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Dan Ariely: Predictably Irrational

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-.

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".

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.

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

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 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."

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)

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

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.

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

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?"

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."

$5: 159 circles

$0.50: 101 circles

Zero: 168 circles

Participants worked harder under non-monetary social norms than for payment!

$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

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.

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

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 day care 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."

"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.

Chapter 5: The Influence of Arousal

Why Hot Is Much Hotter Than We Realize

Sober: 7%

Aroused: 23%

Sober: 53%

Aroused: 77%

Sober: 41%

Aroused: 69%

Sober: 5%

Aroused: 26%

Sober: 86%

Aroused: 60%

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

Students who spaced out their commitments did well; students who did the logical thing and gave no commitments did badly.

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.

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:

When thinking about selling something, you think about all the things you'll miss, rather than the hassles of ownership.

Peculiarities of ownership:

This is why trials and money-back guarantees work so well! People hate to downgrade.

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 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.

"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."

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 ambience 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 afterwards 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 afterwards, those who learned of the vinegar after their tasting were much more likely to add vinegar to their free beer.

How can you use this knowledge?

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 enhance activity in the brain's pleasure center, actually changing the experience of drinking Coke.

Stereotypes

The second group did better on the math test than the first.

The polite word group waited 9.3 minutes before they interrupted.

The rude word group waited only 5.5 minutes before interrupting

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.

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

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!

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:

32.6/50

36.2/50 (cheating = 3.6 questions)

35.9/50

36.1/50

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."

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."

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 you 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.

Of 2,000 participants, only 4 went for total cheating--claiming to have solved every problem

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.

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.

"We are all far less rational in our decisionmaking 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."

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.

This outline was written by Chris Yeh, made free as part of the The Book Outline Wiki: http://bookoutlines.pbworks.com/w/page/14422685/Predictably%20Irrational