Predictable Irrationality
Predictable Irrationality
Predictable Irrationality
Edition
Dan Ariely
To my mentors, colleagues, and students—
who make research exciting
Contents
A Note to Readers
Introduction
How an Injury Led Me to Irrationality and to the
Research Described Here
Chapter 1
The Truth about Relativity
Why Everything Is Relative—Even When It Shouldn’t Be
Chapter 2
The Fallacy of Supply and Demand
Why the Price of Pearls—and Everything Else—Is Up in the Air
Chapter 3
The Cost of Zero Cost
Why We Often Pay Too Much When We Pay Nothing
Chapter 4
The Cost of Social Norms
Why We Are Happy to Do Things, but Not When We Are Paid to Do Them
Chapter 5
The Influence of Arousal
Why Hot Is Much Hotter Than We Realize
Chapter 6
The Problem of Procrastination and Self-Control
Why We Can’t Make Ourselves Do What We Want to Do
Chapter 7
The High Price of Ownership
Why We Overvalue What We Have
Chapter 8
Keeping Doors Open
Why Options Distract Us from Our Main Objective
Chapter 9
The Effect of Expectations
Why the Mind Gets What It Expects
Chapter 10
The Power of Price
Why a 50-Cent Aspirin Can Do What a Penny Aspirin Can’t
Chapter 11
The Context of Our Character, Part I
Why We Are Dishonest, and What We Can Do about It
Chapter 12
The Context of Our Character, Part II
Why Dealing with Cash Makes Us More Honest
Chapter 13
Beer and Free Lunches
What Is Behavioral Economics, and Where Are the Free Lunches?
Thanks
List of Collaborators
Notes
Bibliography and Additional Readings
Searchable Terms
About the Author
Credits
Copyright
About the Publisher
A Note to Readers
I have been told by many people that I have an unusual way of looking at
the world. Over the last 20 years or so of my research career, it’s enabled
me to have a lot of fun figuring out what really influences our decisions in
daily life (as opposed to what we think, often with great confidence,
influences them).
Do you know why we so often promise ourselves to diet, only to have
the thought vanish when the dessert cart rolls by?
Do you know why we sometimes find ourselves excitedly buying things
we don’t really need?
Do you know why we still have a headache after taking a one-cent
aspirin, but why that same headache vanishes when the aspirin costs 50
cents?
Do you know why people who have been asked to recall the Ten
Commandments tend to be more honest (at least immediately afterward)
than those who haven’t? Or why honor codes actually do reduce dishonesty
in the workplace?
By the end of this book, you’ll know the answers to these and many
other questions that have implications for your personal life, for your
business life, and for the way you look at the world. Understanding the
answer to the question about aspirin, for example, has implications not only
for your choice of drugs, but for one of the biggest issues facing our
society: the cost and effectiveness of health insurance. Understanding the
impact of the Ten Commandments in curbing dishonesty might help prevent
the next Enron-like fraud. And understanding the dynamics of impulsive
eating has implications for every other impulsive decision in our lives—
including why it’s so hard to save money for a rainy day.
My goal, by the end of this book, is to help you fundamentally rethink
what makes you and the people around you tick. I hope to lead you there by
presenting a wide range of scientific experiments, findings, and anecdotes
that are in many cases quite amusing. Once you see how systematic certain
mistakes are—how we repeat them again and again—I think you will begin
to learn how to avoid some of them.
But before I tell you about my curious, practical, entertaining (and in
some cases even delicious) research on eating, shopping, love, money,
procrastination, beer, honesty, and other areas of life, I feel it is important
that I tell you about the origins of my somewhat unorthodox worldview—
and therefore of this book. Tragically, my introduction to this arena started
with an accident many years ago that was anything but amusing.
ON WHAT WOULD otherwise have been a normal Friday afternoon in the life
of an eighteen-year-old Israeli, everything changed irreversibly in a matter
of a few seconds. An explosion of a large magnesium flare, the kind used to
illuminate battlefields at night, left 70 percent of my body covered with
third-degree burns.
The next three years found me wrapped in bandages in a hospital and
then emerging into public only occasionally, dressed in a tight synthetic suit
and mask that made me look like a crooked version of Spider-Man. Without
the ability to participate in the same daily activities as my friends and
family, I felt partially separated from society and as a consequence started
to observe the very activities that were once my daily routine as if I were an
outsider. As if I had come from a different culture (or planet), I started
reflecting on the goals of different behaviors, mine and those of others. For
example, I started wondering why I loved one girl but not another, why my
daily routine was designed to be comfortable for the physicians but not for
me, why I loved going rock climbing but not studying history, why I cared
so much about what other people thought of me, and mostly what it is about
life that motivates people and causes us to behave as we do.
During the years in the hospital following my accident, I had extensive
experience with different types of pain and a great deal of time between
treatments and operations to reflect on it. Initially, my daily agony was
largely played out in the “bath,” a procedure in which I was soaked in
disinfectant solution, the bandages were removed, and the dead particles of
skin were scraped off. When the skin is intact, disinfectants create a low-
level sting, and in general the bandages come off easily. But when there is
little or no skin—as in my case because of my extensive burns—the
disinfectant stings unbearably, the bandages stick to the flesh, and removing
them (often tearing them) hurts like nothing else I can describe.
Early on in the burn department I started talking to the nurses who
administered my daily bath, in order to understand their approach to my
treatment. The nurses would routinely grab hold of a bandage and rip it off
as fast as possible, creating a relatively short burst of pain; they would
repeat this process for an hour or so until they had removed every one of the
bandages. Once this process was over I was covered with ointment and with
new bandages, in order to repeat the process again the next day.
The nurses, I quickly learned, had theorized that a vigorous tug at the
bandages, which caused a sharp spike of pain, was preferable (to the
patient) to a slow pulling of the wrappings, which might not lead to such a
severe spike of pain but would extend the treatment, and therefore be more
painful overall. The nurses had also concluded that there was no difference
between two possible methods: starting at the most painful part of the body
and working their way to the least painful part; or starting at the least
painful part and advancing to the most excruciating areas.
As someone who had actually experienced the pain of the bandage
removal process, I did not share their beliefs (which had never been
scientifically tested). Moreover, their theories gave no consideration to the
amount of fear that the patient felt anticipating the treatment; to the
difficulties of dealing with fluctuations of pain over time; to the
unpredictability of not knowing when the pain will start and ease off; or to
the benefits of being comforted with the possibility that the pain would be
reduced over time. But, given my helpless position, I had little influence
over the way I was treated.
As soon as I was able to leave the hospital for a prolonged period (I
would still return for occasional operations and treatments for another five
years), I began studying at Tel Aviv University. During my first semester, I
took a class that profoundly changed my outlook on research and largely
determined my future. This was a class on the physiology of the brain,
taught by professor Hanan Frenk. In addition to the fascinating material
Professor Frenk presented about the workings of the brain, what struck me
most about this class was his attitude to questions and alternative theories.
Many times, when I raised my hand in class or stopped by his office to
suggest a different interpretation of some results he had presented, he
replied that my theory was indeed a possibility (somewhat unlikely, but a
possibility nevertheless)—and would then challenge me to propose an
empirical test to distinguish it from the conventional theory.
Coming up with such tests was not easy, but the idea that science is an
empirical endeavor in which all the participants, including a new student
like myself, could come up with alternative theories, as long as they found
empirical ways to test these theories, opened up a new world to me. On one
of my visits to Professor Frenk’s office, I proposed a theory explaining how
a certain stage of epilepsy developed, and included an idea for how one
might test it in rats.
Professor Frenk liked the idea, and for the next three months I operated
on about 50 rats, implanting catheters in their spinal cords and giving them
different substances to create and reduce their epileptic seizures. One of the
practical problems with this approach was that the movements of my hands
were very limited, because of my injury, and as a consequence it was very
difficult for me to operate on the rats. Luckily for me, my best friend, Ron
Weisberg (an avid vegetarian and animal lover), agreed to come with me to
the lab for several weekends and help me with the procedures—a true test
of friendship if ever there was one.
In the end, it turned out that my theory was wrong, but this did not
diminish my enthusiasm. I was able to learn something about my theory,
after all, and even though the theory was wrong, it was good to know this
with high certainty. I always had many questions about how things work
and how people behave, and my new understanding—that science provides
the tools and opportunities to examine anything I found interesting—lured
me into the study of how people behave.
With these new tools, I focused much of my initial efforts on
understanding how we experience pain. For obvious reasons I was most
concerned with such situations as the bath treatment, in which pain must be
delivered to a patient over a long period of time. Was it possible to reduce
the overall agony of such pain? Over the next few years I was able to carry
out a set of laboratory experiments on myself, my friends, and volunteers—
using physical pain induced by heat, cold water, pressure, loud sounds, and
even the psychological pain of losing money in the stock market—to probe
for the answers.
By the time I had finished, I realized that the nurses in the burn unit
were kind and generous individuals (well, there was one exception) with a
lot of experience in soaking and removing bandages, but they still didn’t
have the right theory about what would minimize their patients’ pain. How
could they be so wrong, I wondered, considering their vast experience?
Since I knew these nurses personally, I knew that their behavior was not
due to maliciousness, stupidity, or neglect. Rather, they were most likely the
victims of inherent biases in their perceptions of their patients’ pain—biases
that apparently were not altered even by their vast experience.
For these reasons, I was particularly excited when I returned to the burn
department one morning and presented my results, in the hope of
influencing the bandage removal procedures for other patients. It turns out,
I told the nurses and physicians, that people feel less pain if treatments
(such as removing bandages in a bath) are carried out with lower intensity
and longer duration than if the same goal is achieved through high intensity
and a shorter duration. In other words, I would have suffered less if they
had pulled the bandages off slowly rather than with their quick-pull method.
The nurses were genuinely surprised by my conclusions, but I was
equally surprised by what Etty, my favorite nurse, had to say. She admitted
that their understanding had been lacking and that they should change their
methods. But she also pointed out that a discussion of the pain inflicted in
the bath treatment should also take into account the psychological pain that
the nurses experienced when their patients screamed in agony. Pulling the
bandages quickly might be more understandable, she explained, if it were
indeed the nurses’ way of shortening their own torment (and their faces
often did reveal that they were suffering). In the end, though, we all agreed
that the procedures should be changed, and indeed, some of the nurses
followed my recommendations.
My recommendations never changed the bandage removal process on a
greater scale (as far as I know), but the episode left a special impression on
me. If the nurses, with all their experience, misunderstood what constituted
reality for the patients they cared so much about, perhaps other people
similarly misunderstand the consequences of their behaviors and, for that
reason, repeatedly make the wrong decisions. I decided to expand my scope
of research, from pain to the examination of cases in which individuals
make repeated mistakes—without being able to learn much from their
experiences.
THIS JOURNEY INTO the many ways in which we are all irrational, then, is
what this book is about. The discipline that allows me to play with this
subject matter is called behavioral economics, or judgment and decision
making (JDM).
Behavioral economics is a relatively new field, one that draws on
aspects of both psychology and economics. It has led me to study
everything from our reluctance to save for retirement to our inability to
think clearly during sexual arousal. It’s not just the behavior that I have
tried to understand, though, but also the decision-making processes behind
such behavior—yours, mine, and everybody else’s. Before I go on, let me
try to explain, briefly, what behavioral economics is all about and how it is
different from standard economics. Let me start out with a bit of
Shakespeare:
AS YOU WILL see in the pages ahead, each of the chapters in this book is
based on a few experiments I carried out over the years with some terrific
colleagues (at the end of the book, I have included short biographies of my
amazing collaborators). Why experiments? Life is complex, with multiple
forces simultaneously exerting their influences on us, and this complexity
makes it difficult to figure out exactly how each of these forces shapes our
behavior. For social scientists, experiments are like microscopes or strobe
lights. They help us slow human behavior to a frame-by-frame narration of
events, isolate individual forces, and examine those forces carefully and in
more detail. They let us test directly and unambiguously what makes us
tick.
There is one other point I want to emphasize about experiments. If the
lessons learned in any experiment were limited to the exact environment of
the experiment, their value would be limited. Instead, I would like you to
think about experiments as an illustration of a general principle, providing
insight into how we think and how we make decisions—not only in the
context of a particular experiment but, by extrapolation, in many contexts of
life.
In each chapter, then, I have taken a step in extrapolating the findings
from the experiments to other contexts, attempting to describe some of their
possible implications for life, business, and public policy. The implications
I have drawn are, of course, just a partial list.
To get real value from this, and from social science in general, it is
important that you, the reader, spend some time thinking about how the
principles of human behavior identified in the experiments apply to your
life. My suggestion to you is to pause at the end of each chapter and
consider whether the principles revealed in the experiments might make
your life better or worse, and more importantly what you could do
differently, given your new understanding of human nature. This is where
the real adventure lies.
One day while browsing the World Wide Web (obviously for work—not
just wasting time), I stumbled on the following ad, on the Web site of a
magazine, the Economist.
Which one would you choose? In this case, Sam knows that customers
find it difficult to compute the value of different options. (Who really
knows if the Panasonic at $690 is a better deal than the Philips at $1,480?)
But Sam also knows that given three choices, most people will take the
middle choice (as in landing your plane between the runway lights). So
guess which television Sam prices as the middle option? That’s right—the
one he wants to sell!
Of course, Sam is not alone in his cleverness. The New York Times ran a
story recently about Gregg Rapp, a restaurant consultant, who gets paid to
work out the pricing for menus. He knows, for instance, how lamb sold this
year as opposed to last year; whether lamb did better paired with squash or
with risotto; and whether orders decreased when the price of the main
course was hiked from $39 to $41.
One thing Rapp has learned is that high-priced entrées on the menu
boost revenue for the restaurant—even if no one buys them. Why? Because
even though people generally won’t buy the most expensive dish on the
menu, they will order the second most expensive dish. Thus, by creating an
expensive dish, a restaurateur can lure customers into ordering the second
most expensive choice (which can be cleverly engineered to deliver a
higher profit margin).4
SO LET’S RUN through the Economist’s sleight of hand in slow motion.
As you recall, the choices were:
So far these Sloan MBAs are smart cookies. They all saw the advantage
in the print-and-Internet offer over the print-only offer. But were they
influenced by the mere presence of the print-only option (which I will
henceforth, and for good reason, call the “decoy”). In other words, suppose
that I removed the decoy so that the choices would be the ones seen in the
figure below:
Would the students respond as before (16 for the Internet only and 84
for the combination)?
Certainly they would react the same way, wouldn’t they? After all, the
option I took out was one that no one selected, so it should make no
difference. Right?
Au contraire! This time, 68 of the students chose the Internet-only
option for $59, up from 16 before. And only 32 chose the combination
subscription for $125, down from 84 before.*
As you can see, the middle circle can’t seem to stay the same size.
When placed among the larger circles, it gets smaller. When placed among
the smaller circles, it grows bigger. The middle circle is the same size in
both positions, of course, but it appears to change depending on what we
place next to it.
This might be a mere curiosity, but for the fact that it mirrors the way
the mind is wired: 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 entrées, and spouses—but for
experiences such as vacations and educational options, and for ephemeral
things as well: emotions, attitudes, and points of view.
We always compare jobs with jobs, vacations with vacations, lovers
with lovers, and wines with wines. All this relativity reminds me of a line
from the film Crocodile Dundee, when a street hoodlum pulls a switchblade
against our hero, Paul Hogan. “You call that a knife?” says Hogan
incredulously, withdrawing a bowie blade from the back of his boot. “Now
this,” he says with a sly grin, “is a knife.”
In the left side of this illustration we see two options, each of which is
better on a different attribute. Option (A) is better on attribute 1—let’s say
quality. Option (B) is better on attribute 2—let’s say beauty. Obviously
these are two very different options and the choice between them is not
simple. Now consider what happens if we add another option, called (-A)
(see the right side of the illustration). This option is clearly worse than
option (A), but it is also very similar to it, making the comparison between
them easy, and suggesting that (A) is not only better than (-A) but also
better than (B).
In essence, introducing (-A), the decoy, creates a simple relative
comparison with (A), and hence makes (A) look better, not just relative to (-
A), but overall as well. As a consequence, the inclusion of (-A) in the set,
even if no one ever selects it, makes people more likely to make (A) their
final choice.
Does this selection process sound familiar? Remember the pitch put
together by the Economist? The marketers there knew that we didn’t know
whether we wanted an Internet subscription or a print subscription. But they
figured that, of the three options, the print-and-Internet combination would
be the offer we would take.
Here’s another example of the decoy effect. Suppose you are planning a
honeymoon in Europe. You’ve already decided to go to one of the major
romantic cities and have narrowed your choices to Rome and Paris, your
two favorites. The travel agent presents you with the vacation packages for
each city, which includes airfare, hotel accommodations, sightseeing tours,
and a free breakfast every morning. Which would you select?
For most people, the decision between a week in Rome and a week in
Paris is not effortless. Rome has the Coliseum; Paris, the Louvre. Both have
a romantic ambience, fabulous food, and fashionable shopping. It’s not an
easy call. But suppose you were offered a third option: Rome without the
free breakfast, called-Rome or the decoy.
If you were to consider these three options (Paris, Rome, -Rome), you
would immediately recognize that whereas Rome with the free breakfast is
about as appealing as Paris with the free breakfast, the inferior option,
which is Rome without the free breakfast, is a step down. The comparison
between the clearly inferior option (-Rome) makes Rome with the free
breakfast seem even better. In fact, -Rome makes Rome with the free
breakfast look so good that you judge it to be even better than the difficult-
to-compare option, Paris with the free breakfast.
ONCE YOU SEE the decoy effect in action, you realize that it is the secret
agent in more decisions than we could imagine. It even helps us decide
whom to date—and, ultimately, whom to marry. Let me describe an
experiment that explored just this subject.
As students hurried around MIT one cold weekday, I asked some of
them whether they would allow me to take their pictures for a study. In
some cases, I got disapproving looks. A few students walked away. But
most of them were happy to participate, and before long, the card in my
digital camera was filled with images of smiling students. I returned to my
office and printed 60 of them—30 of women and 30 of men.
The following week I made an unusual request of 25 of my
undergraduates. I asked them to pair the 30 photographs of men and the 30
of women by physical attractiveness (matching the men with other men,
and the women with other women). That is, I had them pair the Brad Pitts
and the George Clooneys of MIT, as well as the Woody Allens and the
Danny De-Vitos (sorry, Woody and Danny). Out of these 30 pairs, I
selected the six pairs—three female pairs and three male pairs—that my
students seemed to agree were most alike.
Now, like Dr. Frankenstein himself, I set about giving these faces my
special treatment. Using Photoshop, I mutated the pictures just a bit,
creating a slightly but noticeably less attractive version of each of them. I
found that just the slightest movement of the nose threw off the symmetry.
Using another tool, I enlarged one eye, eliminated some of the hair, and
added traces of acne.
No flashes of lightning illuminated my laboratory; nor was there a
baying of the hounds on the moor. But this was still a good day for science.
By the time I was through, I had the MIT equivalent of George Clooney in
his prime (A) and the MIT equivalent of Brad Pitt in his prime (B), and also
a George Clooney with a slightly drooping eye and thicker nose (-A, the
decoy) and a less symmetrical version of Brad Pitt (-B, another decoy). I
followed the same procedure for the less attractive pairs. I had the MIT
equivalent of Woody Allen with his usual lopsided grin (A) and Woody
Allen with an unnervingly misplaced eye (-A), as well as Danny DeVito (B)
and a slightly disfigured version of Danny DeVito (-B).
For each of the 12 photographs, in fact, I now had a regular version as
well as an inferior (-) decoy version. (See the illustration for an example of
the two conditions used in the study.)
It was now time for the main part of the experiment. I took all the sets
of pictures and made my way over to the student union. Approaching one
student after another, I asked each to participate. When the students agreed,
I handed them a sheet with three pictures (as in the illustration here). Some
of them had the regular picture (A), the decoy of that picture (-A), and the
other regular picture (B). Others had the regular picture (B), the decoy of
that picture (-B), and the other regular picture (A).
For example, a set might include a regular Clooney (A), a decoy
Clooney (-A), and a regular Pitt (B); or a regular Pitt (B), a decoy Pitt (-B),
and a regular Clooney (A). After selecting a sheet with either male or
female pictures, according to their preferences, I asked the students to circle
the people they would pick to go on a date with, if they had a choice. All
this took quite a while, and when I was done, I had distributed 600 sheets.
What was my motive in all this? Simply to determine if the existence of
the distorted picture (-A or -B) would push my participants to choose the
similar but undistorted picture. In other words, would a slightly less
attractive George Clooney (-A) push the participants to choose the perfect
George Clooney over the perfect Brad Pitt?
There were no pictures of Brad Pitt or George Clooney in my
experiment, of course. Pictures (A) and (B) showed ordinary students. But
do you remember how the existence of a colonial-style house needing a
new roof might push you to choose a perfect colonial over a contemporary
house—simply because the decoy colonial would give you something
against which to compare the regular colonial? And in the Economist’s ad,
didn’t the print-only option for $125 push people to take the print-and-
Internet option for $125? Similarly, would the existence of a less perfect
person (-A or -B) push people to choose the perfect one (A or B), simply
because the decoy option served as a point of comparison?
Note: For this illustration, I used computerized faces, not those of the
MIT students. And of course, the letters did not appear on the original
sheets.
It did. Whenever I handed out a sheet that had a regular picture, its
inferior version, and another regular picture, the participants said they
would prefer to date the “regular” person—the one who was similar, but
clearly superior, to the distorted version—over the other, undistorted person
on the sheet. This was not just a close call—it happened 75 percent of the
time.
To explain the decoy effect further, let me tell you something about
bread-making machines. When Williams-Sonoma first introduced a home
“bread bakery” machine (for $275), most consumers were not interested.
What was a home bread-making machine, anyway? Was it good or bad?
Did one really need home-baked bread? Why not just buy a fancy
coffeemaker sitting nearby instead? Flustered by poor sales, the
manufacturer of the bread machine brought in a marketing research firm,
which suggested a fix: introduce an additional model of the bread maker,
one that was not only larger but priced about 50 percent higher than the
initial machine.
Now sales began to rise (along with many loaves of bread), though it
was not the large bread maker that was being sold. Why? Simply because
consumers now had two models of bread makers to choose from. Since one
was clearly larger and much more expensive than the other, people didn’t
have to make their decision in a vacuum. They could say: “Well, I don’t
know much about bread makers, but I do know that if I were to buy one, I’d
rather have the smaller one for less money.” And that’s when bread makers
began to fly off the shelves.5
OK for bread makers. But let’s take a look at the decoy effect in a
completely different situation. What if you are single, and hope to appeal to
as many attractive potential dating partners as possible at an upcoming
singles event? 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 (-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
with a “-you,” the decoy friend will do a lot to make you look better, not
just in comparison with the decoy but also in general, and in comparison
with all the other people around. It may sound irrational (and I can’t
guarantee this), but the chances are good that you will get some extra
attention. Of course, don’t just stop at looks. If great conversation will win
the day, be sure to pick a friend for the singles event who can’t match your
smooth delivery and rapier wit. By comparison, you’ll sound great.
Now that you know this secret, be careful: when a similar but better-
looking friend of the same sex asks you to accompany him or her for a night
out, you might wonder whether you have been invited along for your
company or merely as a decoy.
At the onset of World War II, an Italian diamond dealer, James Assael, fled
Europe for Cuba. There, he found a new livelihood: the American army
needed waterproof watches, and Assael, through his contacts in
Switzerland, was able to fill the demand.
When the war ended, Assael’s deal with the U.S. government dried up,
and he was left with thousands of Swiss watches. The Japanese needed
watches, of course. But they didn’t have any money. They did have pearls,
though—many thousands of them. Before long, Assael had taught his son
how to barter Swiss watches for Japanese pearls. The business blossomed,
and shortly thereafter, the son, Salvador Assael, became known as the
“pearl king.”
The pearl king had moored his yacht at Saint-Tropez one day in 1973,
when a dashing young Frenchman, Jean-Claude Brouillet, came aboard
from an adjacent yacht. Brouillet had just sold his air-freight business and
with the proceeds had purchased an atoll in French Polynesia—a blue-
lagooned paradise for himself and his young Tahitian wife. Brouillet
explained that its turquoise waters abounded with black-lipped oysters,
Pinctada margaritifera. And from the black lips of those oysters came
something of note: black pearls.
At the time there was no market for Tahitian black pearls, and little
demand. But Brouillet persuaded Assael to go into business with him.
Together they would harvest black pearls and sell them to the world. At
first, Assael’s marketing efforts failed. The pearls were gunmetal gray,
about the size of musket balls, and he returned to Polynesia without having
made a single sale. Assael could have dropped the black pearls altogether or
sold them at a low price to a discount store. He could have tried to push
them to consumers by bundling them together with a few white pearls. But
instead Assael waited a year, until the operation had produced some better
specimens, and then brought them to an old friend, Harry Winston, the
legendary gemstone dealer. Winston agreed to put them in the window of
his store on Fifth Avenue, with an outrageously high price tag attached.
Assael, meanwhile, commissioned a full-page advertisement that ran in the
glossiest of magazines. There, a string of Tahitian black pearls glowed, set
among a spray of diamonds, rubies, and emeralds.
The pearls, which had shortly before been the private business of a
cluster of black-lipped oysters, hanging on a rope in the Polynesian sea,
were soon parading through Manhattan on the arched necks of the city’s
most prosperous divas. Assael had taken something of dubious worth and
made it fabulously fine. Or, as Mark Twain once noted about Tom Sawyer,
“Tom had discovered a great law of human action, namely, that in order to
make a man covet a thing, it is only necessary to make the thing difficult to
attain.”
HOW DID THE pearl king do it? How did he persuade the cream of society to
become passionate about Tahitian black pearls—and pay him royally for
them? In order to answer this question, I need to explain something about
baby geese.
A few decades ago, the naturalist Konrad Lorenz discovered that
goslings, upon breaking out of their eggs, become attached to the first
moving object they encounter (which is generally their mother). Lorenz
knew this because in one experiment he became the first thing they saw,
and they followed him loyally from then on through adolescence. With that,
Lorenz demonstrated not only that goslings make initial decisions based on
what’s available in their environment, but that they stick with a decision
once it has been made. Lorenz called this natural phenomenon imprinting.
Is the human brain, then, wired like that of a gosling? Do our first
impressions and decisions become imprinted? And if so, how does this
imprinting play out in our lives? When we encounter a new product, for
instance, do we accept the first price that comes before our eyes? And more
importantly, does that price (which in academic lingo we call an anchor)
have a long-term effect on our willingness to pay for the product from then
on?
It seems that what’s good for the goose is good for humans as well. And
this includes anchoring. From the beginning, for instance, Assael
“anchored” his pearls to the finest gems in the world—and the prices
followed forever after. Similarly, once we buy a new product at a particular
price, we become anchored to that price. But how exactly does this work?
Why do we accept anchors?
Consider this: if I asked you for the last two digits of your social
security number (mine are 79), then asked you whether you would pay this
number in dollars (for me this would be $79) for a particular bottle of Côtes
du Rhône 1998, would the mere suggestion of that number influence how
much you would be willing to spend on wine? Sounds preposterous, doesn’t
it? Well, wait until you see what happened to a group of MBA students at
MIT a few years ago.
“NOW HERE WE have a nice Côtes du Rhône Jaboulet Parallel,” said Drazen
Prelec, a professor at MIT’s Sloan School of Management, as he lifted a
bottle admiringly. “It’s a 1998.”
