the truth.  And after that, they would be asked their opinions.

  • If the knowledge merely informs us, whether you found out about the vinegar before or after the tasting should be irrelevant. On the other hand, if the knowledge actually reshapes sensory experiences, being told beforehand would have a radically different effect.
  • People who were told afterward about the vinegar liked the beer just as much as those who weren’t aware of the vinegar at all.  In other words, knowledge affected the sensory experience.
  • And people followed through on their opinion; when participants were given the opportunity to add vinegar to a free beer afterward, those who learned of the vinegar after their tasting was much more likely to add vinegar to their free beer.

How can you use this knowledge?

  • Caterers can use exotic descriptions to improve the perceived taste of their food. Exotic ingredients like chipotle-mango sauce may not improve the food in a blind taste test, but they can enhance the taste by raising expectations.
  • Similarly, buy takeout food and then arrange it artistically on fancy china.  The same holds true for wineglasses–blind taste tests show that wine glass shape has zero impact on taste, but the knowledge can enhance the experiment.
    • This is why Pepsi wins in blind taste tests, but Coke wins when the brands are shown.
    • When a person drinks Coke or Pepsi, the ventromedial prefrontal cortex (VMPFC) was stimulated.
    • When a person knew they were about to get a drink of Coke, the dorsolateral aspect of the prefrontal cortex (DLPFC), an area involved in higher-order brain functions, was also activated.
    • The Coke brand was able to enhance activity in the brain’s pleasure center, actually changing the experience of drinking Coke.

Stereotypes

  • Not only do we react differently based on stereotypes of others, we react differently based on stereotypes about ourselves.
    • Shin, Pittinsky, and Ambady conducted an experiment on Asian-American women.  A first group was asked questions related to their gender, then given a math test. A second group was asked questions related to their race, then given a math test.
      • The second group did better on the math test than the first.
    • Bargh, Chen, and Burrows had participants complete a scrambled-sentence task.  For some, the task involved words like “aggressive” and “rude.” For others, the words were “considerate” and “polite.” They then went to another lab to complete the second task. There, they would find the experimenter trying to explain the task to a seemingly uncomprehending participant (actually a confederate).
      • The polite word group waited 9.3 minutes before they interrupted.
      • The rude word group waited only 5.5 minutes before interrupting
    • Another experiment primed NYU undergrads with words like “Florida”, “bingo,” and “ancient.”  These people walked more slowly when leaving the building than a control group.
      • Policy implications for conflicts between groups
      • “Blind” presentation of the facts (presenting the facts, but not revealing which party took which actions) might help people better recognize the truth.
  • We can try using a neutral third party to set down rules and regulations

Editor’s Note: This ties in nicely with one of my favorite persuasive tactics–reframing a decision in different but logically equivalent terms If a person is being irrational, I give them a what-if that recasts them or a group they identify with as the party being harmed…if they have a shred of self-awareness, this usually helps them understand how their prejudices are clouding their judgment.

Chapter 10: The Power of Price

Why a 50-Cent Aspirin Can Do What A Penny Aspirin Can’t

The placebo effect is well-known and real.  It’s not just a matter of fooling oneself; placebos can actually trigger endorphins and opiates and other biological reactions that actually change body and experience. What is interesting, however, is that price has an impact on efficacy.

Ariely, Waber, Shiv, and Carmon made up a fake painkiller, Veladone-Rx. An attractive woman in a business suit (with a faint Russian accent) told subjects that 92% of patients receiving VR reported significant pain relief in 10 minutes, with relief lasting up to 8 hours.

  • When told that the drug cost $2.50 per dose, nearly all of the subjects reported pain relief.
  • When told that the drug cost $0.10 per dose, only half of the subjects reported pain relief.
  • The more pain a person experienced, the more pronounced the effect.
  • A similar study at U Iowa showed that students who paid list price for cold medications reported better medical outcomes than those who bought discount (but clinically identical) drugs.

A further study on SoBe Adrenalin Rush showed that students at the gym reported less fatigue when told that the drink was more expensive.

  • And this wasn’t just self-perception. Ariely gave the subjects a 15-question puzzle as well.
    • The control group that didn’t drink SoBe got 9/15 correct
    • The “expensive” group got 9/15 correct
    • The “discount” group got 6.5/15 correct
  • One more variation: Ariely printed “Drinks such as SoBe have been shown to improve mental functioning” on the cover of the quiz booklet, and referred to 50 scientific studies showing its efficacy.
  • The “discount” group improved their score by 0.6
  • The “expensive” group improved their score by 3.3…in other words, they did better than the control group!
  • The effect declined when subjects were asked to stop and reflect on the relationship between price and quality. They were far less likely to assume that discounted drinks were less effective.