At the time, sitting before him were the 55 students from his marketing
research class. On this day, Drazen, George Loewenstein (a professor at
Carnegie Mellon University), and I would have an unusual request for this
group of future marketing pros. We would ask them to jot down the last two
digits of their social security numbers and tell us whether they would pay
this amount for a number of products, including the bottle of wine. Then,
we would ask them to actually bid on these items in an auction.
What were we trying to prove? The existence of what we called
arbitrary coherence. 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 makes them “coherent”). So, would
thinking about one’s social security number be enough to create an anchor?
And would that initial anchor have a long-term influence? That’s what we
wanted to see.
“For those of you who don’t know much about wines,” Drazen
continued, “this bottle received eighty-six points from Wine Spectator. It
has the flavor of red berry, mocha, and black chocolate; it’s a medium-
bodied, medium-intensity, nicely balanced red, and it makes for delightful
drinking.”
Drazen held up another bottle. This was a Hermitage Jaboulet La
Chapelle, 1996, with a 92-point rating from the Wine Advocate magazine.
“The finest La Chapelle since 1990,” Drazen intoned, while the students
looked up curiously. “Only 8,100 cases made…”
In turn, Drazen held up four other items: a cordless trackball (TrackMan
Marble FX by Logitech); a cordless keyboard and mouse (iTouch by
Logitech); a design book (The Perfect Package: How to Add Value through
Graphic Design); and a one-pound box of Belgian chocolates by Neuhaus.
Drazen passed out forms that listed all the items. “Now I want you to
write the last two digits of your social security number at the top of the
page,” he instructed. “And then write them again next to each of the items
in the form of a price. In other words, if the last two digits are twenty-three,
write twenty-three dollars.”
“Now when you’re finished with that,” he added, “I want you to
indicate on your sheets—with a simple yes or no—whether you would pay
that amount for each of the products.”
When the students had finished answering yes or no to each item,
Drazen asked them to write down the maximum amount they were willing
to pay for each of the products (their bids). Once they had written down
their bids, the students passed the sheets up to me and I entered their
responses into my laptop and announced the winners. One by one the
student who had made the highest bid for each of the products would step
up to the front of the class, pay for the product,* and take it with them.
The students enjoyed this class exercise, but when I asked them if they
felt that writing down the last two digits of their social security numbers
had influenced their final bids, they quickly dismissed my suggestion. No
way!
When I got back to my office, I analyzed the data. Did the digits from
the social security numbers serve as anchors? Remarkably, they did: the
students with the highest-ending social security digits (from 80 to 99) bid
highest, while those with the lowest-ending numbers (1 to 20) bid lowest.
The top 20 percent, for instance, bid an average of $56 for the cordless
keyboard; the bottom 20 percent bid an average of $16. In the end, we
could see that students with social security numbers ending in the upper 20
percent placed bids that were 216 to 346 percent higher than those of the
students with social security numbers ending in the lowest 20 percent (see
table on the facing page).
Now if the last two digits of your social security number are a high
number I know what you must be thinking: “I’ve been paying too much for
everything my entire life!” This is not the case, however. Social security
numbers were the anchor in this experiment only because we requested
them. We could have just as well asked for the current temperature or the
manufacturer’s suggested retail price (MSRP). Any question, in fact, would
have created the anchor. Does that seem rational? Of course not. But that’s
†
the way we are—goslings, after all.
The data had one more interesting aspect. Although the willingness to
pay for these items was arbitrary, there was also a logical, coherent aspect
to it. When we looked at the bids for the two pairs of related items (the two
wines and the two computer components), their relative prices seemed
incredibly logical. Everyone was willing to pay more for the keyboard than
for the trackball—and also pay more for the 1996 Hermitage than for the
1998 Côtes du Rhône. The significance of this is that once the participants
were willing to pay a certain price for one product, their willingness to pay
for other items in the same product category was judged relative to that first
price (the anchor).
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).
Now I need to add one important clarification to the story I’ve just told.
In life we are bombarded by prices. We see the manufacturer’s suggested
retail price (MSRP) for cars, lawn mowers, and coffeemakers. We get the
real estate agent’s spiel on local housing prices. But price tags by
themselves are not necessarily anchors. 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. Thus the first anchor influences not only the immediate
buying decision but many others that follow.
We might see a 57-inch LCD high-definition television on sale for
$3,000, for instance. The price tag is not the anchor. But if we decide to buy
it (or seriously contemplate buying it) at that price, then the decision
becomes our anchor henceforth in terms of LCD television sets. That’s our
peg in the ground, and from then on—whether we shop for another set or
merely have a conversation at a backyard cookout—all other high-
definition televisions are judged relative to that price.
Anchoring influences all kinds of purchases. Uri Simonsohn (a
professor at the University of Pennsylvania) and George Loewenstein, for
example, found that people who move to a new city generally remain
anchored to the prices they paid for housing in their former city. In their
study they found that people who move from inexpensive markets (say,
Lubbock, Texas) to moderately priced cities (say, Pittsburgh) don’t increase
their spending to fit the new market.* Rather, these people spend an amount
similar to what they were used to in the previous market, even if this means
having to squeeze themselves and their families into smaller or less
comfortable homes. Likewise, transplants from more expensive cities sink
the same dollars into their new housing situation as they did in the past.
People who move from Los Angeles to Pittsburgh, in other words, don’t
generally downsize their spending much once they hit Pennsylvania: they
spend an amount similar to what they used to spend in Los Angeles.
It seems that we get used to the particularities of our housing markets
and don’t readily change. The only way out of this box, in fact, is to rent a
home in the new location for a year or so. That way, we adjust to the new
environment—and, after a while, we are able to make a purchase that aligns
with the local market.
BUT THE STORY doesn’t end there. Now that you have gotten used to paying
more for coffee, and have bumped yourself up onto a new curve of
consumption, other changes also become simpler. Perhaps you will now
move up from the small cup for $2.20 to the medium size for $3.50 or to the
Venti for $4.15. Even though you don’t know how you got into this price
bracket in the first place, moving to a larger coffee at a relatively greater
price seems pretty logical. So is a lateral move to other offerings at
Starbucks: Caffè Americano, Caffè Misto, Macchiato, and Frappuccino, for
instance.
If you stopped to think about this, it would not be clear whether you
should be spending all this money on coffee at Starbucks instead of getting
cheaper coffee at Dunkin’ Donuts or even free coffee at the office. But you
don’t think about these trade-offs anymore. You’ve already made this
decision many times in the past, so you now assume that this is the way you
want to spend your money. You’ve herded yourself—lining up behind your
initial experience at Starbucks—and now you’re part of the crowd.
WHERE DO THESE thoughts lead us? For one, they illustrate the many choices
we make, from the trivial to the profound, in which anchoring plays a role.
We decide whether or not to purchase Big Macs, smoke, run red lights, take
vacations in Patagonia, listen to Tchaikovsky, slave away at doctoral
dissertations, marry, have children, live in the suburbs, vote Republican,
and so on. According to economic theory, we base these decisions on our
fundamental values—our likes and dislikes.
But what are the main lessons from these experiments about our lives in
general? Could it be that the lives we have so carefully crafted are largely
just a product of arbitrary coherence? Could it be that we made arbitrary
decisions at some point in the past (like the goslings that adopted Lorenz as
their parent) and have built our lives on them ever since, assuming that the
original decisions were wise? Is that how we chose our careers, our
spouses, the clothes we wear, and the way we style our hair? Were they
smart decisions in the first place? Or were they partially random first
imprints that have run wild?
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.
What then?
These questions may be tough nuts to crack, but in terms of our
personal lives, we can actively improve on our irrational behaviors. We can
start by becoming aware of our vulnerabilities. Suppose you’re planning to
buy a cutting-edge cell phone (the one with the three-megapixel, 8× zoom
digital camera), or even a daily $4 cup of gourmet coffee. You might begin
by questioning that habit. How did it begin? Second, ask yourself what
amount of pleasure you will be getting out of it. Is the 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. In the case of the
cell phone, could you take a step back from the cutting edge, reduce your
outlay, and use some of the money for something else? And as for the
coffee—rather than asking which blend of coffee you will have today, ask
yourself whether you should even be having that habitual cup of expensive
coffee at all.*
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.).
When we face such a decision, it might seem to us that this is just one
decision, without large consequences; 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. Given this effect, the first decision is
crucial, and we should give it an appropriate amount of attention.
Socrates said that the unexamined life is not worth living. Perhaps it’s
time to inventory the imprints and anchors in our own life. Even if they
once were completely reasonable, are they still reasonable? Once the old
choices are reconsidered, we can open ourselves to new decisions—and the
new opportunities of a new day. That seems to make sense.
ALL THIS TALK about anchors and goslings has larger implications than
consumer preferences, however. Traditional economics assumes that prices
of products in the market are determined by a balance between two forces:
production at each price (supply) and the desires of those with purchasing
power at each price (demand). The price at which these two forces meet
determines the prices in the marketplace.
This is an elegant idea, but it depends centrally on the assumption that
the two forces are independent and that together they produce the market
price. The results of all the experiments presented in this chapter (and the
basic idea of arbitrary coherence itself ) challenge these assumptions. First,
according to the standard economic framework, consumers’ willingness to
pay is one of the two inputs that determine market prices (this is the
demand). But as our experiments demonstrate, what consumers are willing
to pay can easily be manipulated, and this means that consumers don’t in
fact have a good handle on their own preferences and the prices they are
willing to pay for different goods and experiences.
Second, whereas the standard economic framework assumes that the
forces of supply and demand are independent, the type of anchoring
manipulations we have shown here suggest that they are, in fact, dependent.
In the real world, anchoring comes from manufacturer’s suggested retail
prices (MSRPs), advertised prices, promotions, product introductions, etc.
—all of which are supply-side variables. It seems then that instead of
consumers’ willingness to pay influencing market prices, the causality is
somewhat reversed and it is market prices themselves that influence
consumers’ willingness to pay. What this means is that demand is not, in
fact, a completely separate force from supply.
AND THIS IS not the end of the story. In the framework of arbitrary
coherence, the relationships we see in the marketplace between demand and
supply (for example, buying more yogurt when it is discounted) are based
not on preferences but on memory. Here is an illustration of this idea.
Consider your current consumption of milk and wine. Now imagine that
two new taxes will be introduced tomorrow. One will cut the price of wine
by 50 percent, and the other will increase the price of milk by 100 percent.
What do you think will happen? These price changes will surely affect
consumption, and many people will walk around slightly happier and with
less calcium. But now imagine this. What if the new taxes are accompanied
by induced amnesia for the previous prices of wine and milk? What if the
prices change in the same way, but you do not remember what you paid for
these two products in the past?
I suspect that the price changes would make a huge impact on demand
if people remembered the previous prices and noticed the price increases;
but I also suspect that without a memory for past prices, these price changes
would have a trivial effect, if any, on demand. If people had no memory of
past prices, the consumption of milk and wine would remain essentially the
same, as if the prices had not changed. In other words, the sensitivity we
show to price changes might in fact be largely a result of our memory for
the prices we have paid in the past and our desire for coherence with our
past decisions—not at all a reflection of our true preferences or our level of
demand.
The same basic principle would also apply if the government one day
decided to impose a tax that doubled the price of gasoline. Under
conventional economic theory, this should cut demand. But would it?
Certainly, people would initially compare the new prices with their anchor,
would be flabbergasted by the new prices, and so might pull back on their
gasoline consumption and maybe even get a hybrid car. But over the long
run, and once consumers readjusted to the new price and the new anchors (
just as we adjust to the price of Nike sneakers, bottled water, and everything
else), our gasoline consumption, at the new price, might in fact get close to
the pretax level. Moreover, much as in the example of Starbucks, this
process of readjustment could be accelerated if the price change were to
also be accompanied by other changes, such as a new grade of gas, or a new
type of fuel (such as corn-based ethanol fuel).
I am not suggesting that doubling the price of gasoline would have no
effect on consumers’ demand. But I do believe that in the long term, it
would have a much smaller influence on demand than would be assumed
from just observing the short-term market reactions to price increases.
SO, WHERE DOES this leave us? If we can’t rely on the market forces of
supply and demand to set optimal market prices, and we can’t count on
free-market mechanisms to help us maximize our utility, then we may need
to look elsewhere. This is especially the case with society’s essentials, such
as health care, medicine, water, electricity, education, and other critical
resources. If you accept the premise that market forces and free markets
will not always regulate the market for the best, then you may find yourself
among those who believe that the government (we hope a reasonable and
thoughtful government) must play a larger role in regulating some market
activities, even if this limits free enterprise. Yes, a free market based on
supply, demand, and no friction would be the ideal if we were truly rational.
Yet when we are not rational but irrational, policies should take this
important factor into account.
CHAPTER 3
Have you ever grabbed for a coupon offering a FREE! package of coffee
beans—even though you don’t drink coffee and don’t even have a machine
with which to brew it? What about all those FREE! extra helpings you piled
on your plate at a buffet, even though your stomach had already started to
ache from all the food you had consumed? And what about the worthless
FREE! stuff you’ve accumulated—the promotional T-shirt from the radio
station, the teddy bear that came with the box of Valentine chocolates, the
magnetic calendar your insurance agent sends you each year?
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. Would you buy something if it were discounted from
50 cents to 20 cents? Maybe. Would you buy it if it were discounted from
50 cents to two cents? Maybe. Would you grab it if it were discounted from
50 cents to zero? You bet!
What is it about zero cost that we find so irresistible? Why does FREE!
make us so happy? After all, FREE! can lead us into trouble: things that we
would never consider purchasing become incredibly appealing as soon as
they are FREE! For instance, have you ever gathered up free pencils, key
chains, and notepads at a conference, even though you’d have to carry them
home and would only throw most of them away? Have you ever stood in
line for a very long time (too long), just to get a free cone of Ben and
Jerry’s ice cream? Or have you bought two of a product that you wouldn’t
have chosen in the first place, just to get the third one for free?
ZERO HAS HAD a long history. The Babylonians invented the concept of zero;
the ancient Greeks debated it in lofty terms (how could something be
nothing?); the ancient Indian scholar Pingala paired zero with the numeral 1
to get double digits; and both the Mayans and the Romans made zero part
of their numeral systems. But zero really found its place about AD 498,
when the Indian astronomer Aryabhata sat up in bed one morning and
exclaimed, “Sthanam sthanam dasa gunam”—which translates, roughly, as
“Place to place in 10 times in value.” With that, the idea of decimal-based
place-value notation was born. Now zero was on a roll: It spread to the
Arab world, where it flourished; crossed the Iberian Peninsula to Europe
(thanks to the Spanish Moors); got some tweaking from the Italians; and
eventually sailed the Atlantic to the New World, where zero ultimately
found plenty of employment (together with the digit 1) in a place called
Silicon Valley.
So much for a brief recounting of the history of zero. But the concept of
zero applied to money is less clearly understood. In fact, I don’t think it
even has a history. Nonetheless, FREE! has huge implications, extending not
only to discount prices and promotions, but also to how FREE! can be used
to help us make decisions that would benefit ourselves and society.
If FREE! were a virus or a subatomic particle, I might use an electron
microscope to probe the object under the lens, stain it with different
compounds to reveal its nature, or somehow slice it apart to reveal its inner
composition. In behavioral economics we use a different instrument,
however, one that allows us to slow down human behavior and examine it
frame by frame, as it unfolds. As you have undoubtedly guessed by now,
this procedure is called an experiment.
THE CONCEPT OF zero also applies to time. Time spent on one activity, after
all, is time taken away from another. So if we spend 45 minutes in a line
waiting for our turn to get a FREE! taste of ice cream, or if we spend half an
hour filling out a long form for a tiny rebate, there is something else that we
are not doing with our time.
My favorite personal example is free-entrance day at a museum.
Despite the fact that most museums are not very expensive, I find it much
more appealing to satisfy my desire for art when the price is zero. Of course
I am not alone in this desire. So on these days I usually find that the
museum is overcrowded, the line is long, it is hard to see anything, and
fighting the crowds around the museum and in the cafeteria is unpleasant.
Do I realize that it is a mistake to go to a museum when it is free? You bet I
do—but I go nevertheless.
ZERO MAY ALSO affect food purchases. Food manufacturers have to convey
all kinds of information on the side of the box. They have to tell us about
the calories, fat content, fiber, etc. Is it possible that the same attraction we
have to zero price could also apply to zero calories, zero trans fats, zero
carbs, etc.? If the same general rules apply, Pepsi will sell more cans if the
label says “zero calories” than if it says “one calorie.”
Suppose you are at a bar, enjoying a conversation with some friends.
With one brand you get a calorie-free beer, and with another you get a
three-calorie beer. Which brand will make you feel that you are drinking a
really light beer? Even though the difference between the two beers is
negligible, the zero-calorie beer will increase the feeling that you’re doing
the right thing, healthwise. You might even feel so good that you go ahead
and order a plate of fries.
SO YOU CAN maintain the status quo with a 20-cent fee (as in the case of
Amazon’s shipping in France), or you can start a stampede by offering
something FREE! Think how powerful that idea is! Zero is not just another
discount. Zero is a different place. The difference between two cents and
one cent is small. But the difference between one cent and zero is huge!
If you are in business, and understand that, you can do some marvelous
things. Want to draw a crowd? Make something FREE! Want to sell more
products? Make part of the purchase FREE!
Similarly, we can use FREE! to drive social policy. Want people to drive
electric cars? Don’t just lower the registration and inspection fees—
eliminate them, so that you have created FREE! In the same way, if health is
your concern, focus on early detection as a way to eliminate the progression
of severe illnesses. Want people to do the right thing—in terms of getting
regular colonoscopies, mammograms, cholesterol checks, diabetes checks,
and such? Don’t just decrease the cost (by decreasing the co-pay). Make
these critical procedures FREE!
I don’t think most policy strategists realize that FREE! is an ace in their
hand, let alone know how to play it. It’s certainly counterintuitive, in these
times of budget cutbacks, to make something FREE! But when we stop to
think about it, FREE! can have a great deal of power, and it makes a lot of
sense.
APPENDIX: CHAPTER 3
Let me explain how the logic of standard economic theory would apply to
our setting. When a person can select one and only one of two chocolates,
he needs to consider not the absolute value of each chocolate but its relative
value—what he gets and what he gives up. As a first step the rational
consumer needs to compute the relative net benefits of the two chocolates
(the value of the expected taste minus the cost), and make a decision based
on which chocolate has the larger net benefit. How would this look when
the cost of the Lindt truffle was 15 cents and the cost of the Hershey’s Kiss
was one cent? The rational consumer would estimate the amount of
pleasure he expects to get from the truffle and the Kiss (let’s say this is 50
pleasure units and five pleasure units, respectively) and subtract the
displeasure he would get from paying 15 cents and one cent (let’s say this is
15 displeasure units and one displeasure unit, respectively). This would
give him a total expected pleasure of 35 pleasure units (50-15) for the
truffle, and a total expected pleasure of four pleasure units (5-1) for the
Kiss. The truffle leads by 31 points, so it’s an easy choice—the truffle wins
hands down.
What about the case when the cost is reduced by the same amount for
both products? (Truffles cost 14 cents and the Kiss is free.) The same logic
applies. The taste of the chocolates has not changed, so the rational
consumer would estimate the pleasure to be 50 and five pleasure units,
respectively. What has changed is the displeasure. In this setting the rational
consumer would have a lower level of displeasure for both chocolates
because the prices have been reduced by one cent (and one displeasure
unit). Here is the main point: because both products were discounted by the
same amount, their relative difference would be unchanged. The total
expected pleasure for the truffle would now be 36 pleasure units (50-14),
and the total expected pleasure for the Kiss would now be five pleasure
units (5-0). The truffle leads by the same 31 points, so it should be the same
easy choice. The truffle wins hands down.
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.
CHAPTER 4
You are at your mother-in-law’s house for Thanksgiving dinner, and what
a sumptuous spread she has put on the table for you! The turkey is roasted
to a golden brown; the stuffing is homemade and exactly the way you like
it. Your kids are delighted: the sweet potatoes are crowned with
marshmallows. And your wife is flattered: her favorite recipe for pumpkin
pie has been chosen for dessert.
The festivities continue into the late afternoon. You loosen your belt and
sip a glass of wine. Gazing fondly across the table at your mother-in-law,
you rise to your feet and pull out your wallet. “Mom, for all the love you’ve
put into this, how much do I owe you?” you say sincerely. As silence
descends on the gathering, you wave a handful of bills. “Do you think three
hundred dollars will do it? No, wait, I should give you four hundred!”
This is not a picture that Norman Rockwell would have painted. A glass
of wine falls over; your mother-in-law stands up red-faced; your sister-in-
law shoots you an angry look; and your niece bursts into tears. Next year’s
Thanksgiving celebration, it seems, may be a frozen dinner in front of the
television set.
WHAT’S GOING ON here? Why does an offer for direct payment put such a
damper on the party? 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. Could you help me move this
couch? Could you help me change this tire? Social norms are wrapped up in
our social nature and our need for community. They are usually warm and
fuzzy. Instant pay-backs are not required: you may help move your
neighbor’s couch, but this doesn’t mean he has to come right over and move
yours. It’s like opening a door for someone: it provides pleasure for both of
you, and reciprocity is not immediately required.
The second world, the one governed by market norms, is very different.
There’s nothing warm and fuzzy about it. The exchanges are sharp-edged:
wages, prices, rents, interest, and costs-and-benefits. Such market
relationships are not necessarily evil or mean—in fact, they also include
self-reliance, inventiveness, and individualism—but they do imply
comparable benefits and prompt payments. When you are in the domain of
market norms, you get what you pay for—that’s just the way it is.
When we keep social norms and market norms on their separate paths,
life hums along pretty well. Take sex, for instance. We may have it free in
the social context, where it is, we hope, warm and emotionally nourishing.
But there’s also market sex, sex that is on demand and that costs money.
This seems pretty straightforward. We don’t have husbands (or wives)
coming home asking for a $50 trick; nor do we have prostitutes hoping for
everlasting love.
When social and market norms collide, trouble sets in. Take sex again.
A guy takes a girl out for dinner and a movie, and he pays the bills. They go
out again, and he pays the bills once more. They go out a third time, and
he’s still springing for the meal and the entertainment. At this point, he’s
hoping for at least a passionate kiss at the front door. His wallet is getting
perilously thin, but worse is what’s going on in his head: he’s having
trouble reconciling the social norm (court-ship) with the market norm
(money for sex). On the fourth date he casually mentions how much this
romance is costing him. Now he’s crossed the line. Violation! She calls him
a beast and storms off. He should have known that one can’t mix social and
market norms—especially in this case—without implying that the lady is a
tramp. He should also have remembered the immortal words of Woody
Allen: “The most expensive sex is free sex.”
A FEW YEARS ago, James Heyman (a professor at the University of St.
Thomas) and I decided to explore the effects of social and market norms.
Simulating the Thanksgiving incident would have been wonderful, but
considering the damage we might have done to our participants’ family
relationships, we chose something more mundane. In fact, it was one of the
most boring tasks we could find (there is a tradition in social science of
using very boring tasks).
In this experiment, a circle was presented on the left side of a computer
screen and a box was presented on the right. The task was to drag the circle,
using the computer mouse, onto the square. Once the circle was
successfully dragged to the square, it disappeared from the screen and a
new circle appeared at the starting point. We asked the participants to drag
as many circles as they could, and we measured how many circles they
dragged within five minutes. This was our measure of their labor output—
the effort that they would put into this task.
How could this setup shed light on social and market exchanges? Some
of the participants received five dollars for participating in the short
experiment. They were given the money as they walked into the lab; and
they were told that at the end of the five minutes, the computer would alert
them that the task was done, at which point they were to leave the lab.
Because we paid them for their efforts, we expected them to apply market
norms to this situation and act accordingly.
Participants in a second group were presented with the same basic
instructions and task; but for them the reward was much lower (50 cents in
one experiment and 10 cents in the other). Again we expected the
participants to apply market norms to this situation and act accordingly.
Finally, we had a third group, to whom we introduced the tasks as a
social request. We didn’t offer the participants in this group anything
concrete in return for their effort; nor did we mention money. It was merely
a favor that we asked of them. We expected these participants to apply
social norms to the situation and act accordingly.
How hard did the different groups work? In line with the ethos of
market norms, those who received five dollars dragged on average 159
circles, and those who received 50 cents dragged on average 101 circles. As
expected, more money caused our participants to be more motivated and
work harder (by about 50 percent).
What about the condition with no money? Did these participants work
less than the ones who got the low monetary payment—or, in the absence of
money, did they apply social norms to the situation and work harder? The
results showed that on average they dragged 168 circles, much more than
those who were paid 50 cents, and just slightly more than those who were
paid five dollars. In other words, our participants worked harder under the
nonmonetary social norms than for the almighty buck (OK, 50 cents).
Perhaps we should have anticipated this. There are many examples to
show that people will work more for a cause than for cash. A few years ago,
for instance, the AARP asked some lawyers if they would offer less
expensive services to needy retirees, at something like $30 an hour. The
lawyers said no. Then the program manager from AARP had a brilliant
idea: he asked the lawyers if they would offer free services to needy
retirees. Overwhelmingly, the lawyers said yes.
What was going on here? How could zero dollars be more attractive
than $30? 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.
Why didn’t they just accept the $30, thinking of themselves as volunteers
who received $30? Because once market norms enter our considerations,
the social norms depart.
A similar lesson was learned by Nachum Sicherman, an economics
professor at Columbia, who was taking martial arts lessons in Japan. The
sensei (the master teacher) was not charging the group for the training. The
students, feeling that this was unfair, approached the master one day and
suggested that they pay him for his time and effort. Setting down his
bamboo shinai, the master calmly replied that if he charged them, they
would not be able to afford him.
IN THE PREVIOUS experiment, then, those who got paid 50 cents didn’t say to
themselves, “Good for me; I get to do this favor for these researchers, and I
am getting some money out of this,” and continue to work harder than those
who were paid nothing. Instead they switched themselves over to the
market norms, decided that 50 cents wasn’t much, and worked
halfheartedly. In other words, when the market norms entered the lab, the
social norms were pushed out.
But what would happen if we replaced the payments with a gift? Surely
your mother-in-law would accept a good bottle of wine at dinner. Or how
about a housewarming present (such as an eco-friendly plant) for a friend?
Are gifts methods of exchange that keep us within the social exchange
norms? Would participants receiving such gifts switch out of the social
norms and into market norms, or would offering gifts as rewards maintain
the participants in the social world?
To find out just where gifts fall on the line between social and market
norms, James and I decided on a new experiment. This time, we didn’t offer
our participants money for dragging circles across a computer screen; we
offered them gifts instead. We replaced the 50-cent reward with a Snickers
bar (worth about 50 cents), and the five-dollar incentive with a box of
Godiva chocolates (worth about five dollars).
The participants came to the lab, got their reward, worked as much as
they liked, and left. Then we looked at the results. 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.
BUT WHAT WOULD HAPPEN if we mixed the signals for the two types of
norms? What would happen if we blended the market norm with the social
norm? In other words, if we said that we would give them a “50-cent
Snickers bar” or a “five-dollar box of Godiva chocolates,” what would the
participants do? Would a “50-cent Snickers bar” make our participants work
as hard as a “Snickers bar” made them work; or would it make them work
halfheartedly, as the 50-cents made them work? Or would it be somewhere
in the middle? The next experiment tested these ideas.
As it turned out, the participants were not motivated to work at all when
they got the 50-cent Snickers bar, and in fact the effort they invested was
the same as when they got a payment of 50 cents. 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.
By the way, we replicated the setup later when we asked passersby
whether they would help us unload a sofa from a truck. We found the same
results. 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. Gifts are also effective for sofas, and offering people a gift, even a
small one, is sufficient to get them to help; but mention what the gift cost
you, and you will see the back of them faster than you can say market
norms.