Chapter 11: The Context of Our Character, Part 1

Why We Are Dishonest, and What We Can Do About It

Ariely conducted an experiment on Harvard students. He gave students a 50-question, multiple-choice quiz.  They would take the quiz, then transfer the answers to a Scantron sheet.  The students received $0.10 for each correct answer.  The results were as follows:

  • Proctor does the scoring of the quiz and hands out the reward (control group)
    • 32.6/50
  • Correct answers to the quiz pre-marked on the Scantron, students give both workbook and Scantron to proctor
    • 36.2/50 (cheating = 3.6 questions)
  • Correct answers to the quiz pre-marked on the Scantron, students shred their workbook and give Scantron to proctor
    • 35.9/50
  • Correct answers to the quiz pre-marked on the Scantron, students instructed to destroy both workbook and Scantron. When done, students directed to go to front of room, and take the amount of money they had earned from a jar, with no supervision
    • 36.1/50

Conclusions

  •  Given the opportunity, many honest people will cheat (similar experiments were conducted at MIT, Princeton, UCLA, and Yale with similar results, so it’s not just that Harvard students are crooks).
  • Once tempted to cheat, students didn’t seem to be influenced by the risk of getting caught; even when we have no chance of getting caught, we still don’t become wildly dishonest.

“We care about honesty and 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. For little transgressions like taking a single pen, we don’t even consider how these actions would reflect on our honesty.”

One more variation: Nina, On, and Ariely conducted a similar experiment.  But, one group was asked to write down 10 books they had read in high school, and the other group was asked to try to recall and write down the 10 Commandments.

  • When cheating was not possible, the average score was 3.1
  • When cheating was possible, the book group reported a score of 4.1 (33% cheating)
  • When cheating was possible, the 10 Commandments group scored 3.1 (0% cheating)

And most of the subjects couldn’t even recall all of the commandments!  Even those who could only remember 1 or 2 commandments were nearly as honest.”This indicated that it was not the Commandments themselves that encouraged honesty, but the mere contemplation of a moral benchmark of some kind.”

  • Perhaps we can have people sign secular statements–similar to a professional oath–to remind us of our commitment to honesty.  So Ariely had students sign a statement on the answer sheet: “I understand that this study falls under the MIT honor system.”
  • Those who signed didn’t cheat.  Those who didn’t see the statement showed 84% cheating.
  • “The effect of signing a statement about an honor code is particularly amazing because MIT doesn’t even have an honor code.”

 

Chapter 12: The Context of Our Character, Part 2

Why Dealing With Cash Makes Us More Honest

Ariely conducted an experiment on MIT’s communal refrigerators.

  • When he slipped in a 6-pack of Coke, all the Cokes had vanished within 72 hours
  • When he left a plate containing 6 $1 bills, no one *ever* took any of the money
  • Would you feel bad about taking a pen for your child?  How about taking $0.10 from petty cash to pay for a pen for your child?  The two are economically identical but get very different reactions.
    “Cheating is a lot easier when it’s a step removed from money.”

Ariely returned to the honesty tests, but with a twist: Students told the proctor their score.  The proctor gave them tokens.  The students would then walk to another experimenter and trade the tokens for cash.

  • The control group solved 3.5 questions
  • The cash group claimed to have solved 6.2 questions…definite cheating
    • Of 2,000 participants, only 4 went for total cheating–claiming to have solved every problem
  • The token group claimed to have solved 9.4 problems…brazen dishonesty
    • Switching from cash to an equivalent non-monetary currency doubled cheating!
    • Of the token group, 24/150 participants cheated all the way.

We have no idea how dishonest we are

  • Students predicted that they would be no more likely to cheat with tokens than cash…they were completely wrong.
  • People who have their assistants turn in their expense reports (rather than turning them in personally) are much more likely to cheat.
  • Businesspeople are more likely to claim dubious expenses when they are traveling across the country than when they are in their home city, or even just returning from the airport.
  • Overall, cheating is not limited by risk; it is limited by our ability to rationalize the cheating to ourselves.

 

Chapter 13: Beer and Free Lunches

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

Experiment 1: Beer ordering.  A group of 4 is offered a choice of 4 different beers.

  • When people order out loud, and in sequence, they order more types of beer per table, opting for variety
  • Those who made their choices out loud were not as happy with their selections than those who made their choices privately, EXCEPT that the first person to order was just as happy as private choosers (since his situation was logically equivalent)
  • Why did this occur? “People are sometimes willing to sacrifice the pleasure they get from an experience in order to project a certain image to others…People, particularly those with a high need for uniqueness, may sacrifice personal utility in order to gain reputational utility.”
    • In Hong Kong, in a culture that values conformity rather than uniqueness, the similar but opposite effect occurred.  People ordered the same order as the people ordering before them.  They were still unhappy, but they made their choice to avoid uniqueness, rather than to seek it out.
    • Implications: Plan out your order before your waiter approaches, and stick to it. Don’t be swayed by what other people choose.
  • 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.  So wouldn’t economics make a lot more sense if it were based on how people actually behave?  That simple idea is the basis of behavioral economics.

  • There are “free lunches” available by eliminating predictably irrational behaviors

    • Getting employees to pre-commit to using raises to increase 401k contributions raised the savings rate from 3.5% to 13.5% over a few years.

 

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