BUT THE REAL story only started here. The most interesting part occurred a
few weeks later, when the day care center removed the fine. Now the center
was back to the social norm. Would the parents also return to the social
norm? Would their guilt return as well? Not at all. Once the fine was
removed, the behavior of the parents didn’t change. They continued to pick
up their kids late. In fact, when the fine was removed, there was a slight
increase in the number of tardy pickups (after all, both the social norms and
the fine had been removed).
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. Once the bloom
is off the rose—once a social norm is trumped by a market norm—it will
rarely return.
THE FACT THAT we live in both the social world and the market world has
many implications for our personal lives. From time to time, we all need
someone to help us move something, or to watch our kids for a few hours,
or to take in our mail when we’re out of town. What’s the best way to
motivate our friends and neighbors to help us? Would cash do it—a gift,
perhaps? How much? Or nothing at all? This social dance, as I’m sure you
know, isn’t easy to figure out—especially when there’s a risk of pushing a
relationship into the realm of a market exchange.
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.
THE DELICATE BALANCE between social and market norms is also evident in
the business world. In the last few decades companies have tried to market
themselves as social companions—that is, they’d like us to think that they
and we are family, or at least are friends who live on the same cul-de-sac.
“Like a good neighbor, State Farm is there” is one familiar slogan. Another
is Home Depot’s gentle urging: “You can do it. We can help.”
Whoever started the movement to treat customers socially had a great
idea. If customers and a company are family, then the company gets several
benefits. Loyalty is paramount. Minor infractions—screwing up your bill
and even imposing a modest hike in your insurance rates—are
accommodated. Relationships of course have ups and downs, but overall
they’re a pretty good thing.
But here’s what I find strange: although companies have poured billions
of dollars into marketing and advertising to create social relationships—or
at least an impression of social relationships—they don’t seem to
understand the nature of a social relationship, and in particular its risks.
For example, what happens when a customer’s check bounces? If the
relationship is based on market norms, the bank charges a fee, and the
customer shakes it off. Business is business. While the fee is annoying, it’s
nonetheless acceptable. In a social relationship, however, a hefty late fee—
rather than a friendly call from the manager or an automatic fee waiver—is
not only a relationship-killer; it’s a stab in the back. Consumers will take
personal offense. They’ll leave the bank angry and spend hours
complaining to their friends about this awful bank. After all, this was a
relationship framed as a social exchange. No matter how many cookies,
slogans, and tokens of friendship a bank provides, one violation of the
social exchange means that the consumer is back to the market exchange. It
can happen that quickly.
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, even worse, as a nuisance or
a 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.
On the other hand, if you think you may have to play tough from time to
time—charging extra for additional services or rapping knuckles swiftly to
keep the consumers in line—you might not want to waste money in the first
place on making your company the fuzzy feel-good choice. In that case,
stick to a simple value proposition: state what you give and what you expect
in return. Since you’re not setting up any social norms or expectations, you
also can’t violate any—after all, it’s just business.
COMPANIES HAVE ALSO tried to establish social norms with their employees.
It wasn’t always this way. Years ago, the workforce of America was more
of an industrial, market-driven exchange. Back then it was often a nine-to-
five, time-clock kind of mentality. You put in your 40 hours and you got
your paycheck on Friday. Since workers were paid by the hour, they knew
exactly when they were working for the man, and when they weren’t. The
factory whistle blew (or the corporate equivalent took place), and the
transaction was finished. This was a clear market exchange, and it worked
adequately for both sides.
Today companies see an advantage in creating a social exchange. After
all, in today’s market we’re the makers of intangibles. Creativity counts
more than industrial machines. The partition between work and leisure has
likewise blurred. The people who run the workplace want us to think about
work while we’re driving home and while we’re in the shower. They’ve
given us laptops, cell phones, and BlackBerries to bridge the gap between
the workplace and home.
Further blurring the nine-to-five workday is the trend in many
companies to move away from hourly rates to monthly pay. In this 24/7
work environment social norms have a great advantage: they tend to make
employees passionate, hardworking, flexible, and concerned. In a market
where employees’ loyalty to their employers is often wilting, social norms
are one of the best ways to make workers loyal, as well as motivated.
Open-source software shows the potential of social norms. In the case
of Linux and other collaborative projects, you can post a problem about a
bug on one of the bulletin boards and see how fast someone, or often many
people, will react to your request and fix the software—using their own
leisure time. Could you pay for this level of service? Most likely. But if you
had to hire people of the same caliber they would cost you an arm and a leg.
Rather, people in these communities are happy to give their time to society
at large (for which they get the same social benefits we all get from helping
a friend paint a room). What can we learn from this that is applicable to the
business world? There are social rewards that strongly motivate behavior—
and one of the least used in corporate life is the encouragement of social
rewards and reputation.
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.
So what good is money? In ancient times, money made trading easier:
you didn’t have to sling a goose over your back when you went to market,
or decide what section of the goose was equivalent to a head of lettuce. In
modern times money has even more benefits, as it allows us to specialize,
borrow, and save.
But money has also taken on a life of its own. As we have seen, it can
remove the best in human interactions. So do we need money? Of course
we do. But could there be some aspects of our life that would be, in some
ways, better without it?
That’s a radical idea, and not an easy one to imagine. But a few years
ago I had a taste of it. At that time, I got a phone call from John Perry
Barlow, a former lyricist for the Grateful Dead, inviting me to an event that
proved to be both an important personal experience and an interesting
exercise in creating a moneyless society. Barlow told me that I had to come
to Burning Man with him, and that if I did, I would feel as if I had come
home. Burning Man is an annual weeklong event of self-expression and
self-reliance held in Black Rock Desert, Nevada, regularly attended by
more than 40,000 people. Burning Man started in 1986 on Baker Beach in
San Francisco, when a small crowd designed, built, and eventually set fire
to an eight-foot wooden statue of a man and a smaller wooden dog. Since
then the size of the man being burned and the number of people who attend
the festivities has grown considerably, and the event is now one of the
largest art festivals, and an ongoing experiment in temporary community.
Burning Man has many extraordinary aspects, but for me one of the
most remarkable is its rejection of market norms. Money is not accepted at
Burning Man. Rather, the whole place works as a gift exchange economy—
you give things to other people, with the understanding that they will give
something back to you (or to someone else) at some point in the future.
Thus, people who can cook might fix a meal. Psychologists offer free
counseling sessions. Masseuses massage those lying on tables before them.
Those who have water offer showers. People give away drinks, homemade
jewelry, and hugs. (I made some puzzles at the hobby shop at MIT, and
gave them to people. Mostly, people enjoyed trying to solve them.)
At first this was all very strange, but before long I found myself
adopting the norms of Burning Man. I was surprised, in fact, to find that
Burning Man was the most accepting, social, and caring place I had ever
been. I’m not sure I could easily survive in Burning Man for all 52 weeks of
the year. But this experience has convinced me that life with fewer market
norms and more social norms would be more satisfying, creative, fulfilling,
and fun.
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. In fact, it might bring quite a bit of the old civility back to our
lives.
CHAPTER 5
Ask most twentysomething male college students whether they would ever
attempt unprotected sex and they will quickly recite chapter and verse about
the risk of dreaded diseases and pregnancy. Ask them in any dispassionate
circumstances—while they are doing homework or listening to a lecture—
whether they’d enjoy being spanked, or enjoy sex in a threesome with
another man, and they’ll wince. No way, they’d tell you. Furthermore,
they’d narrow their eyes at you and think, What kind of sicko are you
anyhow, asking these questions in the first place?
In 2001, while I was visiting Berkeley for the year, my friend, academic
hero, and longtime collaborator George Loewenstein and I invited a few
bright students to help us understand the degree to which rational,
intelligent people can predict how their attitudes will change when they are
in an impassioned state. In order to make this study realistic, we needed to
measure the participants’ responses while they were smack in the midst of
such an emotional state. We could have made our participants feel angry or
hungry, frustrated or annoyed. But we preferred to have them experience a
pleasurable emotion.
We chose to study decision making under sexual arousal—not because
we had kinky predilections ourselves, but because understanding the impact
of arousal on behavior might help society grapple with some of its most
difficult problems, such as teen pregnancy and the spread of HIV-AIDS.
There are sexual motivations everywhere we look, and yet we understand
very little about how these influence our decision making.
Moreover, since we wanted to understand whether participants would be
able to predict how they would behave in a particular emotional state, the
emotion needed to be one that was already quite familiar to them. That
made our decision easy. If there’s anything predictable and familiar about
twentysomething male college students, it’s the regularity with which they
experience sexual arousal.
IN ANY CASE, our ads went out; and, college men being what they are, we
soon had a long list of hearty fellows awaiting the chance to participate—
including Roy.
Roy, in fact, was typical of most of the 25 participants in our study.
Born and raised in San Francisco, he was accomplished, intelligent, and
kind—the type of kid every prospective mother-in-law dreams of. Roy
played Chopin études on the piano and liked to dance to techno music. He
had earned straight A’s throughout high school, where he was captain of the
varsity volleyball team. He sympathized with libertarians and tended to vote
Republican. Friendly and amiable, he had a steady girlfriend who he’d been
dating for a year. He planned to go to medical school and had a weakness
for spicy California-roll sushi and for the salads at Cafe Intermezzo.
Roy met with our student research assistant, Mike, at Strada coffee shop
—Berkeley’s patio-style percolator for many an intellectual thought,
including the idea for the solution to Fermat’s last theorem. Mike was
slender and tall, with short hair, an artistic air, and an engaging smile.
Mike shook hands with Roy, and they sat down. “Thanks for answering
our ad, Roy,” Mike said, pulling out a few sheets of paper and placing them
on the table. “First, let’s go over the consent forms.”
Mike intoned the ritual decree: The study was about decision making
and sexual arousal. Participation was voluntary. Data would be confidential.
Participants had the right to contact the committee in charge of protecting
the rights of those participating in experiments, and so on.
Roy nodded and nodded. You couldn’t find a more agreeable
participant.
“You can stop the experiment at any time,” Mike concluded.
“Everything understood?”
“Yes,” Roy said. He grabbed a pen and signed. Mike shook his hand.
“Great!” Mike took a cloth bag out of his knapsack. “Here’s what’s
going to happen.” He unwrapped an Apple iBook computer and opened it
up. In addition to the standard keyboard, Roy saw a 12-key multicolored
keypad.
“It’s a specially equipped computer,” Mike explained. “Please use only
this keypad to respond.” He touched the keys on the colored pad. “We’ll
give you a code to enter, and this code will let you start the experiment.
During the session, you’ll be asked a series of questions to which you can
answer on a scale ranging between ‘no’ and ‘yes.’ If you think you would
like the activity described in the question, answer ‘yes,’ and if you think
you would not, answer ‘no.’ Remember that you’re being asked to predict
how you would behave and what kind of activities you would like when
aroused.”
Roy nodded.
“We’ll ask you to sit in your bed, and set the computer up on a chair on
the left side of your bed, in clear sight and reach of your bed,” Mike went
on. “Place the keypad next to you so that you can use it without any
difficulty, and be sure you’re alone.”
Roy’s eyes twinkled a little.
“When you finish with the session, e-mail me and we will meet again,
and you’ll get your ten bucks.”
Mike didn’t tell Roy about the questions themselves. The session started
by asking Roy to imagine that he was sexually aroused, and to answer all
the questions as he would if he were aroused. One set of questions asked
about sexual preferences. Would he, for example, find women’s shoes
erotic? Could he imagine being attracted to a 50-year-old woman? Could it
be fun to have sex with someone who was extremely fat? Could having sex
with someone he hated be enjoyable? Would it be fun to get tied up or to tie
someone else up? Could “just kissing” be frustrating?
A second set of questions asked about the likelihood of engaging in
immoral behaviors such as date rape. Would Roy tell a woman that he loved
her to increase the chance that she would have sex with him? Would he
encourage a date to drink to increase the chance that she would have sex
with him? Would he keep trying to have sex after a date had said “no”?
A third set of questions asked about Roy’s likelihood of engaging in
behaviors related to unsafe sex. Does a condom decrease sexual pleasure?
Would he always use a condom if he didn’t know the sexual history of a
new sexual partner? Would he use a condom even if he was afraid that a
woman might change her mind while he went to get it?*
A few days later, having answered the questions in his “cold,” rational
state, Roy met again with Mike.
“Those were some interesting questions,” Roy noted.
“Yes, I know,” Mike said coolly. “Kinsey had nothing on us. By the
way, we have another set of experimental sessions. Would you be interested
in participating again?”
Roy smiled a little, shrugged, and nodded.
Mike shoved a few pages toward him. “This time we’re asking you to
sign the same consent form, but the next task will be slightly different. The
next session will be very much the same as the last one, but this time we
want you to get yourself into an excited state by viewing a set of arousing
pictures and masturbating. What we want you to do is arouse yourself to a
high level, but not to ejaculate. In case you do, though, the computer will be
protected.”
Mike pulled out the Apple iBook. This time the keyboard and the screen
were covered with a thin layer of Saran wrap.
Roy made a face. “I didn’t know computers could get pregnant.”
“Not a chance,” Mike laughed. “This one had its tubes tied. But we like
to keep them clean.”
Mike explained that Roy would browse through a series of erotic
pictures on the computer to help him get to the right level of arousal; then
he would answer the same questions as before.
IMAGINE WAKING UP one morning, looking in the mirror, and discovering that
someone else—something alien but human—has taken over your body.
You’re uglier, shorter, hairier; your lips are thinner, your incisors are longer,
your nails are filthy, your face is flatter. Two cold, reptilian eyes gaze back
at you. You long to smash something, rape someone. You are not you. You
are a monster.
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.” The book was an overnight success, and no wonder. The
story captivated the imagination of Victorians, who were fascinated with the
dichotomy between repressive propriety—represented by the mild-
mannered scientist Dr. Jekyll—and uncontrollable passion, embodied in the
murderous Mr. Hyde. Dr. Jekyll thought he understood how to control
himself. But when Mr. Hyde took over, look out.
The story was frightening and imaginative, but it wasn’t new. Long
before Sophocles’s Oedipus Rex and Shakespeare’s Macbeth, the war
between interior good and evil had been the stuff of myth, religion, and
literature. In Freudian terms, each of us houses a dark self, an id, a brute
that can unpredictably wrest control away from the superego. Thus a
pleasant, friendly neighbor, seized by road rage, crashes his car into a semi.
A teenager grabs a gun and shoots his friends. A priest rapes a boy. All
these otherwise good people assume that they understand themselves. But
in the heat of passion, suddenly, with the flip of some interior switch,
everything changes.
Our experiment at Berkeley revealed not just the old story that we are
all like Jekyll and Hyde, but also something new—that every one of us,
regardless of how “good” we are, underpredicts the effect of passion on our
behavior. In every case, the participants in our experiment got it wrong.
Even the most brilliant and rational person, in the heat of passion, seems to
be absolutely and completely divorced from the person he thought he was.
Moreover, it is not just that people make wrong predictions about
themselves—their predictions are wrong by a large margin.
Most of the time, according to the results of the study, Roy is smart,
decent, reasonable, kind, and trustworthy. His frontal lobes are fully
functioning, and he is in control of his behavior. But when he’s in a state of
sexual arousal and the reptilian brain takes over, he becomes
unrecognizable to himself.
Roy thinks he knows how he will behave in an aroused state, but his
understanding is limited. He doesn’t truly understand that as his sexual
motivation becomes more intense, he may throw caution to the wind. He
may risk sexually transmitted diseases and unwanted pregnancies in order
to achieve sexual gratification. When he is gripped by passion, his emotions
may blur the boundary between what is right and what is wrong. In fact, he
doesn’t have a clue to how consistently wild he really is, for when he is in
one state and tries to predict his behavior in another state, he gets it wrong.
Moreover, the study suggested that our inability to understand ourselves
in a different emotional state does not seem to improve with experience; we
get it wrong even if we spend as much time in this state as our Berkeley
students spend sexually aroused. Sexual arousal is familiar, personal, very
human, and utterly commonplace. Even so, we all systematically
underpredict the degree to which arousal completely negates our superego,
and the way emotions can take control of our behavior.
WHAT HAPPENS, THEN, when our irrational self comes alive in an emotional
place that we think is familiar but in fact is unfamiliar? If we fail to really
understand ourselves, is it possible to somehow predict how we or others
will behave when “out of our heads”—when we’re really angry, hungry,
frightened, or sexually aroused? Is it possible to do something about this?
The answers to these questions are profound, for they indicate that we
must be wary of situations in which our Mr. Hyde may take over. When the
boss criticizes us publicly, we might be tempted to respond with a vehement
e-mail. But wouldn’t we be better off putting our reply in the “draft” folder
for a few days? When we are smitten by a sports car after a test-drive with
the wind in our hair, shouldn’t we take a break—and discuss our spouse’s
plan to buy a minivan—before signing a contract to buy the car?
Here are a few more examples of ways to protect ourselves from
ourselves:
Safe Sex
Many parents and teenagers, while in a cold, rational, Dr. Jekyll state, tend
to believe that the mere promise of abstinence—commonly known as “Just
say no”—is sufficient protection against sexually transmitted diseases and
unwanted pregnancies. Assuming that this levelheaded thought will prevail
even when emotions reach the boiling point, the advocates of “just saying
no” see no reason to carry a condom with them. But as our study shows, in
the heat of passion, we are all in danger of switching from “Just say no” to
“Yes!” in a heartbeat; and if no condom is available, we are likely to say
yes, regardless of the dangers.
What does this suggest? First, widespread availability of condoms is
essential. We should not decide in a cool state whether or not to bring
condoms; they must be there just in case. Second, unless we understand
how we might react in an emotional state, we will not be able to predict this
transformation. For teenagers, this problem is most likely exacerbated, and
thus sex education should focus less on the physiology and biology of the
reproductive system, and more on strategies to deal with the emotions that
accompany sexual arousal. Third, we must admit that carrying condoms and
even vaguely understanding the emotional firestorm of sexual arousal may
not be enough.
There are most likely many situations where teenagers simply won’t be
able to cope with their emotions. 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.
To be sure, this sounds a lot like the “Just say no” campaign, which
urges teenagers to walk away from sex when tempted. But the difference is
that “Just say no” assumes we can turn off passion at will, at any point,
whereas our study shows this assumption to be false. If we put aside the
debate on the pros and cons of teenage sex, what is clear is that if we want
to help teenagers avoid sex, sexually transmitted diseases, and unwanted
pregnancies, we have two strategies. Either we can teach them how to say
no before any temptation takes hold, and before a situation becomes
impossible to resist; or alternatively, we can get them prepared to deal with
the consequences of saying yes in the heat of passion (by carrying a
condom, for example). One thing is sure: if we don’t teach our young
people how to deal with sex when they are half out of their minds, we are
not only fooling them; we’re fooling ourselves as well. Whatever lessons
we teach them, we need to help them understand that they will react
differently when they are calm and cool from when their hormones are
raging at fever pitch (and of course the same also applies to our own
behavior).
Safe Driving
Similarly, we need to teach teenagers (and everyone else) not to drive when
their emotions are at a boil. It’s not just inexperience and hormones that
make so many teenagers crash their own or their parents’ cars. It’s also the
car full of laughing friends, with the CD player blaring at an adrenaline-
pumping decibel level, and the driver’s right hand searching for the french
fries or his girlfriend’s knee. Who’s thinking about risk in that situation?
Probably no one. A recent study found that a teenager driving alone was 40
percent more likely to get into an accident than an adult. But with one other
teenager in the car, the percentage was twice that—and with a third teenager
along for the ride, the percentage doubled again.8
To react to this, we need an intervention that does not rely on the
premise that teenagers will remember how they wanted to behave while in a
cold state (or how their parents wanted them to behave) and follow these
guidelines even when they are in a hot state. Why not build into cars
precautionary devices to foil teenagers’ behavior? Such cars might be
equipped with a modified OnStar system that the teenager and the parents
configure in a cold state. If a car exceeds 65 miles per hour on the highway,
or more than 40 miles per hour in a residential zone, for example, there will
be consequences. If the car exceeds the speed limit or begins to make
erratic turns, the radio might switch from 2Pac to Schumann’s Second
Symphony (this would slow most teenagers). Or the car might blast the air
conditioning in winter, switch on the heat in summer, or automatically call
Mom (a real downer if the driver’s friends are present). With these
substantial and immediate consequences in mind, then, the driver and his or
her friends would realize that it’s time for Mr. Hyde to move over and let
Dr. Jekyll drive.
This is not at all far-fetched. Modern cars are already full of computers
that control the fuel injection, the climate system, and the sound system.
Cars equipped with OnStar are already linked to a wireless network. With
today’s technology, it would be a simple matter for a car to automatically
call Mom.
A complete list of the questions we asked, with the mean response and
percentage differences. Each question was presented on a visual-analog
scale that stretched between “no” on the left (zero) to “possibly” in the
middle (50) to “yes” on the right (100).
TABLE 1
RATE THE ATTRACTIVENESS OF
DIFFERENT ACTIVITIES
Question Nonaroused Aroused Difference,
percent
Are women’s 42 65 55
shoes erotic?
Can you 23 46 100
imagine being
attracted to a
12-year-old
girl?
Can you 58 77 33
imagine having
sex with a 40-
year-old
woman?
Can you 28 55 96
imagine having
sex with a 50-
year-old
woman?
Can you 7 23 229
imagine having
sex with a 60-
year-old
woman?
Can you 8 14 75
imagine having
sex with a man?
Could it be fun 13 24 85
to have sex with
someone who
was extremely
fat?
Could you enjoy 53 77 45
having sex with
someone you
hated?
If you were 19 34 79
attracted to a
woman and she
proposed a
threesome with
a man, would
you do it?
Is a woman sexy 56 72 29
when she’s
sweating?
Is the smell of 13 22 69
cigarette smoke
arousing?
Would it be fun 63 81 29
to get tied up by
your sexual
partner?
Would it be fun 25 32 28
to watch an
attractive
woman
urinating?
Would you find 61 72 18
it exciting to
spank your
sexual partner?
Would you find 50 68 36
it exciting to get
spanked by an
attractive
woman?
Would you find 46 77 67
it exciting to
have anal sex?
Can you 6 16 167
imagine getting
sexually excited
by contact with
an animal?
Is just kissing 41 69 68
frustrating?
TABLE 2
RATE THE LIKELIHOOD OF ENGAGING IN
IMMORAL BEHAVIORS LIKE DATE RAPE
(A STRICT ORDER OF SEVERITY IS NOT
IMPLIED)
Question Nonaroused Aroused Difference,
percent
Would you take 55 70 27
a date to a fancy
restaurant to
increase your
chance of
having sex with
her?
Would you tell a 30 51 70
woman that you
loved her to
increase the
chance that she
would have sex
with you?
Would you 46 63 37
encourage your
date to drink to
increase the
chance that she
would have sex
with you?
Would you keep 20 45 125
trying to have
sex after your
date says “no”?
Would you slip 5 26 420
a woman a drug
to increase the
chance that she
would have sex
with you?
TABLE 3
RATE YOUR TENDENCY TO USE, AND
OUTCOMES OF NOT USING, BIRTH
CONTROL
Question Nonaroused Aroused Difference,
percent
Birth control is 34 44 29
the woman’s
responsibility.
A condom 66 78 18
decreases sexual
pleasure.
A condom 58 73 26
interferes with
sexual
spontaneity.
Would you 88 69 22
always use a
condom if you
didn’t know the
sexual history of
a new sexual
partner?
Would you use 86 60 30
a condom even
if you were
afraid that a
woman might
change her
mind while you
went to get it?
CHAPTER 6
Onto the American scene, populated by big homes, big cars, and big-
screen plasma televisions, comes another big phenomenon: the biggest
decline in the personal savings rate since the Great Depression.
Go back 25 years, and double-digit savings rates were the norm. As
recently as 1994 the savings rate was nearly five percent. But by 2006 the
savings rate had fallen below zero—to negative one percent. Americans
were not only not saving; they were spending more than they earned.
Europeans do a lot better—they save an average of 20 percent. Japan’s rate
is 25 percent. China’s is 50 percent. So what’s up with America?
I suppose one answer is that Americans have succumbed to rampant
consumerism. Go back to a home built before we had to have everything,
for instance, and check out the size of the closets. Our house in Cambridge,
Massachusetts, for example, was built in 1890. It has no closets whatsoever.
Houses in the 1940s had closets barely big enough to stand in. The closet of
the 1970s was a bit larger, perhaps deep enough for a fondue pot, a box of
eight-track tapes, and a few disco dresses. But the closet of today is a
different breed. “Walk-in closet” means that you can literally walk in for
quite a distance. And no matter how deep these closets are, Americans have
found ways to fill them right up to the closet door.
Another answer—the other half of the problem—is the recent explosion
in consumer credit. The average American family now has six credit cards
(in 2005 alone, Americans received 6 billion direct-mail solicitations for
credit cards). Frighteningly, the average family debt on these cards is about
$9,000; and seven in 10 households borrow on credit cards to cover such
basic living expenses as food, utilities, and clothing.
So wouldn’t it just be wiser if Americans learned to save, as in the old
days, and as the rest of the world does, by diverting some cash to the cookie
jar, and delaying some purchases until we can really afford them? Why
can’t we save part of our paychecks, as we know we should? Why can’t we
resist those new purchases? Why can’t we exert some good old-fashioned
self-control?
The road to hell, they say, is paved with good intentions. And most of
us know what that’s all about. We promise to save for retirement, but we
spend the money on a vacation. We vow to diet, but we surrender to the
allure of the dessert cart. We promise to have our cholesterol checked
regularly, and then we cancel our appointment.
How much do we lose when our fleeting impulses deflect us from our
long-term goals? How much is our health affected by those missed
appointments and our lack of exercise? How much is our wealth reduced
when we forget our vow to save more and consume less? Why do we lose
the fight against procrastination so frequently?
NOW THAT I had Gaurav and his classmates choosing their individual
deadlines, I went to my other two classes—with markedly different deals.
In the second class, I told the students that they would have no deadlines at
all during the semester. They merely needed to submit their papers by the
end of the last class. They could turn the papers in early, of course, but there
was no grade benefit to doing so. I suppose they should have been happy: I
had given them complete flexibility and freedom of choice. Not only that,
but they also had the lowest risk of being penalized for missing an
intermediate deadline.
The third class received what might be called a dictatorial treatment: I
dictated three deadlines for the three papers, set at the fourth, eighth, and
twelfth weeks. These were my marching orders, and they left no room for
choice or flexibility.
Of these three classes, which do you think achieved the best final
grades? Was it Gaurav and his classmates, who had some flexibility? Or the
second class, which had a single deadline at the end, and thus complete
flexibility? Or the third class, which had its deadlines dictated from above,
and therefore had no flexibility? Which class do you predict did worst?
When the semester was over, Jose Silva, the teaching assistant for the
classes (himself an expert on procrastination and currently a professor at the
University of California at Berkeley), returned the papers to the students.
We could at last compare the grades across the three different deadline
conditions. We found that the students in the class with the three firm
deadlines got the best grades; the class in which I set no deadlines at all
(except for the final deadline) had the worst grades; and the class in which
Gaurav and his classmates were allowed to choose their own three
deadlines (but with penalties for failing to meet them) finished in the
middle, in terms of their grades for the three papers and their final grade.
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.
What this finding implies is that the students generally understood their
problem with procrastination and took action to fight it when they were
given the opportunity to do so, achieving relative success in improving their
grades. But why were the grades in the self-imposed deadlines condition
not as good as the grades in the dictatorial (externally imposed) deadlines
condition? My feeling is this: not everyone understands their tendency to
procrastinate, and even those who do recognize their tendency to
procrastinate may not understand their problem completely. Yes, people
may set deadlines for themselves, but not necessarily the deadlines that are
best for getting the best performance.
When I looked at the deadlines set by the students in Gaurav’s class,
this was indeed the case. Although the vast majority of the students in this
class spaced their deadlines substantially (and got grades that were as good
as those earned by students in the dictatorial condition), some did not space
their deadlines much, and a few did not space their deadlines at all. These
students who did not space their deadlines sufficiently pulled the average
grades of this class down. Without properly spaced deadlines—deadlines
that would have forced the students to start working on their papers earlier
in the semester—the final work was generally rushed and poorly written
(even without the extra penalty of one percent off the grade for each day of
delay).
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.
Health Care
Everyone knows that preventive medicine is generally more cost-effective
—for both individuals and society—than our current remedial approach.
Prevention means getting health exams on a regular basis, before problems
develop. But having a colonoscopy or mammogram is an ordeal. Even a
cholesterol check, which requires blood to be drawn, is unpleasant. So
while our long-term health and longevity depend on undergoing such tests,
in the short term we procrastinate and procrastinate and procrastinate.
But can you imagine if we all got the required health exams on time?
Think how many serious health problems could be caught if they were
diagnosed early. Think how much cost could be cut from health-care
spending, and how much misery would be saved in the process.
So how do we fix this problem? Well, we could have a dictatorial
solution, in which the state (in the Orwellian sense) would dictate our
regular checkups. That approach worked well with my students, who were
given a deadline and performed well. In society, no doubt, we would all be
healthier if the health police arrived in a van and took procrastinators to the
ministry of cholesterol control for blood tests.
This may seem extreme, but think of the other dictates that society
imposes on us for our own good. We may receive tickets for jaywalking,
and for having our seat belts unsecured. No one thought 20 years ago that
smoking would be banned in most public buildings across America, as well
as in restaurants and bars, but today it is—with a hefty fine incurred for
lighting up. And now we have the movement against trans fats. Should
people be deprived of heart-clogging french fries?
Sometimes we strongly support regulations that restrain our self-
destructive behaviors, and at other times we have equally strong feelings
about our personal freedom. Either way, it’s always a trade-off.
But if mandatory health checkups won’t be accepted by the public, what
about a middle ground, like the self-imposed deadlines I gave to Gaurav
and his classmates (the deadlines that offered personal choice, but also had
penalties attached for the procrastinators)? This might be the perfect
compromise between authoritarianism, on the one hand, and what we have
too often in preventive health today—complete freedom to fail.
Suppose your doctor tells you that you need to get your cholesterol
checked. That means fasting the night before the blood test, driving to the
lab the next morning without breakfast, sitting in a crowded reception room
for what seems like hours, and finally, having the nurse come and get you
so that she can stick a needle into your arm. Facing those prospects, you
immediately begin to procrastinate. But suppose the doctor charged you an
up-front $100 deposit for the test, refundable only if you showed up
promptly at the appointed time. Would you be more likely to show up for
the test?
What if the doctor asked you if you would like to pay this $100 deposit
for the test? Would you accept this self-imposed challenge? And if you did,
would it make you more likely to show up for the procedure? Suppose the
procedure was more complicated: a colonoscopy, for instance. Would you
be willing to commit to a $200 deposit, refundable only if you arrived at the
appointment on time? If so, you will have replicated the condition that I
offered Gaurav’s class, a condition that certainly motivated the students to
be responsible for their own decisions.
Savings
We could order people to stop spending, as an Orwellian edict. This would
be similar to the case of my third group of students, for whom the deadline
was dictated by me. But are there cleverer ways to get people to monitor
their own spending? 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.
By then, your compulsion to purchase has subsided. (You can’t just put the
card in the microwave, of course, because then you’d destroy the magnetic
strip.)
But here’s another approach that is arguably better, and certainly more
up-to-date. John Leland wrote a very interesting article in the New York
Times in which he described a growing trend of self-shame: “When a
woman who calls herself Tricia discovered last week that she owed $22,302
on her credit cards, she could not wait to spread the news. Tricia, 29, does
not talk to her family or friends about her finances, and says she is ashamed
of her personal debt. Yet from the laundry room of her home in northern
Michigan, Tricia does something that would have been unthinkable—and
impossible—a generation ago: She goes online and posts intimate details of
her financial life, including her net worth (now a negative $38,691), the
balance and finance charges on her credit cards, and the amount of debt she
has paid down ($15,312) since starting the blog about her debt last year.”
It is also clear that Tricia’s blog is part of a larger trend. Apparently,
there are dozens of Web sites (maybe there are thousands by now) devoted
to the same kind of debt blogging (from “Poorer than You”
poorerthanyou.com and “We’re in Debt” wereindebt.com to “Make Love
Not Debt” makelovenotdebt.com and Tricia’s Web page:
bloggingawaydebt.com). Leland noted, “Consumers are asking others to
help themselves develop self-control because so many companies are not
showing any restraint.”9
Blogging about overspending is important and useful, but as we saw in
the last chapter, on emotions, what we truly need is a method to curb our
consumption at the moment of temptation, rather than a way to complain
about it after the fact.
What could we do? Could we create something that replicated the
conditions of Gaurav’s class, with some freedom of choice but built-in
boundaries as well? I began to imagine a credit card of a different kind—a
self-control credit card that would let people restrict their own spending
behavior. The users could decide in advance how much money they wanted
to spend in each category, in every store, and in every time frame. For
instance, users could limit their spending on coffee to $20 every week, and
their spending on clothing to $600 every six months. Cardholders could fix
their limit for groceries at $200 a week and their entertainment spending at
$60 a month, and not allow any spending on candy between two and five
PM. What would happen if they surpassed the limit? The cardholders would
select their penalties. For instance, they could make the card get rejected; or
they could tax themselves and transfer the tax to Habitat for Humanity, a
friend, or long-term savings. This system could also implement the “ice
glass” method as a cooling-off period for large items; and it could even
automatically trigger an e-mail to your spouse, your mother, or a friend:
Dear Sumi,
This e-mail is to draw your attention to the fact that your
husband, Dan Ariely, who is generally an upright citizen, has
exceeded his spending limit on chocolate of $50 per month by
$73.25.
With best wishes,
The self-control credit card team
Now this may sound like a pipe dream, but it isn’t. Think about the
potential of Smart Cards (thin, palm-size cards that carry impressive
computational powers), which are beginning to fill the market. These cards
offer the possibility of being customized to each individual’s credit needs
and helping people manage their credit wisely. Why couldn’t a card, for
instance, have a spending “governor” (like the governors that limit the top
speed on engines) to limit monetary transactions in particular conditions?
Why couldn’t they have the financial equivalent of a time-release pill, so
that consumers could program their cards to dispense their credit to help
them behave as they hope they would?
A FEW YEARS ago I was so convinced that a “self-control” credit card was a
good idea that I asked for a meeting with one of the major banks. To my
delight, this venerable bank responded, and suggested that I come to its
corporate headquarters in New York.
I arrived in New York a few weeks later, and after a brief delay at the
reception desk, was led into a modern conference room. Peering through the
plate glass from on high, I could look down on Manhattan’s financial
district and a stream of yellow cabs pushing through the rain. Within a few
minutes the room had filled with half a dozen high-powered banking
executives, including the head of the bank’s credit card division.
I began by describing how procrastination causes everyone problems. In
the realm of personal finance, I said, it causes us to neglect our savings—
while the temptation of easy credit fills our closets with goods that we
really don’t need. It didn’t take long before I saw that I was striking a very
personal chord with each of them.
Then I began to describe how Americans have fallen into a terrible
dependence on credit cards, how the debt is eating them alive, and how they
are struggling to find their way out of this predicament. America’s seniors
are one of the hardest-hit groups. In fact, from 1992 to 2004 the rate of debt
of Americans age 55 and over rose faster than that of any other group.
Some of them were even using credit cards to fill the gaps in their
Medicare. Others were at risk of losing their homes.
I began to feel like George Bailey begging for loan forgiveness in It’s a
Wonderful Life. The executives began to speak up. Most of them had stories
of relatives, spouses, and friends (not themselves, of course) who had had
problems with credit debt. We talked it over.
Now the ground was ready and I started describing the self-control
credit card idea as a way to help consumers spend less and save more. At
first I think the bankers were a bit stunned. I was suggesting that they help
consumers control their spending. Did I realize that the bankers and credit
card companies made $17 billion a year in interest from these cards? Hello?
They should give that up?
Well, I wasn’t that naive. I explained to the bankers that there was a
great business proposition behind the idea of a self-control card. “Look,” I
said, “the credit card business is cutthroat. You send out six billion direct-
mail pieces a year, and all the card offers are about the same.” Reluctantly,
they agreed. “But suppose one credit card company stepped out of the
pack,” I continued, “and identified itself as a good guy—as an advocate for
the credit-crunched consumer? Suppose one company had the guts to offer
a card that would actually help consumers control their credit, and better
still, divert some of their money into long-term savings?” I glanced around
the room. “My bet is that thousands of consumers would cut up their other
credit cards—and sign up with you!”
A wave of excitement crossed the room. The bankers nodded their
heads and chatted to one another. It was revolutionary! Soon thereafter we
all departed. They shook my hand warmly and assured me that we would be
talking again, soon.
Well, they never called me back. (It might have been that they were
worried about losing the $17 billion in interest charges, or maybe it was just
good old procrastination.) But the idea is still there—a self-control credit
card—and maybe one day someone will take the next step.
CHAPTER 7
THAT NIGHT WE got a list of the students who had won the lottery and those
who hadn’t, and we started telephoning. Our first call was to William, a
senior majoring in chemistry. William was rather busy. After camping for
the previous week, he had a lot of homework and e-mail to catch up on. He
was not too happy, either, because after reaching the front of the line, he
was still not one of the lucky ones who had won a ticket in the lottery.
“Hi, William,” I said. “I understand you didn’t get one of the tickets for
the final four.”
“That’s right.”
“We may be able to sell you a ticket.”
“Cool.”
“How much would you be willing to pay for one?”
“How about a hundred dollars?” he replied.
“Too low,” I laughed. “You’ll have to go higher.”
“A hundred fifty?” he offered.
“You have to do better,” I insisted. “What’s the highest price you’ll
pay?”
William thought for a moment. “A hundred seventy-five.”
“That’s it?”
“That’s it. Not a penny more.”
“OK, you’re on the list. I’ll let you know,” I said. “By the way, how’d
you come up with that hundred seventy-five?”
William said he figured that for $175 he could also watch the game at a
sports bar, free, spend some money on beer and food, and still have a lot left
over for a few CDs or even some shoes. The game would no doubt be
exciting, he said, but at the same time $175 is a lot of money.
Our next call was to Joseph. After camping out for a week Joseph was
also behind on his schoolwork. But he didn’t care—he had won a ticket in
the lottery and now, in a few days, he would be watching the Duke players
fight for the national title.
“Hi, Joseph,” I said. “We may have an opportunity for you—to sell your
ticket. What’s your minimum price?”
“I don’t have one.”
“Everyone has a price,” I replied, giving the comment my best Al
Pacino tone.
His first answer was $3,000.
“Come on,” I said, “That’s way too much. Be reasonable; you have to
offer a lower price.”
“All right,” he said, “twenty-four hundred.”
“Are you sure?” I asked.
“That’s as low as I’ll go.”
“OK. If I can find a buyer at that price, I’ll give you a call. By the way,”
I added, “how did you come up with that price?”
“Duke basketball is a huge part of my life here,” he said passionately.
He then went on to explain that the game would be a defining memory of
his time at Duke, an experience that he would pass on to his children and
grandchildren. “So how can you put a price on that?” he asked. “Can you
put a price on memories?”
William and Joseph were just two of more than 100 students whom we
called. In general, the students who did not own a ticket were willing to pay
around $170 for one. The price they were willing to pay, as in William’s
case, was tempered by alternative uses for the money (such as spending it in
a sports bar for drinks and food). Those who owned a ticket, on the other
hand, demanded about $2,400 for it. Like Joseph, they justified their price
in terms of the importance of the experience and the lifelong memories it
would create.
What was really surprising, though, was that in all our phone calls, not a
single person was willing to sell a ticket at a price that someone else was
willing to pay. What did we have? We had a group of students all hungry
for a basketball ticket before the lottery drawing; and then, bang—in an
instant after the drawing, they were divided into two groups—ticket owners
and non–ticket owners. It was an emotional chasm that was formed,
between those who now imagined the glory of the game, and those who
imagined what else they could buy with the price of the ticket. And it was
an empirical chasm as well—the average selling price (about $2,400) was
separated by a factor of about 14 from the average buyer’s offer (about
$175).
From a rational perspective, both the ticket holders and the non–ticket
holders should have thought of the game in exactly the same way. After all,
the anticipated atmosphere at the game and the enjoyment one could expect
from the experience should not depend on winning a lottery. Then how
could a random lottery drawing have changed the students’ view of the
game—and the value of the tickets—so dramatically?
OWNERSHIP PERVADES OUR lives and, in a strange way, shapes many of the
things we do. Adam Smith wrote, “Every man [and woman]…lives by
exchanging, or becomes in some measure a merchant, and the society itself
grows to be what is properly a commercial society.” That’s an awesome
thought. Much of our life story can be told by describing the ebb and flow
of our particular possessions—what we get and what we give up. We buy
clothes and food, automobiles and homes, for instance. And we sell things
as well—homes and cars, and in the course of our careers, our time.
Since so much of our lives is dedicated to ownership, wouldn’t it be
nice to make the best decisions about this? Wouldn’t it be nice, for instance,
to know exactly how much we would enjoy a new home, a new car, a
different sofa, and an Armani suit, so that we could make accurate decisions
about owning them? Unfortunately, this is rarely the case. We are mostly
fumbling around in the dark. Why? Because of three irrational quirks in our
human nature.
The first quirk, as we saw in the case of the basketball tickets, is that we
fall in love with what we already have. Suppose you decide to sell your old
VW bus. What do you start doing? Even before you’ve put a FOR SALE sign
in the window, you begin to recall trips you took. You were much younger,
of course; the kids hadn’t sprouted into teenagers. A warm glow of
remembrance washes over you and the car. This applies not only to VW
buses, of course, but to everything else. And it can happen fast.
For instance, two of my friends adopted a child from China and told me
this remarkable story. They went to China with 12 other couples. When
they reached the orphanage, the director took each of the couples separately
into a room and presented them with a daughter. When the couples
reconvened the following morning, they all commented on the director’s
wisdom: Somehow she knew exactly which little girl to give to each couple.
The matches were perfect. My friends felt the same way, but they also
realized that the matches had been random. What made each match seem
perfect was not the Chinese woman’s talent, but nature’s ability to make us
instantly attached to what we have.
The second quirk is that we focus on what we may lose, rather than
what we may gain. When we price our beloved VW, therefore, we think
more about what we will lose (the use of the bus) than what we will gain
(money to buy something else). Likewise, the ticket holder focuses on
losing the basketball experience, rather than imagining the enjoyment of
obtaining money or on what can be purchased with it. Our aversion to loss
is a strong emotion, and as I will explain later in the book, one that
sometimes causes us to make bad decisions. Do you wonder why we often
refuse to sell some of our cherished clutter, and if somebody offers to buy
it, we attach an exorbitant price tag to it? As soon as we begin thinking
about giving up our valued possessions, we are already mourning the loss.
The third quirk is that we assume other people will see the transaction
from the same perspective as we do. We somehow expect the buyer of our
VW to share our feelings, emotions, and memories. Or we expect the buyer
of our house to appreciate how the sunlight filters through the kitchen
windows. Unfortunately, the buyer of the VW is more likely to notice the
puff of smoke that is emitted as you shift from first into second; and the
buyer of your house is more likely to notice the strip of black mold in the
corner. It is just difficult for us to imagine that the person on the other side
of the transaction, buyer or seller, is not seeing the world as we see it.
OWNERSHIP ALSO HAS what I’d call “peculiarities.” For one, the more work
you put into something, the more ownership you begin to feel for it. Think
about the last time you assembled some furniture. Figuring out which piece
goes where and which screw fits into which hole boosts the feeling of
ownership.
In fact, I can say with a fair amount of certainty that pride of ownership
is inversely proportional to the ease with which one assembles the furniture;
wires the high-definition television to the surround-sound system; installs
software; or gets the baby into the bath, dried, powdered, diapered, and
tucked away in the crib. My friend and colleague Mike Norton (a professor
at Harvard) and I have a term for this phenomenon: the “Ikea effect.”
Another peculiarity is that we can begin to feel ownership even before
we own something. Think about the last time you entered an online auction.
Suppose you make your first bid on Monday morning, for a wristwatch, and
at this point you are the highest bidder. That night you log on, and you’re
still the top dog. Ditto for the next night. You start thinking about that
elegant watch. You imagine it on your wrist; you imagine the compliments
you’ll get. And then you go online again one hour before the end of the
auction. Some dog has topped your bid! Someone else will take your watch!
So you increase your bid beyond what you had originally planned.
Is the feeling of partial ownership causing the upward spiral we often
see in online auctions? Is it the case that the longer an auction continues, the
greater grip virtual ownership will have on the various bidders and the more
money they will spend? A few years ago, James Heyman, Yesim Orhun (a
professor at the University of Chicago), and I set up an experiment to
explore how the duration of an auction gradually affects the auction’s
participants and encourages them to bid to the bitter end. As we suspected,
the participants who were the highest bidders, for the longest periods of
time, ended up with the strongest feelings of virtual ownership. Of course,
they were in a vulnerable position: once they thought of themselves as
owners, they were compelled to prevent losing their position by bidding
higher and higher.
“Virtual ownership,” of course, is one mainspring of the advertising
industry. We see a happy couple driving down the California coastline in a
BMW convertible, and we imagine ourselves there. We get a catalog of
hiking clothing from Patagonia, see a polyester fleece pullover, and—poof
—we start thinking of it as ours. The trap is set, and we willingly walk in.
We become partial owners even before we own anything.
There’s another way that we can get drawn into ownership. Often,
companies will have “trial” promotions. If we have a basic cable television
package, for instance, we are lured into a “digital gold package” by a
special “trial” rate (only $59 a month instead of the usual $89). After all, we
tell ourselves, we can always go back to basic cable or downgrade to the
“silver package.”
But once we try the gold package, of course, we claim ownership of it.
Will we really have the strength to downgrade back to basic or even to
“digital silver”? Doubtful. At the onset, we may think that we can easily
return to the basic service, but once we are comfortable with the digital
picture, we begin to incorporate our ownership of it into our view of the
world and ourselves, and quickly rationalize away the additional price.
More than that, our aversion to loss—the loss of that nice crisp “gold
package” picture and the extra channels—is too much for us to bear. In
other words, before we make the switch we may not be certain that the cost
of the digital gold package is worth the full price; but once we have it, the
emotions of ownership come welling up, to tell us that the loss of “digital
gold” is more painful than spending a few more dollars a month. We may
think we can turn back, but that is actually much harder than we expected.
Another example of the same hook is the “30-day money-back
guarantee.” If we are not sure whether or not we should get a new sofa, the
guarantee of being able to change our mind later may push us over the
hump so that we end up getting it. We fail to appreciate how our perspective
will shift once we have it at home, and how we will start viewing the sofa—
as ours—and consequently start viewing returning it as a loss. We might
think we are taking it home only to try it out for a few days, but in fact we
are becoming owners of it and are unaware of the emotions the sofa can
ignite in us.
OWNERSHIP IS NOT limited to material things. It can also apply to points of
view. Once we take ownership of an idea—whether it’s about politics or
sports—what do we do? We love it perhaps more than we should. We prize
it more than it is worth. And most frequently, we have trouble letting go of
it because we can’t stand the idea of its loss. What are we left with then? An
ideology—rigid and unyielding.
THERE IS NO known cure for the ills of ownership. As Adam Smith said, it is
woven into our lives. But being aware of it might help. Everywhere around
us we see the temptation to improve the quality of our lives by buying a
larger home, a second car, a new dishwasher, a lawn mower, and so on. But,
once we change our possessions we have a very hard time going back
down. As I noted earlier, ownership simply changes our perspective.
Suddenly, moving backward to our pre-ownership state is a loss, one that
we cannot abide. And so, while moving up in life, we indulge ourselves
with the fantasy that we can always ratchet ourselves back if need be; but in
reality, we can’t. Downgrading to a smaller home, for instance, is
experienced as a loss, it is psychologically painful, and we are willing to
make all kinds of sacrifices in order to avoid such losses—even if, in this
case, the monthly mortgage sinks our ship.
My own approach is to try to view all transactions (particularly large
ones) as if I were a nonowner, putting some distance between myself and
the item of interest. In this attempt, I’m not certain if I have achieved the
uninterest in material things that is espoused by the Hindu sannyasi, but at
least I try to be as Zen as I can about it.
CHAPTER 8
In 210 BC, a Chinese commander named Xiang Yu led his troops across
the Yangtze River to attack the army of the Qin (Ch’in) dynasty. Pausing on
the banks of the river for the night, his troops awakened in the morning to
find, to their horror, that their ships were burning. They hurried to their feet
to fight off their attackers, but soon discovered that it was Xiang Yu himself
who had set their ships on fire, and that he had also ordered all the cooking
pots crushed.
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.
Xiang Yu’s story is remarkable because it is completely antithetical to
normal human behavior. Normally, we cannot stand the idea of closing the
doors on our alternatives. Had most of us been in Xiang Yu’s armor, in
other words, we would have sent out part of our army to tend to the ships,
just in case we needed them for retreat; and we would have asked others to
cook meals, just in case the army needed to stay put for a few weeks. Still
others would have been instructed to pound rice out into paper scrolls, just
in case we needed parchment on which to sign the terms of the surrender of
the mighty Qin (which was highly unlikely in the first place).
In the context of today’s world, we work just as feverishly to keep all
our options open. We buy the expandable computer system, just in case we
need all those high-tech bells and whistles. We buy the insurance policies
that are offered with the plasma high-definition television, just in case the
big screen goes blank. We keep our children in every activity we can
imagine—just in case one sparks their interest in gymnastics, piano, French,
organic gardening, or tae kwon do. And we buy a luxury SUV, not because
we really expect to drive off the highway, but because just in case we do,
we want to have some clearance beneath our axles.
We might not always be aware of it, but in every case we give
something up for those options. We end up with a computer that has more
functions than we need, or a stereo with an unnecessarily expensive
warranty. And in the case of our kids, we give up their time and ours—and
the chance that they could become really good at one activity—in trying to
give them some experience in a large range of activities. In running back
and forth among the things that might be important, we forget to spend
enough time on what really is important. It’s a fool’s game, and one that we
are remarkably adept at playing.
I saw this precise problem in one of my undergraduate students, an
extremely talented young man named Joe. As an incoming junior, Joe had
just completed his required courses, and now he had to choose a major. But
which one? He had a passion for architecture—he spent his weekends
studying the eclectically designed buildings around Boston. He could see
himself as a designer of such proud structures one day. At the same time he
liked computer science, particularly the freedom and flexibility that the
field offered. He could see himself with a good-paying job at an exciting
company like Google. His parents wanted him to become a computer
scientist—and besides, who goes to MIT to be an architect anyway?* Still,
his love of architecture was strong.
As Joe spoke, he wrung his hands in frustration. The classes he needed
for majors in computer science and architecture were incompatible. For
computer science, he needed Algorithms, Artificial Intelligence, Computer
Systems Engineering, Circuits and Electronics, Signals and Systems,
Computational Structures, and a laboratory in Software Engineering. For
architecture, he needed different courses: Experiencing Architecture Studio,
Foundations in the Visual Arts, Introduction to Building Technology,
Introduction to Design Computing, Introduction to the History and Theory
of Architecture, and a further set of architecture studios.
How could he shut the door on one career or the other? If he started
taking classes in computer science, he would have a hard time switching
over to architecture; and if he started in architecture, he would have an
equally difficult time switching to computer science. On the other hand, if
he signed up for classes in both disciplines, he would most likely end up
without a degree in either field at the end of his four years at MIT, and he
would require another year (paid for by his parents) to complete his degree.
(He eventually graduated with a degree in computer science, but he found
the perfect blend in his first job—designing nuclear subs for the Navy.)
Dana, another student of mine, had a similar problem—but hers
centered on two boyfriends. She could dedicate her energy and passion to a
person she had met recently and, she hoped, build an enduring relationship
with him. Or she could continue to put time and effort into a previous
relationship that was dying. She clearly liked the new boyfriend better than
the former one—yet she couldn’t let the earlier relationship go. Meanwhile,
her new boyfriend was getting restless. “Do you really want to risk losing
the boy you love,” I asked her, “for the remote possibility that you may
discover—at some later date—that you love your former boyfriend more?”
She shook her head “no,” and broke into tears.*
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?
To try to answer these questions, Jiwoong Shin (a professor at Yale) and
I devised a series of experiments that we hoped would capture the dilemma
represented by Joe and Dana. In our case, the experiment would be based
on a computer game that we hoped would eliminate some of the
complexities of life and would give us a straightforward answer about
whether people have a tendency to keep doors open for too long. We called
it the “door game.” For a location, we chose a dark, dismal place—a cavern
that even Xiang Yu’s army would have been reluctant to enter.
SAM, A RESIDENT of the hackers’ hall, was our first participant in the
“disappearing” condition. He chose the blue door to begin with; and after
entering it, he clicked three times. His earnings began building at the
bottom of the screen, but this wasn’t the only activity that caught his eye.
With each additional click, the other doors diminished by one-twelfth,
signifying that if not attended to, they would vanish. Eight more clicks and
they would disappear forever.
Sam wasn’t about to let that happen. Swinging his cursor around, he
clicked on the red door, brought it up to its full size, and clicked three times
inside the red room. But now he noticed the green door—it was four clicks
from disappearing. Once again, he moved his cursor, this time restoring the
green door to its full size.
The green door appeared to be delivering the highest payout. So should
he stay there? (Remember that each room had a range of payouts. So Sam
could not be completely convinced that the green door was actually the
best. The blue might have been better, or perhaps the red, or maybe neither.)
With a frenzied look in his eye, Sam swung his cursor across the screen. He
clicked the red door and watched the blue door continue to shrink. After a
few clicks in the red, he jumped over to the blue. But by now the green was
beginning to get dangerously small—and so he was back there next.
Before long, Sam was racing from one option to another, his body
leaning tensely into the game. In my mind I pictured a typically harried
parent, rushing kids from one activity to the next.
Is this an efficient way to live our lives—especially when another door
or two is added every week? I can’t tell you the answer for certain in terms
of your personal life, but in our experiments we saw clearly that running
from pillar to post was not only stressful but uneconomical. In fact, in their
frenzy to keep doors from shutting, our participants ended up making
substantially less money (about 15 percent less) than the participants who
didn’t have to deal with closing doors. The truth is that they could have
made more money by picking a room—any room—and merely staying
there for the whole experiment! (Think about that in terms of your life or
career.)
When Jiwoong and I tilted the experiments against keeping options
open, the results were still the same. For instance, we made each click
opening a door cost three cents, so that the cost was not just the loss of a
click (an opportunity cost) but also a direct financial loss. There was no
difference in response from our participants. They still had the same
irrational excitement about keeping their options open.
Then we told the participants the exact monetary outcomes they could
expect from each room. The results were still the same. They still could not
stand to see a door close. Also, we allowed some participants to experience
hundreds of practice trials before the actual experiment. Certainly, we
thought, they would see the wisdom of not pursuing the closing doors. But
we were wrong. Once they saw their options shrinking, our MIT students—
supposedly among the best and brightest of young people—could not stay
focused. Pecking like barnyard hens at every door, they sought to make
more money, and ended up making far less.
In the end, we tried another sort of experiment, one that smacked of
reincarnation. In this condition, a door would still disappear if it was not
visited within 12 clicks. But it wasn’t gone forever. Rather, a single click
could bring it back to life. In other words, you could neglect a door without
any loss. Would this keep our participants from clicking on it anyhow? No.
To our surprise, they continued to waste their clicks on the “reincarnating”
door, even though its disappearance had no real consequences and could
always be easily reversed. They just couldn’t tolerate the idea of the loss,
and so they did whatever was necessary to prevent their doors from closing.
SUPPOSE YOU’VE CLOSED so many of your doors that you have just two left. I
wish I could say that your choices are easier now, but often they are not. In
fact, choosing between two things that are similarly attractive is one of the
most difficult decisions we can make. This is a situation not just of keeping
options open for too long, but of being indecisive to the point of paying for
our indecision in the end. Let me use the following story to explain.
A hungry donkey approaches a barn one day looking for hay and
discovers two haystacks of identical size at the two opposite sides of the
barn. The donkey stands in the middle of the barn between the two
haystacks, not knowing which to select. Hours go by, but he still can’t make
up his mind. Unable to decide, the donkey eventually dies of starvation.*
This story is hypothetical, of course, and casts unfair aspersions on the
intelligence of donkeys. A better example might be the U.S. Congress.
Congress frequently gridlocks itself, not necessarily with regard to the big
picture of particular legislation—the restoration of the nation’s aging
highways, immigration, improving federal protection of endangered
species, etc.—but with regard to the details. Often, to a reasonable person,
the party lines on these issues are the equivalent of the two bales of hay.
Despite this, or because of it, Congress is frequently left stuck in the
middle. Wouldn’t a quick decision have been better for everybody?
Here’s another example. One of my friends spent three months selecting
a digital camera from two nearly identical models. When he finally made
his selection, I asked him how many photo opportunities had he missed,
how much of his valuable time he had spent making the selection, and how
much he would have paid to have digital pictures of his family and friends
documenting the last three months. More than the price of the camera, he
said. Has something like this ever happened to you?
What my friend (and also the donkey and Congress) failed to do when
focusing on the similarities and minor differences between two things was
to take into account the consequences of not deciding. The donkey failed to
consider starving, Congress failed to consider the lives lost while it debated
highway legislation, and my friend failed to consider all the great pictures
he was missing, not to mention the time he was spending at Best Buy. More
important, they all failed to take into consideration the relatively minor
differences that would have come with either one of the decisions.
My friend would have been equally happy with either camera; the
donkey could have eaten either bale of hay; and the members of Congress
could have gone home crowing over their accomplishments, regardless of
the slight difference in bills. In other words, they all should have considered
the decision an easy one. They could have even flipped a coin (figuratively,
in the case of the donkey) and gotten on with their lives. But we don’t act
that way, because we just can’t close those doors.
YOU REACH THE entrance to Walker by climbing a set of broad steps between
towering Greek columns. Once inside (and after turning right), you enter
two rooms with carpeting that predates the advent of electric light, furniture
to match, and a smell that has the unmistaken promise of alcohol, packs of
peanuts, and good company. Welcome to the Muddy Charles—one of
MIT’s two pubs, and the location for a set of studies that Leonard, Shane,
and I would be conducting over the following weeks. The purpose of our
experiments would be to determine whether people’s expectations influence
their views of subsequent events—more specifically, whether bar patrons’
expectations for a certain kind of beer would shape their perception of its
taste.
Let me explain this further. One of the beers that would be served to the
patrons of the Muddy Charles would be Budweiser. The second would be
what we fondly called MIT Brew. What’s MIT Brew? Basically Budweiser,
plus a “secret ingredient”—two drops of balsamic vinegar for each ounce of
beer. (Some of the MIT students objected to our calling Budweiser “beer,”
so in subsequent studies, we used Sam Adams—a substance more readily
acknowledged by Bostonians as “beer.”)
At about seven that evening, Jeffrey, a second-year PhD student in
computer science, was lucky enough to drop by the Muddy Charles. “Can I
offer you two small, free samples of beer?” asked Leonard, approaching
him. Without much hesitation, Jeffrey agreed, and Leonard led him over to
a table that held two pitchers of the foamy stuff, one labeled A and the other
B. Jeffrey sampled a mouthful of one of them, swishing it around
thoughtfully, and then sampled the other. “Which one would you like a
large glass of?” asked Leonard. Jeffrey thought it over. With a free glass in
the offing, he wanted to be sure he would be spending his near future with
the right malty friend.
Jeffrey chose beer B as the clear winner, and joined his friends (who
were in deep conversation over the cannon that a group of MIT students had
recently “borrowed” from the Caltech campus). Unbeknownst to Jeffrey,
the two beers he had previewed were Budweiser and the MIT Brew—and
the one he selected was the vinegar-laced MIT Brew.
A few minutes later, Mina, a visiting student from Estonia, dropped in.
“Like a free beer?” asked Leonard. Her reply was a smile and a nod of the
head. This time, Leonard offered more information. Beer A, he explained,
was a standard commercial beer, whereas beer B had been doctored with a
few drops of balsamic vinegar. Mina tasted the two beers. After finishing
the samples (and wrinkling her nose at the vinegar-laced brew B) she gave
the nod to beer A. Leonard poured her a large glass of the commercial brew
and Mina happily joined her friends at the pub.
Mina and Jeffrey were only two of hundreds of students who
participated in this experiment. But their reaction was typical: without
foreknowledge about the vinegar, most of them chose the vinegary MIT
Brew. But when they knew in advance that the MIT Brew had been laced
with balsamic vinegar, their reaction was completely different. At the first
taste of the adulterated suds, they wrinkled their noses and requested the
standard beer instead. 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.
If, at this point in the book, you are considering the establishment of a
new brewing company, especially one that specializes in adding some
balsamic vinegar to beer, consider the following points: (1) If people read
the label, or knew about the ingredient, they would most likely hate your
beer. (2) Balsamic vinegar is actually pretty expensive—so even if it makes
beer taste better, it may not be worth the investment. Just brew a better beer
instead.
BEER WAS JUST the start of our experiments. The MBA students at MIT’s
Sloan School also drink a lot of coffee. So one week, Elie Ofek (a professor
at the Harvard Business School), Marco Bertini (a professor at the London
Business School), and I opened an impromptu coffee shop, at which we
offered students a free cup of coffee if they would answer a few questions
about our brew. A line quickly formed. We handed our participants their
cups of coffee and then pointed them to a table set with coffee additives—
milk, cream, half-and-half, white sugar, and brown sugar. We also set out
some unusual condiments—cloves, nutmeg, orange peel, anise, sweet
paprika, and cardamom—for our coffee drinkers to add to their cups as they
pleased.
After adding what they wanted (and none of our odd condiments were
ever used) and tasting the coffee, the participants filled out a survey form.
They indicated how much they liked the coffee, whether they would like it
served in the cafeteria in the future, and the maximum price they would be
willing to pay for this particular brew.
We kept handing out coffee for the next few days, but from time to time
we changed the containers in which the odd condiments were displayed.
Sometimes we placed them in beautiful glass-and-metal containers, set on a
brushed metal tray with small silver spoons and nicely printed labels. At
other times we placed the same odd condiments in white Styrofoam cups.
The labels were handwritten in a red felt-tip pen. We went further and not
only cut the Styrofoam cups shorter, but gave them jagged, hand-cut edges.
What were the results? No, the fancy containers didn’t persuade any of
the coffee drinkers to add the odd condiments (I guess we won’t be seeing
sweet paprika in coffee anytime soon). But the interesting thing was that
when the odd condiments were offered in the fancy containers, the coffee
drinkers were much more likely to tell us that they liked the coffee a lot,
that they would be willing to pay well for it, and that they would
recommend that we should start serving this new blend in the cafeteria.
When the coffee ambience looked upscale, in other words, the coffee tasted
upscale as well.
AS YOU SEE, expectations can influence nearly every aspect of our life.
Imagine that you need to hire a caterer for your daughter’s wedding.
Josephine’s Catering boasts about its “delicious Asian-style ginger chicken”
and its “flavorful Greek salad with kalamata olives and feta cheese.”
Another caterer, Culinary Sensations, offers a “succulent organic breast of
chicken roasted to perfection and drizzled with a merlot demi-glace, resting
in a bed of herbed Israeli couscous” and a “mélange of the freshest roma
cherry tomatoes and crisp field greens, paired with a warm circle of chèvre
in a fruity raspberry vinagrette.”
Although there is no way to know whether Culinary Sensations’ food is
any better than Josephine’s, the sheer depth of the description may lead us
to expect greater things from the simple tomato and goat cheese salad. This,
accordingly, increases the chance that we (and our guests, if we give them
the description of the dish) will rave over it.
This principle, so useful to caterers, is available to everyone. We can
add small things that sound exotic and fashionable to our cooking (chipotle-
mango sauces seem all the rage right now, or try buffalo instead of beef ).
These ingredients might not make the dish any better in a blind taste test;
but by changing our expectations, they can effectively influence the taste
when we have this pre-knowledge.
These techniques are especially useful when you are inviting people for
dinner—or persuading children to try new dishes. By the same token, it
might help the taste of the meal if you omit the fact that a certain cake is
made from a commercial mix or that you used generic rather than brand-
name orange juice in a cocktail, or, especially for children, that Jell-O
comes from cow hooves. I am not endorsing the morality of such actions,
just pointing to the expected outcomes.
Finally, don’t underestimate the power of presentation. There’s a reason
that learning to present food artfully on the plate is as important in culinary
school as learning to grill and fry. Even when you buy take-out, try
removing the Styrofoam packaging and placing the food on some nice
dishes and garnishing it (especially if you have company); this can make all
the difference.
One more piece of advice: If you want to enhance the experience of
your guests, invest in a nice set of wineglasses.
Moreover, if you’re really serious about your wine, you may want to go
all out and purchase the glasses that are specific to burgundies,
chardonnays, champagne, etc. Each type of glass is supposed to provide the
appropriate environment, which should bring out the best in these wines
(even though controlled studies find that the shape of the glass makes no
difference at all in an objective blind taste test, that doesn’t stop people
from perceiving a significant difference when they are handed the “correct
glass”). Moreover, if you forget that the shape of the glass really has no
effect on the taste of the wine, you yourself may be able to better enjoy the
wine you consume in the appropriately shaped fancy glasses.
Expectations, of course, are not limited to food. When you invite people
to a movie, you can increase their enjoyment by mentioning that it got great
reviews. This is also essential for building the reputation of a brand or
product. That’s what marketing is all about—providing information that
will heighten someone’s anticipated and real pleasure. But do expectations
created by marketing really change our enjoyment?
I’m sure you remember the famous “Pepsi Challenge” ads on television
(or at least you may have heard of them). The ads consisted of people
chosen at random, tasting Coke and Pepsi and remarking about which they
liked better. These ads, created by Pepsi, announced that people preferred
Pepsi to Coke. At the same time, the ads for Coke proclaimed that people
preferred Coke to Pepsi. How could that be? Were the two companies
fudging their statistics?
The answer is in the different ways the two companies evaluated their
products. Coke’s market research was said to be based on consumers’
preferences when they could see what they were drinking, including the
famous red trademark, while Pepsi ran its challenge using blind tasting and
standard plastic cups marked M and Q. Could it be that Pepsi tasted better
in a blind taste test but that Coke tasted better in a non-blind (sighted) test?
To better understand the puzzle of Coke versus Pepsi, a terrific group of
neuroscientists—Sam McClure, Jian Li, Damon Tomlin, Kim Cypert,
Latané Montague, and Read Montague—conducted their own blind and
non-blind taste test of Coke and Pepsi. The modern twist on this test was
supplied by a functional magnetic resonance imaging (fMRI) machine.
With this machine, the researchers could monitor the activity of the
participants’ brains while they consumed the drinks.
Tasting drinks while one is in an fMRI is not simple, by the way,
because a person whose brain is being scanned must lie perfectly still. To
overcome this problem, Sam and his colleagues put a long plastic tube into
the mouth of each participant, and from a distance injected the appropriate
drink (Pepsi or Coke) through the tube into their mouths. As the participants
received a drink, they were also presented with visual information
indicating either that Coke was coming, that Pepsi was coming, or that an
unknown drink was coming. This way the researchers could observe the
brain activation of the participants while they consumed Coke and Pepsi,
both when they knew which beverage they were drinking and when they
did not.
What were the results? In line with the Coke and Pepsi “challenges,” it
turned out that the brain activation of the participants was different
depending on whether the name of the drink was revealed or not. This is
what happened: 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 in people who had a stronger preference for Coke).
The reaction of the brain to the basic hedonic value of the drinks
(essentially sugar) turned out to be similar for the two drinks. But the
advantage of Coke over Pepsi was due to Cokes’s brand—which activated
the higher-order brain mechanisms. These associations, then, and not the
chemical properties of the drink, gave Coke an advantage in the
marketplace.
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. This is
probably why Coke was liked more when the brand was known—the
associations were more powerful, allowing the part of the brain that
represents these associations to enhance activity in the brain’s pleasure
center. This should be good news to any ad agency, of course, because it
means that the bright red can, swirling script, and the myriad messages that
have come down to consumers over the years (such as “Things go better
with…”) are as much responsible for our love of Coke as the brown bubbly
stuff itself.
ALL THESE EXPERIMENTS teach us that expectations are more than the mere
anticipation of a boost from a fizzy Coke. Expectations enable us to make
sense of a conversation in a noisy room, despite the loss of a word here and
there, and likewise, to be able to read text messages on our cell phones,
despite the fact that some of the words are scrambled. And although
expectations can make us look foolish from time to time, they are also very
powerful and useful.
So what about our football fans and the game-winning pass? Although
both friends were watching the same game, they were doing so through
markedly different lenses. One saw the pass as in bounds. The other saw it
as out. In sports, such arguments are not particularly damaging—in fact,
they can be fun. The problem is that these same biased processes can
influence how we experience other aspects of our world. These biased
processes are in fact a major source of escalation in almost every conflict,
whether Israeli-Palestinian, American-Iraqi, Serbian-Croatian, or Indian-
Pakistani.
In all these conflicts, individuals from both sides can read similar
history books and even have the same facts taught to them, yet it is very
unusual to find individuals who would agree about who started the conflict,
who is to blame, who should make the next concession, etc. In such matters,
our investment in our beliefs is much stronger than any affiliation to sport
teams, and so we hold on to these beliefs tenaciously. Thus the likelihood of
agreement about “the facts” becomes smaller and smaller as personal
investment in the problem grows. This is clearly disturbing. We like to think
that sitting at the same table together will help us hammer out our
differences and that concessions will soon follow. But history has shown us
that this is an unlikely outcome; and now we know the reason for this
catastrophic failure.
But there’s reason for hope. In our experiments, tasting beer without
knowing about the vinegar, or learning about the vinegar after the beer was
tasted, allowed the true flavor to come out. The same approach should be
used 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.
When stripping away our preconceptions and our previous knowledge is
not possible, perhaps we can at least acknowledge that we are all biased. If
we acknowledge that we are trapped within our perspective, which partially
blinds us to the truth, we may be able to accept the idea that conflicts
generally require a neutral third party—who has not been tainted with our
expectations—to set down the rules and regulations. Of course, accepting
the word of a third party is not easy and not always possible; but when it is
possible, it can yield substantial benefits. And for that reason alone, we
must continue to try.
CHAPTER 10
If you were living in 1950 and had chest pain, your cardiologist might well
have suggested a procedure for angina pectoris called internal mammary
artery ligation. In this operation, the patient is anesthetized, the chest is
opened at the sternum, and the internal mammary artery is tied off. Voilà!
Pressure to the pericardiophrenic arteries is raised, blood flow to the
myocardium is improved, and everyone goes home happy.10
This was an apparently successful operation, and it had been a popular
one for the previous 20 years. But one day in 1955, a cardiologist in Seattle,
Leonard Cobb, and a few colleagues became suspicious. Was it really an
effective procedure? Did it really work? Cobb decided to try to prove the
efficacy of the procedure in a very bold way: he would perform the
operation on half his patients, and fake the procedure on the other half.
Then he would see which group felt better, and whose health actually
improved. In other words, after 25 years of filleting patients like fish, heart
surgeons would finally get a scientifically controlled surgical trial to see
how effective the procedure really was.
To carry out this test, Dr. Cobb performed the traditional procedure on
some of the patients, and placebo surgery on the others. The real surgery
meant opening the patient up and tying up the internal mammary artery. In
the placebo procedure, the surgeon merely cut into the patient’s flesh with a
scalpel, leaving two incisions. Nothing else was done.
The results were startling. Both the patients who did have their
mammary arteries constricted and those who didn’t reported immediate
relief from their chest pain. In both groups, the relief lasted about three
months—and then complaints about chest pain returned. Meanwhile,
electrocardiograms showed no difference between those who had
undergone the real operation and those who got the placebo operation. In
other words, the traditional procedure seemed to provide some short-term
relief—but so did the placebo. In the end, neither procedure provided
significant long-term relief.
More recently a different medical procedure was submitted to a similar
test, with surprisingly similar results. As early as 1993, J. B. Moseley, an
orthopedic surgeon, had increasing doubts about the use of arthroscopic
surgery for a particular arthritic affliction of the knee. Did the procedure
really work? Recruiting 180 patients with osteoarthritis from the veterans’
hospital in Houston, Texas, Dr. Moseley and his colleagues divided them
into three groups.
One group got the standard treatment: anesthetic, three incisions, scopes
inserted, cartilage removed, correction of soft-tissue problems, and 10 liters
of saline washed through the knee. The second group got anesthesia, three
incisions, scopes inserted, and 10 liters of saline, but no cartilage was
removed. The third group—the placebo group—looked from the outside
like the other two treatments (anesthesia, incisions, etc.); and the procedure
took the same amount of time; but no instruments were inserted into the
knee. In other words, this was simulated surgery.11
For two years following the surgeries, all three groups (which consisted
of volunteers, as in any other placebo experiment) were tested for a
lessening of their pain, and for the amount of time it took them to walk and
climb stairs. How did they do? The groups that had the full surgery and the
arthroscopic lavage were delighted, and said they would recommend the
surgery to their families and friends. But strangely—and here was the
bombshell—the placebo group also got relief from pain and improvements
in walking—to the same extent, in fact, as those who had the actual
operations. Reacting to this startling conclusion, Dr. Nelda Wray, one of the
authors of the Moseley study, noted, “The fact that the effectiveness of
arthroscopic lavage and debridement in patients with osteoarthritis of the
knee is no greater than that of placebo surgery makes us question whether
the $1 billion spent on these procedures might be put to better use.”
If you assume that a firestorm must have followed this report, you’re
right. When the study appeared on July 11, 2002, as the lead article in the
New England Journal of Medicine, some doctors screamed foul and
questioned the method and results of the study. In response, Dr. Moseley
argued that his study had been carefully designed and carried out.
“Surgeons…who routinely perform arthroscopy are undoubtedly
embarrassed at the prospect that the placebo effect—not surgical skill—is
responsible for patient improvement after the surgeries they perform. As
you might imagine, these surgeons are going to great lengths to try to
discredit our study.”
Regardless of the extent to which you believe the results of this study, it
is clear that we should be more suspicious about arthroscopic surgery for
this particular condition, and at the same time increase the burden of proof
for medical procedures in general.
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. Gerbi went on to treat hundreds
of patients with the worm secretions, keeping meticulous records of their
reactions. Of his patients, 68 percent reported that their pain, too, went
away for a year. We don’t know the full story of Gerbi and his worm
secretions, but we have a pretty good idea that the secretions really had
nothing to do with curing toothaches. The point is that Gerbi believed they
helped—and so did a majority of his patients.
Of course, Gerbi’s worm secretion wasn’t the only placebo in the
market. Before recent times, almost all medicines were placebos. Eye of the
toad, wing of the bat, dried fox lungs, mercury, mineral water, cocaine, an
electric current: these were all touted as suitable cures for various ailments.
When Lincoln lay dying across the street from Ford’s Theater, it is said that
his physician applied a bit of “mummy paint” to the wounds. Egyptian
mummy, ground to a powder, was believed to be a remedy for epilepsy,
abscesses, rashes, fractures, paralysis, migraine, ulcers, and many other
things. As late as 1908, “genuine Egyptian mummy” could be ordered
through the E. Merck catalog—and it’s probably still in use somewhere
today.12
Mummy powder wasn’t the most macabre of medicines, though. One
seventeenth-century recipe for a “cure all” medication advised: “Take the
fresh corpse of a red-haired, uninjured, unblemished man, 24 years old and
killed no more than one day before, preferably by hanging, breaking on the
wheel or impaling…. Leave it one day and one night in the light of the sun
and the moon, then cut into shreds or rough strips. Sprinkle on a little
powder of myrrh and aloes, to prevent it from being too bitter.”
We may think we’re different now. But we’re not. Placebos still work
their magic on us. For years, surgeons cut remnants of scar tissue out of the
abdomen, for instance, imagining that this procedure addressed chronic
abdominal pain—until researchers faked the procedure in controlled studies
and patients reported equal relief.13 Encainide, flecainide, and mexiletine
were widely prescribed off-label drugs for irregular heartbeat—and were
later found to cause cardiac arrest.14 When researchers tested the effect of
the six leading antidepressants, they noted that 75 percent of the effect was
duplicated in placebo controls.15 The same was true of brain surgery for
Parkinson’s disease.16 When physicians drilled holes in the skulls of several
patients without performing the full procedure, to test its efficacy, the
patients who received the sham surgery had the same outcome as those who
received the full procedure. And of course the list goes on and on.
One could defend these modern procedures and compounds by noting
that they were developed with the best intentions. This is true. But so were
the applications of Egyptian mummy, to a great extent. And sometimes, the
mummy powder worked just as well as (or at least no worse than) whatever
else was used.
The truth is that placebos run on the power of suggestion. They are
effective because people believe in them. You see your doctor and you feel
better. You pop a pill and you feel better. And if your doctor is a highly
acclaimed specialist, or your prescription is for a new wonder drug of some
kind, you feel even better. But how does suggestion influence us?
ON THE BASIS of price alone, it is easy to imagine that a $4,000 couch will
be more comfortable than a $400 couch; that a pair of designer jeans will be
better stitched and more comfortable than a pair from Wal-Mart; that a
high-grade electric sander will work better than a low-grade sander; and
that the roast duck at the Imperial Dynasty (for $19.95) is substantially
better than the roast duck at Wong’s Noodle Shop (for $10.95). But can
such implied difference in quality influence the actual experience, and can
such influence also apply to objective experiences such as our reactions to
pharmaceuticals?
For instance, would a cheaper painkiller be less effective than a more
expensive one? Would your winter cold feel worse if you took a discount
cold medicine than if you took an expensive one? Would your asthma
respond less well to a generic drug than to the latest brand-name on the
market? In other words, are drugs like Chinese food, sofas, blue jeans, and
tools? Can we assume that high price means higher quality, and do our
expectations translate into the objective efficacy of the product?
This is a particularly important question. The fact is that you can get
away with cheaper Chinese food and less expensive jeans. With some self-
control, we can usually steer ourselves away from the most expensive
brands. But will you really look for bargains when it comes to your health?
Putting the common cold aside for the moment, are many of us going to
pinch pennies when our lives are at risk? No—we want the best, for
ourselves, our children, and our loved ones.
If we want the best for ourselves, does an expensive drug make us feel
better than a cheaper drug? Does cost really make a difference in how we
feel? In a series of experiments a few years ago, that’s what Rebecca Waber
(a graduate student at MIT), Baba Shiv (a professor at Stanford), Ziv
Carmon, and I decided to find out.
FROM THIS EXPERIMENT, we saw that our capsule did have a placebo effect.
But suppose we priced the Veladone differently. Suppose we discounted the
price of a capsule of Veladone-Rx from $2.50 to just 10 cents. Would our
participants react differently?
In our next test, we changed the brochure, scratching out the original
price ($2.50 per pill) and inserting a new discount price of 10 cents. Did
this change our participants’ reaction? Indeed. At $2.50 almost all our
participants experienced pain relief from the pill. But when the price was
dropped to 10 cents, only half of them did.
Moreover, it turns out that this relationship between price and placebo
effect was not the same for all participants, and the effect was particularly
pronounced for people who had more experience with recent pain. In other
words, for people who had experienced more pain, and thus depended more
on pain medications, the relationship was more pronounced: they got even
less benefit when the price was discounted. When it comes to medicines,
then, we learned that you get what you pay for. Price can change the
experience.
SO WE’VE SEEN how pricing drives the efficacy of placebo, painkillers, and
energy drinks. But here’s another thought. If placebos can make us feel
better, should we simply sit back and enjoy them? Or are placebos patently
bad—shams that should be discarded, whether they make us feel good or
not? Before you answer this question, let me raise the ante. Suppose you
found a placebo substance or a placebo procedure that not only made you
feel better but actually made you physically better. Would you still use it?
What if you were a physician? Would you prescribe medications that were
only placebos? Let me tell you a story that helps explain what I’m
suggesting.
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. Charles II,
who ruled England from 1660 to 1685, for instance, was said to have
touched some 100,000 people during his reign; and the records even include
the names of several American colonists, who returned to the Old World
from the New World just to cross paths with King Charles and be healed.
Did the royal touch really work? If no one had ever gotten better after
receiving the royal touch, the practice would obviously have withered away.
But throughout history, the royal touch was said to have cured thousands of
people. Scrofula, a disfiguring and socially isolating disease often mistaken
for leprosy, was believed to be dispelled by the royal touch. Shakespeare
wrote in Macbeth: “Strangely visited people, All sworn and ulcerous, pitiful
to the eye…Put on with holy prayers and ’tis spoken, the healing
benediction.” The royal touch continued until the 1820s, by which time
monarchs were no longer considered heaven-sent—and (we might imagine)
“new, improved!” advances in Egyptian mummy ointments made the royal
touch obsolete.
When people think about a placebo such as the royal touch, they usually
dismiss it as “just psychology.” 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.
In reality, physicians provide placebos all the time. For instance, a study
done in 2003 found that more than one-third of patients who received
antibiotics for a sore throat were later found to have viral infections, for
which an antibiotic does absolutely no good (and possibly contributes to the
rising number of drug-resistant bacterial infections that threaten us all17).
But do you think doctors will stop handing us antibiotics when we have
viral colds? Even when doctors know that a cold is viral rather than
bacterial (and many colds are viral), they still know very well that the
patient wants some sort of relief; most commonly, the patient expects to
walk out with a prescription. Is it right for the physician to fill this psychic
need?
The fact that physicians give placebos all the time does not mean that
they want to do this, and I suspect that the practice tends to make them
somewhat uncomfortable. They’ve been trained to see themselves as men
and women of science, people who must look to the highest technologies of
modern medicine for answers. They want to think of themselves as real
healers, not practitioners of voodoo. So it can be extremely difficult for
them to admit, even to themselves, that their job may include promoting
health through the placebo effect. Now suppose that a doctor does allow,
however grudgingly, that a treatment he knows to be a placebo helps some
patients. Should he enthusiastically prescribe it? After all, the physician’s
enthusiasm for a treatment can play a real role in its efficacy.
Here’s another question about our national commitment to health care.
America already spends more of its GDP per person on health care than any
other Western nation. How do we deal with the fact that expensive medicine
(the 50-cent aspirin) may make people feel better than cheaper medicine
(the penny aspirin). Do we indulge people’s irrationality, thereby raising the
costs of health care? Or do we insist that people get the cheapest generic
drugs (and medical procedures) on the market, regardless of the increased
efficacy of the more expensive drugs? How do we structure the cost and co-
payment of treatments to get the most out of medications, and how can we
provide discounted drugs to needy populations without giving them
treatments that are less effective? These are central and complex issues for
structuring our health care system. I don’t have the answers to these
questions, but they are important for all of us to understand.
Placebos pose dilemmas for marketers, too. Their profession requires
them to create perceived value. Hyping a product beyond what can be
objectively proved is—depending on the degree of hype—stretching the
truth or outright lying. But we’ve seen that the perception of value, in
medicine, soft drinks, drugstore cosmetics, or cars, can become real value.
If people actually get more satisfaction out of a product that has been
hyped, has the marketer done anything worse than sell the sizzle along with
the steak? As we start thinking more about placebos and the blurry
boundary between beliefs and reality, these questions become more difficult
to answer.
AS A SCIENTIST I value experiments that test our beliefs and the efficacy of
different treatments. At the same time, it is also clear to me that
experiments, particularly those involving medical placebos, raise many
important ethical questions. Indeed, the experiment involving mammary
ligation that I mentioned at the beginning of this chapter raised an ethical
issue: there was an outcry against performing sham operations on patients.
The idea of sacrificing the well-being and perhaps even the life of some
individuals in order to learn whether a particular procedure should be used
on other people at some point in the future is indeed difficult to swallow.
Visualizing a person getting a placebo treatment for cancer, for example,
just so that years later other people will perhaps get better treatment seems a
strange and difficult trade-off to make.
At the same time, the trade-offs we make by not carrying out enough
placebo experiments are also hard to accept. And as we have seen, they can
result in hundreds or thousands of people undergoing useless (but risky)
operations. In the United States very few surgical procedures are tested
scientifically. For that reason, we don’t really know whether many
operations really offer a cure, or whether, like many of their predecessors,
they are effective merely because of their placebo effect. Thus, we may find
ourselves frequently submitting to procedures and operations that if more
carefully studied, would be put aside. Let me share with you my own story
of a procedure that, in my case, was highly touted, but in reality was
nothing more than a long, painful experience.
I had been in the hospital for two long months when my occupational
therapist came to me with exciting news. There was a technological
garment for people like me called the Jobst suit. It was skinlike, and it
would add pressure to what little skin I had left, so that my skin would heal
better. She told me that it was made at one factory in America, and one in
Ireland, from where I would get such a suit, tailored exactly to my size. She
told me I would need to wear trousers, a shirt, gloves, and a mask on my
face. Since the suit fit exactly, they would press against my skin all the
time, and when I moved, the Jobst suit would slightly massage my skin,
causing the redness and the hypergrowth of the scars to decrease.
How excited I was! Shula, the physiotherapist, would tell me about how
wonderful the Jobst was. She told me that it was made in different colors,
and immediately I imagined myself covered from head to toe in a tight blue
skin, like Spider-Man; but Shula cautioned me that the colors were only
brown for white people and black for black people. She told me that people
used to call the police when a person wearing the Jobst mask went into a
bank, because they thought it was a bank robber. Now when you get the
mask from the factory, there is a sign you have to put on your chest,
explaining the situation.
Rather than deterring me, this new information made the suit seem even
better. It made me smile. I thought it would be nice to walk in the streets
and actually be invisible. No one would be able to see any part of me except
my mouth and my eyes. And no one would be able to see my scars.
As I imagined this silky cover, I felt I could endure any pain until my
Jobst suit arrived. Weeks went by. And then it did arrive. Shula came to
help me put it on for the first time. We started with the trousers: She opened
them, in all their brownish glory, and started to put them on my legs. The
feeling wasn’t silky like something that would gently massage my scars.
The material felt more like canvas that would tear my scars. I was still by
no means disillusioned. I wanted to feel how it would be to be immersed
completely in the suit.
After a few minutes it became apparent that I had gained some weight
since the time when the measurements were taken (they used to feed me
7,000 calories and 30 eggs a day to help my body heal). The Jobst suit
didn’t fit very well. Still, I had waited a long time for it. Finally, with some
stretching and a lot of patience on everyone’s part, I was eventually
completely dressed. The shirt with the long sleeves put great pressure on
my chest, shoulders, and arms. The mask pressed hard all the time. The
long trousers began at my toes and went all the way up to my belly button.
And there were the gloves. The only visible parts of me were the ends of
my toes, my eyes, my ears, and my mouth. Everything else was covered by
the brown Jobst.
The pressure seemed to become stronger every minute. The heat inside
was intense. My scars had a poor blood supply, and the heat made the blood
rush to them, making them red and much more itchy. Even the sign warning
people that I was not a bank robber was a failure. The sign was in English,
not Hebrew, and so was quite worthless. My lovely dream had failed me. I
struggled out of the suit. New measurements were taken and sent to Ireland
so that I could get a better-fitting Jobst.
The next suit provided a more comfortable fit, but otherwise it was not
much better. I suffered with this treatment for months—itching, aching,
struggling to wear it, and tearing my delicate new skin while trying to put it
on (and when this new thin skin tears, it takes a long while to heal). At the
end I learned that this suit had no real benefits, at least not for me. The
areas of my body that were better covered looked and felt no different from
the areas that were not as well covered, and the suffering that went along
with the suit turned out to be all that it provided me.
You see, while it would be morally questionable to make patients in the
burn department take part in an experiment that was designed to test the
efficacy of such suits (using different types of fabrics, different pressure
levels, etc.), and even more difficult to ask someone to participate in a
placebo experiment, it is also morally difficult to inflict painful treatments
on many patients and for many years, without having a really good reason
to do so.
If this type of synthetic suit had been tested relative to other methods,
and relative to a placebo suit, that approach might have eliminated part of
my daily misery. It might also have stimulated research on new approaches
—ones that would actually work. My wasted suffering, and the suffering of
other patients like me, is the real cost of not doing such experiments.
Should we always test every procedure and carry out placebo
experiments? The moral dilemmas involved in medical and placebo
experiments are real. The potential benefits of such experiments should be
weighed against their costs, and as a consequence we cannot, and should
not, always do placebo tests. But my feeling is that we are not doing nearly
as many of them as we should.
CHAPTER 11
The Context of Our Character, Part I
In 2004, the total cost of all robberies in the United States was $525
million, and the average loss from a single robbery was about $1,300.18
These amounts are not very high, when we consider how much police,
judicial, and corrections muscle is put into the capture and confinement of
robbers—let alone the amount of newspaper and television coverage these
kinds of crimes elicit. I’m not suggesting that we go easy on career
criminals, of course. They are thieves, and we must protect ourselves from
their acts.
But consider this: every year, employees’ theft and fraud at the
workplace are estimated at about $600 billion. That figure is dramatically
higher than the combined financial cost of robbery, burglary, larceny-theft,
and automobile theft (totaling about $16 billion in 2004); it is much more
than what all the career criminals in the United States could steal in their
lifetimes; and it’s also almost twice the market capitalization of General
Electric. But there’s much more. Each year, according to reports by the
insurance industry, individuals add a bogus $24 billion to their claims of
property losses. The IRS, meanwhile, estimates a loss of $350 billion per
year, representing the gap between what the feds think people should pay in
taxes and what they do pay. The retail industry has its own headache: it
loses $16 billion a year to customers who buy clothes, wear them with the
tags tucked in, and return these secondhand clothes for a full refund.
Add to this sundry everyday examples of dishonesty—the congressman
accepting golfing junkets from his favorite lobbyist; the physician making
kickback deals with the laboratories that he uses; the corporate executive
who backdates his stock options to boost his final pay—and you have a
huge amount of unsavory economic activity, dramatically larger than that of
the standard household crooks.
When the Enron scandal erupted in 2001 (and it became apparent that
Enron, as Fortune magazine’s “America’s Most Innovative Company” for
six consecutive years, owed much of its success to innovations in
accounting), Nina Mazar, On Amir (a professor at the University of
California at San Diego), and I found ourselves discussing the subject of
dishonesty over lunch. Why are some crimes, particularly white-collar
crimes, judged less severely than others, we wondered—especially since
their perpetrators can inflict more financial damage between their ten
o’clock latte and lunch than a standard-issue burglar might in a lifetime?
After some discussion we decided that there might be two types of
dishonesty. One is the type of dishonesty that evokes the image of a pair of
crooks circling a gas station. As they cruise by, they consider how much
money is in the till, who might be around to stop them, and what
punishment they may face if caught (including how much time off they
might get for good behavior). On the basis of this cost-benefit calculation,
they decide whether to rob the place or not.
Then there is the second type of dishonesty. This is the kind committed
by people who generally consider themselves honest—the men and women
(please stand) who have “borrowed” a pen from a conference site, taken an
extra splash of soda from the soft drink dispenser, exaggerated the cost of
their television on their property loss report, or falsely reported a meal with
Aunt Enid as a business expense (well, she did inquire about how work was
going).
We know that this second kind of dishonesty exists, but how prevalent
is it? Furthermore, if we put a group of “honest” people into a scientifically
controlled experiment and tempted them to cheat, would they? Would they
compromise their integrity? Just how much would they steal? We decided
to find out.
AS THE FIRST group settled into their seats, we explained the rules and
handed out the tests. They worked for their 15 minutes, then copied their
answers onto the bubble sheet, and turned in their worksheets and bubble
sheets. These students were our control group. Since they hadn’t been given
any of the answers, they had no opportunity at all to cheat. On average, they
got 32.6 of the 50 questions right.
What do you predict that the participants in our other experimental
conditions did? Given that the participants in the control condition solved
on average 32.6 questions correctly, how many questions do you think the
participants in the other three conditions claimed to have solved correctly?
What about the second group? They too answered the questions. But
this time, when they transferred their answers to the bubble sheet, they
could see the correct answers. Would they sweep their integrity under the
rug for an extra 10 cents per question? As it turned out, this group claimed
to have solved on average 36.2 questions. Were they smarter than our
control group? Doubtful. Instead, we had caught them in a bit of cheating
(by about 3.6 questions).
What about the third group? This time we upped the ante. They not only
got to see the correct answers but were also asked to shred their worksheets.
Did they take the bait? Yes, they cheated. On average they claimed to have
solved 35.9 questions correctly—more than the participants in the control
condition, but about the same as the participants in the second group (the
group that did not shred their worksheets).
Finally came the students who were told to shred not only their
worksheets but the bubble sheets as well—and then dip their hands into the
money jar and withdraw whatever they deserved. Like angels they shredded
their worksheets, stuck their hands into the money jar, and withdrew their
coins. The problem was that these angels had dirty faces: their claims added
up to an average 36.1 correct answers—quite a bit higher than the 32.6 of
our control group, but basically the same as the other two groups who had
the opportunity to cheat.
What did we learn from this experiment? The first conclusion, is that
when given the opportunity, many honest people will cheat. In fact, rather
than finding that a few bad apples weighted the averages, we discovered
that the majority of people cheated, and that they cheated just a little bit.*
And before you blame the refined air at the Harvard Business School for
this level of dishonesty, I should add that we conducted similar experiments
at MIT, Princeton, UCLA, and Yale with similar results.
The second, and more counterintuitive, result was even more
impressive: once tempted to cheat, the participants didn’t seem to be as
influenced by the risk of being caught as one might think. When the
students were given the opportunity to cheat without being able to shred
their papers, they increased their correct answers from 32.6 to 36.2. But
when they were offered the chance to shred their papers—hiding their little
crime completely—they didn’t push their dishonesty farther. They still
cheated at about the same level. This means that even when we have no
chance of getting caught, we still don’t become wildly dishonest.
When the students could shred both their papers, dip their hand into the
money jar, and walk away, every one of them could have claimed a perfect
test score, or could have taken more money (the jar had about $100 in it).
But none of them did. Why? Something held them back—something inside
them. But what was it? What is honesty, anyhow?
TO THAT QUESTION, Adam Smith, the great economic thinker, had a pleasant
reply: “Nature, when she formed man for society, endowed him with an
original desire to please, and an original aversion to offend his bretheren.
She taught him to feel pleasure in their favourable, and pain in their
unfavourable regard,” he noted.
To this Smith added, “The success of most people…almost always
depends upon the favour and good opinion of their neighbours and equals;
and without a tolerably regular conduct these can very seldom be obtained.
The good old proverb, therefore, that honesty is always the best policy,
holds, in such situations, almost always perfectly true.”
That sounds like a plausible industrial-age explanation, as balanced and
harmonious as a set of balance weights and perfectly meshed gears.
However optimistic this perspective might seem, Smith’s theory had a
darker corollary: since people engage in a cost-benefit analysis with regard
to honesty, they can also engage in a cost-benefit analysis to be dishonest.
According to this perspective, individuals are honest only to the extent that
suits them (including their desire to please others).
Are decisions about honesty and dishonesty based on the same cost-
benefit analysis that we use to decide between cars, cheeses, and
computers? I don’t think so. First of all, can you imagine a friend
explaining to you the cost-benefit analysis that went into buying his new
laptop? Of course. But can you imagine your friend sharing with you a cost-
benefit analysis of her decision to steal a laptop? Of course not—not unless
your friend is a professional thief. Rather, I agree with others (from Plato
down) who say that honesty is something bigger—something that is
considered a moral virtue in nearly every society.
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. This is why we
stop our car at four AM when we see a red light, even if we know that no
one is around; and it is why we get a warm feeling when we return a lost
wallet to its owner, even if our identity is never revealed. Such acts
stimulate the reward centers of our brain—the nucleus accumbens and the
caudate nucleus—and make us content.
But if honesty is important to us (in a recent survey of nearly 36,000
high school students in the United States, 98 percent of them said it was
important to be honest), and if honesty makes us feel good, why are we so
frequently dishonest?
This is my take. We care about honesty and 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.
Without the superego’s help, monitoring, and managing of our honesty,
the only defense we have against this kind of transgression is a rational
cost-benefit analysis. But who is going to consciously weigh the benefits of
taking a towel from a hotel room versus the cost of being caught? Who is
going to consider the costs and benefits of adding a few receipts to a tax
statement? As we saw in the experiment at Harvard, the cost-benefit
analysis, and the probability of getting caught in particular, does not seem
to have much influence on dishonesty.
THIS IS THE way the world turns. It’s almost impossible to open a newspaper
without seeing a report of a dishonest or deceptive act. We watch as the
credit card companies bleed their customers with outrageous interest rate
hikes; as the airlines plunge into bankruptcy and then call on the federal
government to get them—and their underfunded pension funds—out of
trouble; and as schools defend the presence of soda machines on campus
(and rake in millions from the soft drinks firms) all the while knowing that
sugary drinks make kids hyperactive and fat. Taxes are a festival of eroding
ethics, as the insightful and talented reporter David Cay Johnston of the
New York Times describes in his book Perfectly Legal: The Covert
Campaign to Rig Our Tax System to Benefit the Super Rich—and Cheat
Everybody Else.
Against all of this, society, in the form of the government, has battled
back, at least to some extent. The Sarbanes-Oxley Act of 2002 (which
requires the chief executives of public companies to vouch for the firms’
audits and accounts) was passed to make debacles like Enron’s a thing of
the past. Congress has also passed restrictions on “earmarking” (specifically
the pork-barrel spending that politicians insert into larger federal bills). The
Securities and Exchange Commission even passed requirements for
additional disclosure about executives’ pay and perks—so that when we see
a stretch limo carrying a Fortune 500 executive, we know pretty certainly
how much the corporate chief inside is getting paid.
But can external measures like these really plug all the holes and
prevent dishonesty? Some critics say they can’t. Take the ethics reforms in
Congress, for instance. The statutes ban lobbyists from serving free meals
to congressmen and their aides at “widely attended” functions. So what
have lobbyists done? Invited congressmen to luncheons with “limited”
guest lists that circumvent the rule. Similarly, the new ethics laws ban
lobbyists from flying congressmen in “fixed-wing” aircraft. So hey, how
about a lift in a helicopter?
The most amusing new law I’ve heard about is called the “toothpick
rule.” It states that although lobbyists can no longer provide sit-down meals
to congressmen, the lobbyists can still serve anything (presumably hors
d’oeuvres) which the legislators can eat while standing up, plopping into
their mouths using their fingers or a toothpick.
Did this change the plans of the seafood industry, which had organized a
sit-down pasta and oyster dinner for Washington’s legislators (called—you
guessed it—“Let the World Be Your Oyster”)? Not by much. The seafood
lobbyists did drop the pasta dish (too messy to fork up with a toothpick),
but still fed the congressmen well with freshly opened raw oysters (which
the congressmen slurped down standing up).19
Sarbanes-Oxley has also been called ineffectual. Some critics say that
it’s rigid and inflexible, but the loudest outcry is from those who call it
ambiguous, inconsistent, inefficient, and outrageously expensive (especially
for smaller firms). “It hasn’t cleaned up corruption,” argued William A.
Niskanen, chairman of the Cato Institute; “it has only forced companies to
jump through hoops.”
So much for enforcing honesty through external controls. They may
work in some cases, but not in others. Could there be a better cure for
dishonesty?
Up to now I have not told you anything new. But the key to this
experiment was what preceded it. When the participants first came to the
lab, we asked some of them to write down the names of 10 books that they
read in high school. The others were asked to write down as many of the
Ten Commandments as they could recall.* After they finished this
“memory” part of the experiment, we asked them to begin working on the
matrix task.
This experimental setup meant that some of the participants were
tempted to cheat after recalling 10 books that they read in high school, and
some of them were tempted after recalling the Ten Commandments. Who
do you think cheated more?
When cheating was not possible, our participants, on average, solved
†
3.1 problems correctly.
When cheating was possible, the group that recalled 10 books read in
high school achieved an average score of 4.1 questions solved (or 33
percent more than those who could not cheat).
But the big question is what happened to the other group—the students
who first wrote down the Ten Commandments, then took the test, and then
ripped up their worksheets. This, as sportscasters say, was the group to
watch. Would they cheat—or would the Ten Commandments have an effect
on their integrity? The result surprised even us: the students who had been
asked to recall the Ten Commandments had not cheated at all. They
averaged three correct answers—the same basic score as the group that
could not cheat, and one less than those who were able to cheat but had
recalled the names of the books.
As I walked home that evening I began to think about what had just
happened. The group who listed 10 books cheated. Not a lot, certainly—
only to that point where their internal reward mechanism (nucleus
accumbens and superego) kicked in and rewarded them for stopping.
But what a miracle the Ten Commandments had wrought! We didn’t
even remind our participants what the Commandments were—we just asked
each participant to recall them (and almost none of the participants could
recall all 10). We hoped the exercise might evoke the idea of honesty
among them. And this was clearly what it did. So, we wondered, what
lessons about decreasing dishonesty can we learn from this experiment? It
took us a few weeks to come to some conclusions.
FOR ONE, PERHAPS we could bring the Bible back into public life. If we only
want to reduce dishonesty, it might not be a bad idea. Then again, some
people might object, on the grounds that the Bible implies an endorsement
of a particular religion, or merely that it mixes religion in with the
commercial and secular world. But perhaps an oath of a different nature
would work. 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.
If that were the case, then we could also use nonreligious benchmarks to
raise the general level of honesty. For instance, what about the professional
oaths that doctors, lawyers, and others swear to—or used to swear to?
Could those professional oaths do the trick?
The word profession comes from the Latin professus, meaning
“affirmed publicly.” Professions started somewhere deep in the past in
religion and then spread to medicine and law. Individuals who had mastered
esoteric knowledge, it was said, not only had a monopoly on the practice of
that knowledge, but had an obligation to use their power wisely and
honestly. The oath—spoken and often written—was a reminder to
practitioners to regulate their own behavior, and it also provided a set of
rules that had to be followed in fulfilling the duties of their profession.
Those oaths lasted a long time. But then, in the 1960s, a strong
movement arose to deregulate professions. Professions were elitist
organizations, it was argued, and needed to be turned out into the light of
day. For the legal profession that meant more briefs written in plain English
prose, cameras in the courtrooms, and advertising. Similar measures against
elitism were applied to medicine, banking, and other professions as well.
Much of this could have been beneficial, but something was lost when
professions were dismantled. Strict professionalism was replaced by
flexibility, individual judgment, the laws of commerce, and the urge for
wealth, and with it disappeared the bedrock of ethics and values on which
the professions had been built.
A study by the state bar of California in the 1990s, for instance, found
that a preponderance of attorneys in California were sick of the decline in
honor in their work and “profoundly pessimistic” about the condition of the
legal profession. Two-thirds said that lawyers today “compromise their
professionalism as a result of economic pressure.” Nearly 80 percent said
that the bar “fails to adequately punish unethical attorneys.” Half said they
wouldn’t become attorneys if they had it to do over again.20
A comparable study by the Maryland Judicial Task Force found similar
distress among lawyers in that state. According to Maryland’s lawyers, their
profession had degenerated so badly that “they were often irritable, short-
tempered, argumentative, and verbally abusive” or “detached, withdrawn,
preoccupied, or distracted.” When lawyers in Virginia were asked whether
the increasing problems with professionalism were attributable to “a few
bad apples” or to a widespread trend, they overwhelmingly said this was a
widespread issue.21
Lawyers in Florida have been deemed the worst.22 In 2003 the Florida
bar reported that a “substantial minority” of lawyers were “money-
grabbing, too clever, tricky, sneaky, and not trustworthy; who had little
regard for the truth or fairness, willing to distort, manipulate, and conceal to
win; arrogant, condescending, and abusive.” They were also “pompous and
obnoxious.” What more can I say?
The medical profession has its critics as well. The critics mention
doctors who do unnecessary surgeries and other procedures just to boost the
bottom line: who order tests at laboratories that are giving them kickbacks,
and who lean toward medical tests on equipment that they just happen to
own. And what about the influence of the pharmaceutical industry? A
friend of mine said he sat waiting for his doctor for an hour recently. During
that time, he said, four (very attractive) representatives of drug companies
went freely into and out of the office, bringing lunch, free samples, and
other gifts with them.
You could look at almost any professional group and see signs of
similar problems. How about the Association of Petroleum Geologists, for
instance? The image I see is Indiana Jones types, with more interest in
discussing Jurassic shale and deltaic deposits than in making a buck. But
look deeper and you’ll find trouble. “There is unethical behavior going on
at a much larger scale than most of us would care to think,” one member of
the association wrote to her colleagues.23
What kind of dishonesty, for goodness’ sake, could be rife in the ranks
of petroleum geologists, you ask? Apparently things like using bootlegged
seismic and digital data; stealing maps and materials; and exaggerating the
promise of certain oil deposits, in cases where a land sale or investment is
being made. “The malfeasance is most frequently of shades of gray, rather
than black and white,” one petroleum geologist remarked.
But let’s remember that petroleum geologists are not alone. This decline
in professionalism is everywhere. If you need more proof, consider the
debate within the field of professional ethicists, who are called more often
than ever before to testify at public hearings and trials, where they may be
hired by one party or another to consider issues such as treatment rendered
to a patient and the rights of the unborn. Are they tempted to bend to the
occasion? Apparently so. “Moral Expertise: A Problem in the Professional
Ethics of Professional Ethicists” is the title of one article in an ethics
journal.24 As I said, the signs of erosion are everywhere.
WHAT TO DO? Suppose that, rather than invoking the Ten Commandments,
we got into the habit of signing our name to some secular statement—
similar to a professional oath—that would remind us of our commitment to
honesty. Would a simple oath make a difference, in the way that we saw the
Ten Commandments make a difference? We needed to find out—hence our
next experiment.
Once again we assembled our participants. In this study, the first group
of participants took our matrix math test and handed in their answers to the
experimenter in the front of the room (who counted how many questions
they answered correctly and paid them accordingly). The second group also
took the test, but the members of this group were told to fold their answer
sheet, keep it in their possession, and tell the experimenter in the front of
the room how many of the problems they got right. The experimenter paid
them accordingly, and they were on their way.
The novel aspect of this experiment had to do with the third group.
Before these participants began, each was asked to sign the following
statement on the answer sheet: “I understand that this study falls under the
MIT honor system.” After signing this statement, they continued with the
task. When the time had elapsed they pocketed their answer sheets, walked
to the front of the room, told the experimenter how many problems they had
correctly solved, and were paid accordingly.
What were the results? In the control condition, in which cheating was
not possible, participants solved on average three problems (out of 20). In
the second condition, in which the participants could pocket their answers,
they claimed to have solved on average 5.5 problems. What was remarkable
was the third situation—in which the participants pocketed their answer
sheets, but had also signed the honor code statement. In this case they
claimed to have solved, on average, three problems—exactly the same
number as the control group. This outcome was similar to the results we
achieved with the Ten Commandments—when a moral reminder eliminated
cheating altogether. The effect of signing a statement about an honor code is
particularly amazing when we take into account that MIT doesn’t even have
an honor code.
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.
At present, several state bars and professional organizations are
scrambling to shore up their professional ethics. Some are increasing
courses in college and graduate schools, and others are requiring brush-up
ethics classes. In the legal profession, Judge Dennis M. Sweeney of the
Howard County (Maryland) circuit published his own book, Guidelines for
Lawyer Courtroom Conduct, in which he noted, “Most rules, like these, are
simply what our mothers would say a polite and well raised man or woman
should do. Since, given their other important responsibilities, our mothers
(and yours) cannot be in every courtroom in the State, I offer these rules.”
Will such general measures work? Let’s remember that lawyers do take
an oath when they are admitted to the bar, as doctors take an oath when they
enter their profession. But occasional swearing of oaths and occasional
statements of adherence to rules are not enough. From our experiments, it is
clear that oaths and rules must be recalled at, or just before, the moment of
temptation. Also, what is more, time is working against us as we try to curb
this problem. 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.
THIS DOESN’T MEAN that we shouldn’t try. Why is honesty so important? For
one thing, let’s not forget that the United States holds a position of
economic power in the world today partly because it is (or at least is
perceived to be) one of the world’s most honest nations, in terms of its
standards of corporate governance.
In 2002, the United States ranked twentieth in the world in terms of
integrity, according to one survey (Denmark, Finland, and New Zealand
were first; Haiti, Iraq, Myanmar, and Somalia were last, at number 163). On
this basis, I would suspect that people doing business with the United States
generally feel they can get a fair deal. But the fact of the matter is that the
United States ranked fourteenth in 2000, before the wave of corporate
scandals made the business pages in American newspapers look like a
police blotter.25 We are going down the slippery slope, in other words, not
up it, and this can have tremendous long-term costs.
Adam Smith reminded us that honesty really is the best policy,
especially in business. To get a glimpse at the other side of that realization
—at the downside, in a society without trust—you can take a look at several
countries. In China, the word of one person in one region rarely carries to
another region. Latin America is full of family-run cartels that hand out
loans to relatives (and then fail to cut off credit when the debtor begins to
default). Iran is another example of a nation stricken by distrust. An Iranian
student at MIT told me that business there lacks a platform of trust. Because
of this, no one pays in advance, no one offers credit, and no one is willing
to take risks. People must hire within their families, where some level of
trust still exists. Would you like to live in such a world? Be careful, because
without honesty we might get there faster than you’d imagine.
What can we do to keep our country honest? We can read the Bible, the
Koran, or whatever reflects our values, perhaps. We can revive professional
standards. We can sign our names to promises that we will act with
integrity. 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. What is the answer, then? If
we recognize this weakness, we can try to avoid such situations from the
outset. We can prohibit physicians from ordering tests that would benefit
them financially; we can prohibit accountants and auditors from functioning
as consultants to the same companies; we can bar members of Congress
from setting their own salaries, and so on.
But this is not the end of the issue of dishonesty. In the next chapter, I
will offer some other suggestions about dishonesty, and some other insights
into how we struggle with it.
APPENDIX: CHAPTER 11
The Ten Commandments*
I am the Lord your God, you shall have no other gods before me.
You shall not take the name of the Lord your God in vain.
Keep holy the Sabbath day.
Honor your father and your mother.
You shall not kill.
You shall not commit adultery.
You shall not steal.
You shall not bear false witness.
You shall not covet your neighbor’s wife.
You shall not covet your neighbor’s goods.
CHAPTER 12
The Context of Our Character, Part II
Many of the dormitories at MIT have common areas, where sit a variety
of refrigerators that can be used by the students in the nearby rooms. One
morning at about eleven, when most of the students were in class, I slipped
into the dorms and, floor by floor, went hunting for all the shared
refrigerators that I could find.
When I detected a communal fridge, I inched toward it. Glancing
cautiously around, I opened the door, slipped in a six-pack of Coke, and
walked briskly away. At a safe distance, I paused and jotted down the time
and the location of the fridge where I had left my Cokes.
Over the next few days I returned to check on my Coke cans. I kept a
diary detailing how many of them remained in the fridge. As you might
expect, the half-life of Coke in a college dorm isn’t very long. All of them
had vanished within 72 hours. But I didn’t always leave Cokes behind. In
some of the fridges, I left a plate containing six one-dollar bills. Would the
money disappear faster than the Cokes?
Before I answer that question, let me ask you one. Suppose your spouse
calls you at work. Your daughter needs a red pencil for school the next day.
“Could you bring one home?” How comfortable would you be taking a red
pencil from work for your daughter? Very uncomfortable? Somewhat
uncomfortable? Completely comfortable?
Let me ask you another question. Suppose there are no red pencils at
work, but you can buy one downstairs for a dime. And the petty cash box in
your office has been left open, and no one is around. Would you take 10
cents from the petty cash box to buy the red pencil? Suppose you didn’t
have any change and needed the 10 cents. Would you feel comfortable
taking it? Would that be OK?
I don’t know about you, but while I’d find taking a red pencil from
work relatively easy, I’d have a very hard time taking the cash. (Luckily for
me, I haven’t had to face this issue, since my daughter is not in school yet.)
As it turns out, the students at MIT also felt differently about taking
cash. As I mentioned, the cans of Coke quickly disappeared; within 72
hours every one of them was gone. But what a different story with the
money! The plates of dollar bills remained untouched for 72 hours, until I
removed them from the refrigerators.
So what’s going on here?
When we look at the world around us, much of the dishonesty we see
involves cheating that is one step removed from cash. Companies cheat
with their accounting practices; executives cheat by using backdated stock
options; lobbyists cheat by underwriting parties for politicians; drug
companies cheat by sending doctors and their wives off on posh vacations.
To be sure, these people don’t cheat with cold cash (except occasionally).
And that’s my point: cheating is a lot easier when it’s a step removed from
money.
Do you think that the architects of Enron’s collapse—Kenneth Lay,
Jeffrey Skilling, and Andrew Fastow—would have stolen money from the
purses of old women? Certainly, they took millions of dollars in pension
monies from a lot of old women. But do you think they would have hit a
woman with a blackjack and pulled the cash from her fingers? You may
disagree, but my inclination is to say no.
So what permits us to cheat when cheating involves nonmonetary
objects, and what restrains us when we are dealing with money? How does
that irrational impulse work?
WE HAVE LEARNED that given a chance, people cheat. But what’s really odd
is that most of us don’t see this coming. When we asked students in another
experiment to predict if people would cheat more for tokens than for cash,
the students said no, the amount of cheating would be the same. After all,
they explained, the tokens represented real money—and the tokens were
exchanged within seconds for actual cash. And so, they predicted, our
participants would treat the tokens as real cash.
But how wrong they were! They didn’t see how fast we can rationalize
our dishonesty when it is one step away from cash. Of course, their
blindness is ours as well. Perhaps it’s why so much cheating goes on.
Perhaps it’s why Jeff Skilling, Bernie Ebbers, and the entire roster of
executives who have been prosecuted in recent years let themselves, and
their companies, slide down the slope.
All of us are vulnerable to this weakness, of course. Think about all the
insurance fraud that goes on. It is estimated that when consumers report
losses on their homes and cars, they creatively stretch their claims by about
10 percent. (Of course, as soon as you report an exaggerated loss, the
insurance company raises its rates, so the situation becomes tit for tat).
Again it is not the case that there are many claims that are completely
flagrant, but instead many people who have lost, say, a 27-inch television
set report the loss of a 32-inch set; those who have lost a 32-inch set report
the loss of a 36-inch set, and so on. These same people would be unlikely to
steal money directly from the insurance companies (as tempting as that
might sometimes be), but reporting what they no longer have—and
increasing its size and value by just a little bit—makes the moral burden
easier to bear.
There are other interesting practices. Have you ever heard the term
“wardrobing”? Wardrobing is buying an item of clothing, wearing it for a
while, and then returning it in such a state that the store has to accept it but
can no longer resell it. By engaging in wardrobing, consumers are not
directly stealing money from the company; instead, it is a dance of buying
and returning, with many unclear transactions involved. But there is at least
one clear consequence—the clothing industry estimates that its annual
losses from wardrobing are about $16 billion (about the same amount as the
estimated annual loss from home burglaries and automobile theft
combined).
And how about expense reports? When people are on business trips,
they are expected to know what the rules are, but expense reports too are
one step, and sometimes even a few steps, removed from cash. In one study,
Nina and I found that not all expenses are alike in terms of people’s ability
to justify them as business expenses. For example, buying a mug for five
dollars for an attractive stranger was clearly out of bounds, but buying the
same stranger an eight-dollar drink in a bar was very easy to justify. The
difference was not the cost of the item, or the fear of getting caught, but
people’s ability to justify the item to themselves as a legitimate use of their
expense account.
A few more investigations into expense accounts turned up similar
rationalizations. In one study, we found that when people give receipts to
their administrative assistants to submit, they are then one additional step
removed from the dishonest act, and hence more likely to slip in
questionable receipts. In another study, we found that businesspeople who
live in New York are more likely to consider a gift for their kid as a
business expense if they purchased it at the San Francisco airport (or
someplace else far from home) than if they had purchased it at the New
York airport, or on their way home from the airport. None of this makes
logical sense, but when the medium of exchange is nonmonetary, our ability
to rationalize increases by leaps and bounds.
I HAD MY own experience with dishonesty a few years ago. Someone broke
into my Skype account (very cool online telephone software) and charged
my PayPal account (an online payment system) a few hundred dollars for
the service.
I don’t think the person who did this was a hardened criminal. From a
criminal’s perspective, breaking into my account would most likely be a
waste of time and talent because if this person was sufficiently smart to
hack into Skype, he could probably have hacked into Amazon, Dell, or
maybe even a credit card account, and gotten much more value for his time.
Rather, I imagine that this person was a smart kid who had managed to hack
into my account and who took advantage of this “free” communication by
calling anyone who would talk to him until I managed to regain control of
my account. He may have even seen this as a techie challenge—or maybe
he is a student to whom I once gave a bad grade and who decided to tweak
my nose for it.
Would this kid have taken cash from my wallet, even if he knew for
sure that no one would ever catch him? Maybe, but I imagine that the
answer is no. Instead, I suspect that there were some aspects of Skype and
of how my account was set up that “helped” this person engage in this
activity and not feel morally reprehensible: First, he stole calling time, not
money. Next, he did not gain anything tangible from the transaction. Third,
he stole from Skype rather than directly from me. Fourth, he might have
imagined that at the end of the day Skype, not I, would cover the cost. Fifth,
the cost of the calls was charged automatically to me via PayPal. So here
we had another step in the process—and another level of fuzziness in terms
of who would eventually pay for the calls. (Just in case you are wondering,
I have since canceled this direct link to PayPal.)
Was this person stealing from me? Sure, but there were so many things
that made the theft fuzzy that I really don’t think he thought of himself as a
dishonest guy. No cash was taken, right? And was anyone really hurt? This
kind of thinking is worrisome. If my problem with Skype was indeed due to
the nonmonetary nature of the transactions on Skype, this would mean that
there is much more at risk here, including a wide range of online services,
and perhaps even credit and debit cards. All these electronic transactions,
with no physical exchange of money from hand to hand, might make it
easier for people to be dishonest—without ever questioning or fully
acknowledging the immorality of their actions.
THERE’S ANOTHER, SINISTER impression that I took out of our studies. In our
experiments, the participants were smart, caring, honorable individuals,
who for the most part had a clear limit to the amount of cheating they would
undertake, even with nonmonetary currency like the tokens. For almost all
of them, there was a point at which their conscience called for them to stop,
and they did. Accordingly, the dishonesty that we saw in our experiments
was probably the lower boundary of human dishonesty: the level of
dishonesty practiced by individuals who want to be ethical and who want to
see themselves as ethical—the so-called good people.
The scary thought is that if we did the experiments with nonmonetary
currencies that were not as immediately convertible into money as tokens,
or with individuals who cared less about their honesty, or with behavior that
was not so publicly observable, we would most likely have found even
higher levels of dishonesty. In other words, the level of deception we
observed here is probably an underestimation of the level of deception we
would find across a variety of circumstances and individuals.
Now suppose that you have a company or a division of a company led
by a Gordon Gekko character who declares that “greed is good.” And
suppose he used nonmonetary means of encouraging dishonesty. Can you
see how such a swashbuckler could change the mind-set of people who in
principle want to be honest and want to see themselves as honest, but also
want to hold on to their jobs and get ahead in the world? It is under just
such circumstances that nonmonetary currencies can lead us astray. They let
us bypass our conscience and freely explore the benefits of dishonesty.
This view of human nature is worrisome. We can hope to surround
ourselves with good, moral people, but we have to be realistic. Even good
people are not immune to being partially blinded by their own minds. This
blindness allows them to take actions that bypass their own moral standards
on the road to financial rewards. In essence, motivation can play tricks on
us whether or not we are good, moral people.
As the author and journalist Upton Sinclair once noted, “It is difficult to
get a man to understand something when his salary depends upon his not
understanding it.” We can now add the following thought: it is even more
difficult to get a man to understand something when he is dealing with
nonmonetary currencies.
The Carolina Brewery is a hip bar on Franklin Street, the main street
outside the University of North Carolina at Chapel Hill. A beautiful street
with brick buildings and old trees, it has many restaurants, bars, and coffee
shops—more than one would expect to find in a small town.
As you open the doors to the Carolina Brewery, you see an old building
with high ceilings and exposed beams, and a few large stainless steel beer
containers that promise a good time. There are semiprivate tables scattered
around. This is a favorite place for students as well as for an older crowd to
enjoy good beer and food.
Soon after I joined MIT, Jonathan Levav (a professor at Columbia) and
I were mulling over the kinds of questions one might conjure up in such a
pleasant pub. First, does the sequential process of taking orders (asking
each person in turn to state his or her order) influence the choices that the
people sitting around the table ultimately make? In other words, are the
patrons influenced by the selections of the others around them? Second, if
this is the case, does it encourage conformity or nonconformity? In other
words, would the patrons sitting around a table intentionally choose beers
that were different from or the same as the choices of those ordering before
them? Finally, we wanted to know whether being influenced by others’
choices would make people better or worse off, in terms of how much they
enjoyed their beer.
THROUGHOUT THIS BOOK, I have described experiments that I hoped would
be surprising and illuminating. If they were, it was largely because they
refuted the common assumption that we are all fundamentally rational.
Time and again I have provided examples that are contrary to Shakespeare’s
depiction of us in “What a piece of work is a man.” In fact, these examples
show that we are not noble in reason, not infinite in faculty, and rather weak
in apprehension. (Frankly, I think Shakespeare knew that very well, and this
speech of Hamlet’s is not without irony.)
In this final chapter, I will present an experiment that offers one more
example of our predictable irrationality. Then I will further describe the
general economic perspective on human behavior, contrast it with
behavioral economics, and draw some conclusions. Let me begin with the
experiment.
ANOTHER STUDY, CONDUCTED later at Duke with wine samples and MBA
students, allowed us to measure some of the participants’ personality traits
—something the manager of the Carolina Brewery had not been thrilled
about. That opened the door for us to find out what might be contributing to
this interesting phenomenon. What we found was a correlation between the
tendency to order alcoholic beverages that were different from what other
people at the table had chosen and a personality trait called “need for
uniqueness.” In essence, individuals more concerned with portraying their
own uniqueness were more likely to select an alcoholic beverage not yet
ordered at their table in an effort to demonstrate that they were in fact one
of a kind.
What these results show is that people are sometimes willing to
sacrifice the pleasure they get from a particular consumption experience in
order to project a certain image to others. When people order food and
drinks, they seem to have two goals: to order what they will enjoy most and
to portray themselves in a positive light in the eyes of their friends. The
problem is that once they order, say, the food, they may be stuck with a dish
they don’t like—a situation they often regret. In essence, people,
particularly those with a high need for uniqueness, may sacrifice personal
utility in order to gain reputational utility.
Although these results were clear, we suspected that in other cultures—
where the need for uniqueness is not considered a positive trait—people
who ordered aloud in public would try to portray a sense of belonging to the
group and express more conformity in their choices. In a study we
conducted in Hong Kong, we found that this was indeed the case. In Hong
Kong, individuals also selected food that they did not like as much when
they selected it in public rather than in private, but these participants were
more likely to select the same item as the people ordering before them—
again making a regrettable mistake, though a different type of mistake,
when ordering food.
FROM WHAT I have told you so far about this experiment, you can see that a
bit of simple life advice—a free lunch—comes out of this research. First,
when you go to a restaurant, it’s a good idea to plan your order before the
waiter approaches you, and stick to it. Being swayed by what other people
choose might lead you to choose a worse alternative. If you’re afraid that
you might be swayed anyway, a useful strategy is to announce your order to
the table before the waiter comes. This way, you have staked a claim to
your order, and it’s less likely that the other people around the table will
think you are not unique, even if someone else orders the same dish before
you get your chance. But of course the best option is to order first.
Perhaps restaurant owners should ask their customers to write out orders
privately (or quietly give their orders to the waiters), so that no customer
will be influenced by the orders of his or her companions. We pay a lot of
money for the pleasure of dining out. Getting people to order anonymously
is most likely the cheapest and simplest way to increase the enjoyment
derived from these experiences.
But there’s a bigger lesson that I would like to draw from this
experiment—and in fact from all that I have said in the preceding chapters.
Standard economics assumes that we are rational—that we know all the
pertinent information about our decisions, that we can calculate the value of
the different options we face, and that we are cognitively unhindered in
weighing the ramifications of each potential choice.
The result is that we are presumed to be making logical and sensible
decisions. And even if we make a wrong decision from time to time, the
standard economics perspective suggests that we will quickly learn from
our mistakes either on our own or with the help of “market forces.” On the
basis of these assumptions, economists draw far-reaching conclusions about
everything from shopping trends to law to public policy.
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. So wouldn’t it
make sense to modify standard economics and move away from naive
psychology, which often fails the tests of reason, introspection, and—most
important—empirical scrutiny?
Wouldn’t economics make a lot more sense if it were based on how
people actually behave, instead of how they should behave? As I said in the
Introduction, that simple idea is the basis of behavioral economics, an
emerging field focused on the (quite intuitive) idea that people do not
always behave rationally and that they often make mistakes in their
decisions.
In many ways, the standard economic and Shakespearean views are
more optimistic about human nature, since they assume that our capacity
for reasoning is limitless. By the same token the behavioral economics
view, which acknowledges human deficiencies, is more depressing, because
it demonstrates the many ways in which we fall short of our ideals. Indeed,
it can be rather depressing to realize that we all continually make irrational
decisions in our personal, professional, and social lives. But there is a silver
lining: the fact that we make mistakes also means that there are ways to
improve our decisions—and therefore that there are opportunities for “free
lunches.”
ONE OF THE main differences between standard and behavioral economics
involves this concept of “free lunches.” According to the assumptions of
standard economics, all human decisions are rational and informed,
motivated by an accurate concept of the worth of all goods and services and
the amount of happiness (utility) all decisions are likely to produce. Under
this set of assumptions, everyone in the marketplace is trying to maximize
profit and striving to optimize his experiences. As a consequence, economic
theory asserts that there are no free lunches—if there were any, someone
would have already found them and extracted all their value.
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). What good news can
accompany this realization? The good news is that these mistakes also
provide opportunities for improvement. If we all make systematic mistakes
in our decisions, then why not develop new strategies, tools, and methods to
help us make better decisions and improve our overall well-being? That’s
exactly the meaning of free lunches from the perspective of behavioral
economics—the idea that there are tools, methods, and policies that can
help all of us make better decisions and as a consequence achieve what we
desire.
For example, the question why Americans are not saving enough for
retirement is meaningless from the perspective of standard economics. If we
are all making good, informed decisions in every aspect of our lives, then
we are also saving the exact amount that we want to save. We might not
save much because we don’t care about the future, because we are looking
forward to experiencing poverty at retirement, because we expect our kids
to take care of us, or because we are hoping to win the lottery—there are
many possible reasons. The main point is that from the standard economic
perspective, we are saving exactly the right amount in accordance with our
preferences.
But from the perspective of behavioral economics, which does not
assume that people are rational, the idea that we are not saving enough is
perfectly reasonable. In fact, research in behavioral economics points to
many possible reasons why people are not saving enough for retirement.
People procrastinate. People have a hard time understanding the real cost of
not saving as well as the benefits of saving. (By how much would your life
be better in the future if you were to deposit an additional $1,000 in your
retirement account every month for the next 20 years?) Being “house rich”
helps people believe that they are indeed rich. It is easy to create
consumption habits and hard to give them up. And there are many, many
more reasons.
The potential for free lunches from the perspective of behavioral
economics lies in new methods, mechanisms, and other interventions that
would help people achieve more of what they truly want. For example, the
new and innovative credit card that I described in Chapter 6, on self-
control, could help people exercise more self-control within the domain of
spending. Another example of this approach is a mechanism called “save
more tomorrow,” which Dick Thaler and Shlomo Benartzi proposed and
tested a few years ago.
Here’s how “save more tomorrow” works. When new employees join a
company, in addition to the regular decisions they are asked to make about
what percentage of their paycheck to invest in their company’s retirement
plan, they are also asked what percentage of their future salary raises they
would be willing to invest in the retirement plan. It is difficult to sacrifice
consumption today for saving in the distant future, but it is psychologically
easier to sacrifice consumption in the future, and even easier to give up a
percentage of a salary increase that one does not yet have.
When the plan was implemented in Thaler and Benartzi’s test, the
employees joined and agreed to have their contribution, as a percentage,
increase with their future salary raises. What was the outcome? Over the
next few years, as the employees received raises, the saving rates increased
from about 3.5 percent to around 13.5 percent—a gain for the employees,
their families, and the company, which by now had more satisfied and less
worried employees.
This is the basic idea of free lunches—providing benefits for all the
parties involved. Note that these free lunches don’t have to be without cost
(implementing the self-control credit card or “save more tomorrow”
inevitably involves a cost). As long as these mechanisms provide more
benefits than costs, we should consider them to be free lunches—
mechanisms that provide net benefits to all parties.
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.
Each of the chapters in this book describes a force (emotions, relativity,
social norms, etc.) that influences our behavior. And while these influences
exert a lot of power over our behavior, our natural tendency is to vastly
underestimate or completely ignore this power. These influences have an
effect on us not because we lack knowledge, lack practice, or are weak-
minded. On the contrary, they repeatedly affect experts as well as novices in
systematic and predictable ways. The resulting mistakes are simply how we
go about our lives, how we “do business.” They are a part of us.
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. In
essence we are limited to the tools nature has given us, and the natural way
in which we make decisions is limited by the quality and accuracy of these
tools.
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. This is also where
businesses and policy makers could revise their thinking and consider how
to design their policies and products so as to provide free lunches.
THANK YOU FOR reading this book. I hope you have gained some interesting
insights about human behavior, gained some insight into what really makes
us tick, and discovered ways to improve your decision making. I also hope
that I have been able to share with you my enthusiasm for the study of
rationality and irrationality. In my opinion, studying human behavior is a
fantastic gift because it helps us better understand ourselves and the daily
mysteries we encounter. Although the topic is important and fascinating, it
is not easy to study, and there is still a lot of work ahead of us. As the Nobel
laureate Murray Gell-Mann once said, “Think how hard physics would be if
particles could think.”
Irrationally yours,
Dan Ariely
MY WIFE, SUMI, and I also fell victim to this bias. When we worked at MIT,
we bought a new house in Cambridge, Massachusetts (the house was
originally built in 1890, but it felt new to us). We promptly went about
fixing it up. We took down some walls to give the house an open feel,
which we loved. We renovated the bathrooms and set up a sauna in the
basement. We also converted the carriage house in the garden into a small
combination office-apartment. Sometimes we would pack our laundry
basket with some wine, food, and clothing, and escape to the carriage house
for a “weekend away.”
Then, in 2007, we took jobs at Duke University and moved to Durham,
North Carolina. We assumed that the housing market would continue to
decline, and that it would be in our best interest to sell the Cambridge house
as quickly as possible. We also wanted to avoid having to pay for heating,
taxes, and a mortgage on two homes.
Many people came to see our beautifully remodeled Cambridge home.
They all seemed to appreciate the structure and the feel of the place, but no
one put in an offer. People told us that the house was beautiful, but
somehow they could not fully appreciate the benefit of the open floor plan.
Instead, they wanted something with more privacy. We heard what they
said, but it didn’t fully register. “Clearly,” we said to each other after each
set of prospective buyers had come and gone, “those people are just dull
and unimaginative, and have no taste. Surely our beautiful, open, airy home
will be just right for the perfect someone.”
Time passed. We paid double mortgages, double heating bills, and
double taxes while the housing market continued to slow down. Many more
people came to see the house and left without extending an offer.
Eventually Jean, our real estate agent, delivered the bad news to us the way
a doctor tells a patient there’s something funny looking on his X-ray. “I
think,” she said slowly, “that if you want to sell the house, you will have to
rebuild some walls and reverse some of the changes you have made.” Until
she said those words, we had not accepted this truth. Despite our disbelief,
and still fully convinced of our superior taste, we took the plunge and paid a
contractor to re-erect some walls. A few weeks later the house was sold.
In the end, the buyers didn’t want our home. They wanted theirs. This
was a very expensive lesson, and I certainly wish we had had a better sense
of the effect of our modifications on potential buyers.
For a long time, economists have maintained that human behavior and the
functioning of our institutions are best described by the rational economic
model, which basically holds that man is self-interested, calculating, and
able to perfectly weigh the costs and benefits in every decision in order to
optimize the outcome.
But in the wake of a number of financial crises, from the dot-com
implosion of 2000 to the subprime mortgage crisis of 2008 and the financial
meltdown that followed, we were rudely awakened to the reality that
psychology and irrational behavior play a much larger role in the
economy’s functioning than rational economists (and the rest of us) had
been willing to admit.
It all started from questionable mortgage practices, augmented by
collateralized debt obligations (CDOs are securities based mostly on
mortgage payments). In turn, the CDO crisis accelerated the deflation of the
housing market bubble, creating a reinforcing cycle of decreasing
valuations. It also brought to light some questionable practices of various
players in the financial services industry.
In March 2008, JP Morgan Chase acquired Bear Stearns at two dollars
per share, the low valuation resulting from the fact that Bear Stearns was
under investigation for CDO-related fraud. On July 17, major banks and
financial institutions that had bet heavily on CDOs and other mortgage-
backed securities posted a loss of almost $500 billion. Eventually 26 banks
and financial institutions would be under investigation for questionable
practices relating to their handling of CDOs.
On September 7, the government federalized Fannie Mae and Freddie
Mac to avoid their bankruptcy, which would have had dire effects on
financial markets. A week later, on September 14, Merrill Lynch was sold
to Bank of America. The following day, Lehman Brothers filed for
bankruptcy, raising fears of a liquidity crisis that could precipitate an
economic meltdown. The day after that (September 16) the United States
Federal Reserve lent money to the insurance giant AIG to prevent the
company’s collapse. On September 25, after being seized by the Federal
Depositor Insurance Corporation (FDIC), Washington Mutual was forced to
sell its banking subsidiaries to JP Morgan Chase, and the following day the
bank’s holding company and remaining subsidiary filed for Chapter 11
bankruptcy.
On Monday, September 29, Congress rejected the bailout package
(formally known as the Troubled Assets Relief Program, or TARP)
proposed by President Bush; resulting in a 778-point drop in the stock
market. And while the government worked to build a package that would
pass about a week later, Wachovia became another casualty as it entered
talks with Citigroup and Wells Fargo (the latter eventually bought the
bank), and the stock market reacted to the news of the bailout with a loss of
22 percent of its valuation, making this the worst week on Wall Street since
the Great Depression.
One by one, the institutional banks—all staffed by wonderful (rational)
smart economists, who followed standard models, fell like so many
dominoes.
If the rational economic approach is not sufficient to protect us, what
are we supposed to do? What models should we use? Given our human
fallibilities, quirks, and irrational tendencies, it seems to me that our models
of behavior and, more important, our recommendations for new policies
and practices should be based on what people actually do rather than what
they are supposed to be doing under the assumption that they are
completely rational.
This seemingly radical idea is, in fact, a very old idea in economics.
Before Adam Smith, the grandfather of modern economics, wrote his
magnum opus, Inquiry into the Nature and Causes of the Wealth of Nations
(1776), he wrote The Theory of Moral Sentiments (1759), a book that is
equally important but much more psychologically oriented. In The Theory
of Moral Sentiments, Smith notes that emotions, feelings, and morality are
aspects of human behavior which the economist should not ignore (or,
worse, deny) but instead treat as topics worthy of investigation.
About 200 years ago, another economist, John Maurice Clark, noted
similarly, “The economist may attempt to ignore psychology, but it is sheer
impossibility for him to ignore human nature…. If the economist borrows
his conception of man from the psychologist, his constructive work may
have some chance of remaining purely economic in character. But if he
does not, he will not thereby avoid psychology. Rather, he will force
himself to make his own, and it will be bad psychology.”31
How did economics move from embracing human psychology to
completely rejecting the possibility that human behavior could be
irrational? One reason, no doubt, has to do with the fascination economists
have with simple mathematical models. Another has to do with their desire
to provide businesses and policy makers with simple, tractable answers.
And while both of these can be good reasons to sometimes ignore
irrationality, they also take us down a dangerous road.
In my mind, the goal of behavioral economics is to rekindle the
economic interest in human behavior and psychology that Adam Smith
wrote about. In general, researchers in behavioral economics are interested
in modifying standard economics so as to take real, common, and often
irrational behavior into account. We want to move the study of economics
away from being grounded in naive psychology (which often fails the tests
of reason, introspection, and—most important—empirical scrutiny), and
return it to a more broadly encompassing study of human behavior. We
think that economics would then become better suited to make
recommendations that would help people with their problems in the real
world: saving for retirement, educating their children, making decisions
about health care, and so on.
A FEW WEEKS after our discussion, Dave was assigned to write a paper on
the wisdom of interest-only mortgages.* He was very excited about these
types of mortgages and wanted to recommend that the regulators promote
them as much as possible. “Look,” he tried to explain to me, “there is no
argument that interest-only mortgages are more flexible than regular
mortgages. The people who take them on can decide each month what they
want to do with the money that otherwise, in a regular mortgage, would go
toward paying the principal. They can pay down their credit card debt or
pay for college tuition or medical expenses. Or, if they prefer, they can
always pay down the principal of their mortgage.”
I nodded, waiting for him to unspool. “Go on,” I said.
“So at a minimum, interest-only mortgages are as good as regular
mortgages. But they give people more flexibility in terms of how they want
to spend their money, and by definition every time you add flexibility you
help consumers because you increase their freedom to make the decisions
that are right specifically for them.”
I said that it all sounded perfectly reasonable, assuming that people
make perfectly reasonable decisions. Then I told him about the results of
my small study, which had left me uncomfortable. “If people simply borrow
the most they can,” I explained, “interest-only mortgages will not increase
the financial flexibility of the people who use them. They will only increase
the amount that people will borrow.”
Dave was not persuaded, so I tried to give him a more concrete
example. “Let’s say your cousin what’s-her-name…”
“Didi,” he volunteered.
“Let’s say that Didi can afford a regular mortgage with a monthly
payment of three thousand dollars. Now you give her the option of taking
an interest-only mortgage. What will she do? She could of course get a
house she can afford with the regular mortgage and simply pay less every
month—using the extra money to pay her student loans. But if she’s like
other people, Didi will use her maximum ability to pay as the starting point
for figuring out what mortgage and house to get, and she’ll end up paying
three thousand dollars a month for a much bigger, fancier home. She will
not have any more flexibility, but she will be much more exposed to the
housing market.”
I don’t think Dave was very impressed with my arguments. But after the
subprime mortgage crisis hit, I had the opportunity to look at some data on
interest-only mortgages, and it did appear that instead of providing financial
flexibility, all that they achieved was to stretch borrowing and put
borrowers at higher risk in a fickle housing market.
FROM MY PERSPECTIVE, one of the main failures of the mortgage market was
that the bankers didn’t even consider the possibility that people cannot
compute the right amount to borrow. If banks understood this, they
undoubtedly would not have left it up to individuals to figure out the right
amount for themselves. In the absence of such an understanding, however,
the banks tempted individuals to borrow more than they could possibly
afford. Sure, the banks could threaten borrowers with the financial
equivalent of breaking legs, but they didn’t help borrowers do what’s best
for the banks—or themselves. It’s no wonder that, when the housing crisis
finally hit, both banks and their customers wound up with broken legs.
Now, let’s say that after all is said and done, the banks finally wise up
and decide to conduct empirical studies that examine how people might go
about computing the ideal loan amount. Assuming their data reveal the
same results as my small study (that people simply borrow to the
maximum), the bankers might then realize that it is in their best interest to
help borrowers make better decisions. How could they do this?
Obviously, helping borrowers figure out a realistic mortgage amount is
not going to be simple, but I know we can do much better than what
mortgage calculators do right now (in fact, I don’t think we could do
worse). So let’s say the banks accept the challenge and actually develop
better mortgage calculators that not only tell people the maximum they
could theoretically borrow, but also help people figure out the right amount
for them. If people had the benefit of such humane mortgage calculators, I
suspect that they would make better decisions, take on less risk, and
ultimately be less likely to lose their homes. Who knows? If such
calculators had existed during the last 10 years, maybe much of the
mortgage fiasco would have been avoided.
Despite my belief in the desire of borrowers to make the right decisions
(and to avoid the disastrous outcomes of making wrong decisions), I must
admit that even if some of the banks had created better mortgage
calculators, it is possible that in the delirium of the housing market bubble,
zealous bankers and real estate brokers could still have pushed people to
borrow more and more.
This is where regulators could have stepped in. After all, regulation is a
very useful tool to help us fight our own worst tendencies. In the 1970s,
regulators placed strict limits on mortgages. They dictated the share of
income that could be used to pay a mortgage, the amount of down payment
required, and the proof that borrowers had to show to document their
income. Over time, these limits were dramatically and dangerously relaxed.
Eventually, banks offered the infamous NINJA mortgages (“No Income, No
Job or Assets”) to people who should never have taken out loans in the first
place, and thus ushered in the subprime mortgage fiasco.
You see, in a perfectly rational world, it would make sense to eliminate
all limits and regulators from all markets, including the mortgage market.
But because we don’t live in a perfectly rational world, and because human
beings don’t always naturally make the right decisions, it makes sense to
limit our ability to cause damage to ourselves and others. This is the real
role of regulations—they provide us with safe boundaries. They limit our
ability to drink and drive; they force kids to go to school; they make
pharmaceutical companies empirically test the medications they administer;
they limit the ability of companies to pollute our environment; and so on.
Certainly, there are many domains of life in which we can function
reasonably well without regulations, or at least not cause too much damage
when we are left to our own devices. But, when our ability to perform at a
satisfactory level is low or nonexistent, and when our failures can hurt
ourselves and others (think about driving)—this is when regulations are
very handy boundaries to apply.
SEEN THROUGH THE lens of conflict of interests, some aspects of the 2008
financial crisis become clearer. It seems to me that with few exceptions,
bankers wanted to accurately estimate the risks associated with different
financial products, and make good investments for themselves and for their
clients. On the other hand, they also had tremendous financial incentives to
view financial products such as mortgage-backed securities as fabulous
innovations. Put yourself in their shoes: If you could make $10 million
simply by getting all your clients to buy mortgage-backed securities,
wouldn’t you soon convince yourself that such investments were truly
wonderful? And if you had to buy into the story of rational markets to
convince yourself that this was the case, wouldn’t you become a true
believer? As with sports fans, bankers’ conflicts of interest gave them a
reason to see the market make calls in their favor, and thanks to their ability
to observe the world as they expected, they managed to see mortgage-
backed securities as the best human invention since sliced bread.
On top of the basic conflict of interest, the bankers had one more force
working against them—the power of fuzziness. As I described in Chapter
12, when the participants in our studies had an opportunity to cheat for
tokens that were one step removed from money for a few seconds, they
doubled their cheating. In the same way that the tokens in our experiments
allowed our participants to bend reality, I suspect that the opaque nature of
pricing mortgage-backed securities, derivatives, and other complex
financial products allowed bankers to see what they wanted to see, and to
be dishonest to a larger degree. When it came to these complex financial
tools, conflicts of interest caused the Wall Street giants to want to see them
as the latest and greatest innovations of the modern world, and thanks to the
inherent fuzziness of these financial instruments, they were more easily able
to reshape reality in a way that was comfortable for them.
So there they were, and here we are. In a market driven by the all-too-
human desire to prosper, our incredible ability to fudge reality and shape it
to suit our vision got us into trouble. The stock market also utilized lots of
fuzzy signifiers for money. For example, bankers often use the term “yard”
to signify a billion, “stick” to mean a million, and “points” to mean
hundredths of a percent—tokens on a grand scale. Together all these factors
allowed the bankers’ natural ability at bending reality to flourish and led to
new levels of deception.
OF COURSE, THERE’S the ultimate question: Where does all this leave us in
terms of a solution? If you believe that there are good and bad people, then
all you need to do is figure out how to determine who is good and who is
bad and hire only the good people. But if you believe, as our results show,
that most people faced with a conflict of interest can cheat, then the only
solution is to eliminate conflicts of interest.
In the same way that we would never dream of creating a system in
which judges get 5 percent of the settlements over which they preside, it’s
also clear to me that we don’t want doctors to sell drugs they help develop,
or bankers to be biased by their own incentives. Unless we create a
financial system free of conflicts of interest, the sad story of the financial
meltdown of 2008 and its terrible aftermath will be repeated.
How do we eliminate conflicts of interest from the markets? We can
hope that the government will begin to regulate the market more effectively,
but given the complexity and cost of creating and implementing such
regulations, I’m personally not holding my breath until this solution is in
place. My hope is that one of the banks will decide to step up to the
challenge and lead the way for others by announcing a different pay
structure, different incentives for its bankers, transparency, and strict rules
against conflicts of interest. I also think that such actions will eventually be
beneficial for the bank.
While I wait for an upstanding bank and better regulations, I plan to
take a proactive step by looking more closely at my relationships with
physicians, lawyers, bankers, accountants, financial advisers, and the other
professionals to whom I turn to for expert advice. I can ask doctors who
prescribe me drugs whether they have any financial interest in the
pharmaceutical company; financial advisers whether they get paid by the
management of particular funds they are recommending; and life insurance
salespeople what kind of commission they are working on—and seek to
establish relationships with providers who do not have conflicts of interest
(or at least get a second independent opinion).
While I realize that doing so will be time-consuming and expensive, I
suspect that acting on the biased opinions from a specialist with a strong
conflict of interest could end up costing me more in the long run.
(3) Why didn’t we plan better for the possibility of bad times?
The general phenomenon social scientists call the planning fallacy has to do
with our tendency to underestimate how long we will take to finish a task (it
explains why roadwork never seems to get finished and new buildings
never open on time). There is a very simple way to demonstrate the
planning fallacy. Ask some undergraduate students how long it will take
them to finish a big task, such as their honors thesis, under the best
conditions.
“Three months” is the standard reply.
Next ask them how long it would take under the worst conditions.
“Six months,” they routinely offer.
Then ask another group how much time they think it will really take
them to finish their honors thesis under normal conditions, following their
usual study, work, and activity schedule.
“Three months,” they usually respond.
Given the first two answers, you might expect that they would predict
that finishing their honors thesis would take them closer to six months, or
maybe four and a half months, but they don’t. Their answer is always too
optimistic no matter how unrealistic this may actually be. If you think that
this kind of misjudgment occurs only with undergraduates, think back to the
times you promised your spouse that you would be home from work by six
p.m. You have every intention of fulfilling your promise, but invariably
something goes wrong and your departure is delayed. You get a call from a
client, you receive an e-mail from your boss that needs an immediate
response, a coworker stops by your office to sound off about something, or
perhaps you’ve been trying to print something out and the printer gets
stuck. Now, if the printer got stuck for five minutes every time you tried to
print, you would quickly take this into account and plan to print before you
needed to depart the office. But because different things go wrong at
different times, and because it’s impossible to predict when any particular
delay will rear its ugly head, we play the scenario of leaving the office in
our minds (sending one last e-mail, printing the notes for tomorrow’s
meeting, packing our bag, finding our keys, and leaving for the day),
without taking any of these possible interruptions or mishaps into account.
As it turns out, the planning fallacy also plays a large role in how we
think about our budgets. When we think generally about what we can and
cannot afford, and what we should and should not buy, we consider our
monthly bills and expenses and make decisions more or less accordingly.
But when things go awry and something unplanned happens—say we need
a new roof for our house or a new set of tires for our car—we just don’t
have the cash in the bank to pay for them. Because different bad things
happen at different times, we don’t take many of them into account.
REGRETTABLY, THIS IS not the end of the story, because the planning fallacy
joins forces with its silent partner the financial industry, and together they
wreak even more havoc on our lives. It turns out that the financial industry
understands that we are partially blind to these negative events, and this is
exactly where the industry sticks it to us. When something goes badly and
we don’t make a payment on time or bounce a check, there are strong
negative consequences. To illustrate, allow me to tell you a story about my
experience of being poor for a day, and what I learned in the process.
In the winter of 2006 I was out of the country for a month, and during
that time my car insurance expired. When I returned and discovered this, I
called my insurance agent to request a renewal of my policy. “No, no, no,”
she said with surprising vehemence. “If your insurance has expired, you
can’t renew it over the phone. You have to come to our office in person and
take out a new policy.”
I was living in Princeton, New Jersey, at the time, and my insurance
agency was about 250 miles away, in Boston. I tried to argue with the agent
and even called a few other insurance agencies, but they all had the same
demand. Because I had let my insurance expire, I was now categorized as a
bad person in the eyes of their industry, and an agent had to see me face-to-
face to approve a policy. So I took the seven-hour train trip to Boston and
arrived at the insurance office in the early afternoon—ready to hand over a
check, renew my insurance, and then take the train back to Princeton. You
would think that the rest would be simple, but of course, it wasn’t.
The first thing I learned when I got to the insurance agency was that my
insurance premium would increase substantially. Sheila, the insurance
agent, informed me that in allowing my insurance to lapse, I lost all the
good-driver discounts I’d collected. Now that I was a subprime human
being, I was given a premium suitable for a teenager. Furthermore, the
insurance company would not accept a check from me, because, in their
eyes, I had shown my true, irresponsible colors.
“Will a credit card do?” I asked, in as even a tone as I could muster.
“Of course not,” Sheila said coldly. Her hands were hidden under her
desk. I imagined that at any moment she might push a button to call the
police. “We can accept only cash from you.”
For some reason I had a few hundred dollars in cash on me, and there
was a bank just next door. Using two ATM cards to withdraw all the cash I
could, I was able take out an additional $800 for a net sum of slightly more
than a half year’s worth of insurance.
“Surely this will do?” I said, plunking down the money in front of
Sheila. “I am giving you the payment for the first six months of coverage
now in cash, and I’ll send you the rest tomorrow.”
Sheila paused and looked at me as if I were hard of understanding
(which I guess I was). “You must pay us the premium for a year in cash,”
she said very slowly, “before we can renew your insurance.” Then her face
suddenly brightened. “Luckily,” she added in a more cheerful tone, “we
have a solution designed for this exact problem. There is a lending company
that offers short-term loans just for these cases. The application process is
very quick and simple and you can be out of here in ten minutes.”
What else could I do? I asked her to sign me up for this special loan.
The terms of the loan included a 20.5 percent interest rate on the loan itself
plus a $100 fee just for the privilege of enrolling. This was obviously very
annoying, but I had no other option if I was to get my insurance back that
day. (Of course, a few days later I paid this terrible loan off.)
On the train back to Princeton, I concluded that this had been a
maddening but very enlightening experience. I learned that the moment you
make a financial mistake, the chances are very high that you will be hit with
all kinds of fines, bureaucratic difficulties, and additional financial
obstacles. I was fortunate not to have suffered much: Sure, I’d lost a day of
work, and I had been forced to pay money for the train tickets, the fee to
initiate the loan, the expensive loan itself, and the increased premium on the
insurance—in advance and in cash. But what, I wondered, happens to
people who can’t afford to take a day off work, and who are on the verge of
financial difficulty? How do they come up with the money to pay all these
fees and higher premiums? If I were stretched to my limit with financial
obligations, and if I had no cushion, this incident would have most likely
pushed me over the financial edge, making my life much more expensive,
stressful, and difficult. I would have had to take out a terribly expensive
loan to pay for my car insurance, borrow more to pay that loan, start
carrying a balance on my credit card, start paying fees and high interest for
that privilege, and so on.
I later learned that many parts of the insurance and banking industry
operate in such a way as to take advantage of people who are already at
financial risk. Think, for example, about the “perk” of free checking that the
banks so generously provide us. You might think that banks lose money by
offering free checking, because it costs them something to manage the
accounts. Actually, they make huge amounts of money on mistakes:
charging very high penalties for bounced checks, overdrafts, and debit card
charges that exceed the amount in our checking accounts. In essence, the
banks use these penalties to subsidize the “free checking” for the people
who have sufficient amounts of cash in their checking accounts and who are
not as likely to bounce a check or over-draw with their debit cards. In other
words, those living from paycheck to paycheck end up subsidizing the
system for everyone else: the poor pay for the wealthy, and the banks make
billions in the process.
Nor does the usury (I daresay, depravity) of the banks end there.
Imagine that it is the last day of the month and you have $20 in your
checking account. Your $2,000 salary will be automatically deposited into
your bank today. You walk down the street and buy yourself a $2.95 ice
cream cone. Later you also buy yourself a copy of Predictably Irrational
for $27.99, and an hour later you treat yourself to a $2.50 caffe latte. You
pay for everything with a debit card, and you feel good about the day—it is
payday, after all.
That night, sometime after midnight, the bank settles your account for
the day. Instead of first depositing your salary and then charging you for the
three purchases, the bank does the opposite and you are hit with overdraft
fees. You would think this would be enough punishment, but the banks are
even more nefarious. They use an algorithm that charges you for the most
expensive item (the book) first. Boom— you are over your available cash
and are charged a $35 overdraft fee. The ice cream and the latte come next,
each with its own $35 overdraft fee. A split second later, your salary is
deposited and you are back in the black—but $105 poorer.
WE ALL SUFFER from the planning fallacy syndrome, and the banking and
insurance institutions, realizing this, build in large penalties that kick in just
when these unexpected (unexpected to us) bad things happen. And because
when we sign up for these financial or insurance services we certainly don’t
plan to miss an insurance payment, bounce a check, skip a credit card
payment, or go over our debit card limit, we often don’t even look at the
terms of the penalties, thinking they do not apply to us. But when “stuff
happens,” the banks are lying in wait and we end up paying dearly.
Given this modus operandi, is it any wonder that many of the people
who took subprime mortgages (by definition those who were not doing well
financially) defaulted on their credit card payments, walked out on their
mortgages, and even declared bankruptcy?
There are some well-to-do people who think none of this is their
problem, of course. But one of the major lessons we’ve learned from the
2008 economic meltdown is that our financial fortunes are all tied together
more tightly than anybody realized. What started as subprime mortgage
loans to people with relatively bad credit ended up sucking the wealth out
of the entire economy, and bringing almost every economic activity—from
car loans to retail spending—to a near-halt. Even people with hefty
retirement portfolios took a big hit. In the end, the economy is a complex
dynamic system, a bit like the “butterfly effect” in chaos theory where
events that happen to a small group of individuals (such as subprime
borrowers) can have large and frightening effects down the road for
everyone else.
I also find myself drawn to provisions (in the bailout bill) that
would serve no useful purpose except to insult the industry, like
requiring the CEOs, CFOs and the chair of the board of any
entity that sells mortgage related securities to the Treasury
Department to certify that they have completed an approved
course in credit counseling. That is now required of consumers
filing bankruptcy to make sure they feel properly humiliated for
being head over heels in debt, although most lost control of their
finances because of a serious illness in the family. That would
just be petty and childish, and completely in character for me.
I’m open to other ideas, and I am looking for volunteers who
want to hold the sons of bitches so I can beat the crap out of
them.
Rather than taking this anger seriously, and thinking carefully about
how to rebuild the public’s trust in the banking system and the government,
the legislators added insult to injury and contributed further to the erosion
of public trust. They added a few irrelevant tax cuts to the proposed bailout
package and then force-passed it. A few months later, Paulson revealed that
after roughly half of the $700 billion had been paid out to banks, none of
the money had been spent to buy back toxic securities, nor did the Treasury
Department intend to buy any in the future. He offered no reasons, no
explanations, not even so much as an apology. At the end of 2008, when
time for bonuses came, the banks did their share to further erode the
public’s trust by giving themselves millions of dollars in bonuses, and no
doubt patting themselves on the backs for a job well done.
THIS ANALYSIS OF trust and the pleasure of revenge also provides a useful
lens through which to view irrationality and behavioral economics more
generally. At first glance revenge seems to be an undesirable human
motivation: why on earth would human beings have evolved to enjoy
seeking revenge on each other? Think about it this way: Imagine that you
and I are living 2,000 years ago in an ancient desert land, and I have a
mango that you want. You might say to yourself: “Dan Ariely is a perfectly
rational person. It took him twenty minutes to find this mango. If I steal it
and hide so that Dan will need more time to find me than to go and get a
new mango, he will do the correct cost-benefit analysis and set off on his
way to find a new mango.” But what if you know that I am not rational, and
that instead I’m a dark-souled, vengeful type who would chase you to the
end of the world, and take back not only my mango but also all of your
bananas? Would you still go ahead and steal my mango? My guess is that
you would not. In a bizarre way, revenge can be an enforcement
mechanism, supporting social cooperation and order.
This is how a human tendency that might initially look senseless, and
not part of the basic definition of rationality, can, in fact, be a useful
mechanism—not necessarily one that always works in our favor, but one
that has some beneficial logic and function nevertheless.
NOW THAT WE understand a bit more about trust, its violation, revenge, and
mangoes, how do we begin to deal with the current mistrust of the stock
market? The parallel between the trust game and the subprime mortgage
crisis is very clear: we trusted the bankers with our retirement funds, our
savings, and our mortgages, but when it was their turn to act, they walked
away with the entire $50 (most likely, you may want to put a few zeros
behind that). As a consequence, we feel betrayed and angry, and we want
the institutions and bankers to pay dearly.
Beyond the feeling of revenge, this type of analysis helps us understand
that trust is an essential part of the economy, and that once trust is eroded, it
is very difficult to restore. The central banks can take heroic measures to
infuse money, give short-term loans to banks, increase liquidity, buy back
mortgage-backed securities, and use any other trick in the book. But unless
they rebuild the public’s trust, these very expensive measures are unlikely
to have the desired effect.
I suspect that the government’s actions not only ignored the issue of
trust, but they unintentionally contributed to its further erosion. For
example, the bailout legislation was eventually passed not because it had
been made more appealing, but because a few irrelevant tax cuts were
added to it. Also, Paulson asked us to trust him when he said that $700
billion was needed to buy toxic assets, and that he would manage this
responsibility appropriately. We learned later that he didn’t follow through
with the former, and this failure made the latter seem unlikely. And of
course, let’s not forget the behavior of the bankers themselves, from minor
issues such as costly office decorations (Merrill Lynch’s CEO John Thain
spent more than $1 million to decorate his office), to more substantial issues
such as the compensation of the CEOs at Lehman Brothers, Fannie Mae,
Freddie Mac, AIG, Wachovia, Merrill Lynch, Washington Mutual, and Bear
Stearns—establishing new records for CEO pay.
Imagine how different things would have looked if the banks and the
government had understood the importance of trust from the get-go. Had
that been the case, they would have worked harder to explain more clearly
what went wrong and how the bailout would be used to clean up the mess.
They would not have ignored the public’s sentiment; they would have used
it for guidance. They would have included some trust-building elements in
the bailout legislation itself (for example, they could have guaranteed that
every bank bailed out with taxpayers’ money would have to commit to
transparency, limit top managers’ salaries, and eliminate conflicts of
interest).
Nevertheless, all is not lost. While it is clear that the legislators do not
yet understand the importance of trust, I remain hopeful that some of the
banks will decide to step away from the herd and be good guys—creating
trust by eliminating conflicts of interest and modeling complete
transparency. They might do it because it is the moral thing to do or, more
likely, because they will understand that the best way to solve the liquidity
problem is to engender trust. It will certainly take a while for them to view
the world this way, but at some point they will understand that unless they
create a new structure to slowly regain our trust, none of us will get out of
this economic mess.
(5) What is the psychological fallout from not understanding what the
#$%^ is going on in the markets?
At the end of 2008, consumers’ confidence was at its lowest since 1967 (the
year that research groups began measuring it), suggesting that the economy
was also in the worst shape since 1967, and feeding on itself to further sink
the economy. While there is no question that the state of the economy was
indeed depressing, I suspect that there were other factors—ones not related
to the underlying economic situation—that contributed to our gloomy
outlook.
Henry Paulson’s behavior, as described above, gave us a clear message
that no one really understood what was going on in the financial markets
and that we had no real control over the monster we had created. One
question we might ask is whether the general depression that followed
might have been mitigated if Paulson had been able to explain what went
wrong in the first place, what his proposed measures were going to achieve,
why he changed his decision to buy toxic securities, and what his plan was
for the rest of the bailout money.
As it turns out, even some answers could have made a difference. All
creatures (including humans) respond negatively in situations where things
don’t seem to make sense. When the world gives us unpredictable
punishments without rhyme or reason, and when we don’t have any
explanation for what is happening, we become prone to something
psychologists call “learned helplessness.”
In 1967, two psychologists, Martin Seligman and Steve Maier,
conducted a famous set of experiments using one predictable environment,
one unpredictable environment, and two dogs—a control dog and an
experimental dog.34 (Warning: The following description may be upsetting
for animal lovers.) In the control dog’s room, a bell sounded from time to
time. Shortly after each bell, the dog received a mild electrical shock—just
enough to annoy and surprise him. Fortunately for him, the control dog also
had access to a switch that turned off the shocks, and he quickly discovered
the switch and learned to use it.
Next door, the experimental dog (which the scientists referred to as the
“yoked” dog) received the exact same electrical shocks, but he did not hear
any bells sound beforehand. Nor did he have a switch that allowed him to
turn off the shocks. From the perspective of their physical reality, both dogs
received exactly the same shocks, but the difference in their situations was
their ability to predict and control the shocks.
Once the dogs acclimated to their environment (as best they could), the
researchers administered a second test. This time, both dogs were put in a
“shuttle box”—a large box divided by a low fence into two compartments.
From time to time a warning light came on, and a few seconds later the
floor of the shuttle box emitted a mild electrical shock. If, at that point, the
dog jumped from one compartment to the other, he would escape the shock.
Even better, if the dog jumped over the fence to the other compartment
when the warning light first came on, he avoided the shock entirely. As you
might expect, the control dog quickly learned to jump over the fence as
soon as the light went on. Though he was understandably a bit anxious, he
seemed relatively happy.
What about the experimental “yoked” dog? You might expect that he
would be equally motivated and equally able to escape the shocks in the
shuttle box. But the result was both interesting and rather depressing: The
yoked dog just lay in the corner of his cage, whimpering. Having learned in
the first stage of the experiment that shocks happened unpredictably and
inescapably, the yoked dog carried that mind-set into the shuttle box. The
experience during the first part of the experiment taught this dog that he
didn’t understand the relationships between cause and effect. As a
consequence, this poor dog later became helpless in his general approach to
life, exhibiting symptoms similar to those of people suffering from chronic
clinical depression, including ulcers and a general weakening of the
immune system.
YOU MIGHT THINK that this experiment applies only to electrical shocks and
dogs, but the principle holds true in many cases when we don’t understand
the causes of rewards and punishments in our environment. Imagine
yourself in the economic equivalent of the yoked dog’s chamber. One day
you are told that the best place to invest your money is in high-tech stocks,
and the next moment, without warning—bzzz—the Internet stock bubble
explodes. Next, you are told that the best place to invest your money is
housing, and again—no warning, then bzzz—the value of your house
plummets. Then, suddenly—bzzz—the price of gasoline increases to an all-
time high, presumably due to the war in Iraq, yet a few months later, even
as the war rages on, the price of gasoline drops—bzzz—to a much lower
price.
Next you watch as giant financial institutions that have been the
backbone of the heretofore-trusted U.S. financial system fail and your
investments take a hit—giant bzzz. For some unexplained reason some of
these institutions receive a bailout—bzzz—using the money you earned and
then paid in taxes—bzzz—and others do not—bzzz. Then the Big Three
automakers find themselves on the verge of bankruptcy (not a real surprise
there), but they don’t receive the same generous treatment as the banks,
even though they were asking for far less and had many jobs on the line. At
the end of the day all these dramatically expensive bailout attempts seem
like a capricious, idiosyncratic patch-up job with no reason or plan. BZZZ.
Does this economic shuttle box sound familiar? All this unexplained
and erratic economic behavior destroyed our faith that we understood the
causes and effects in our environment and turned the public into the
economic equivalent of a yoked dog. As a result of getting zapped with so
many different and incomprehensible shocks every now and again, it’s no
wonder that consumer confidence plummeted and that depression spread.
This idea that the whole world is wired together is mass death.
Every biologist knows that small groups in isolation evolve
fastest. You put a thousand birds on an ocean island and they’ll
evolve very fast. You put ten thousand on a big continent, and
their evolution slows down. Now, for our own species, evolution
occurs mostly through our behavior. We innovate new behavior
to adapt. And everybody on earth knows that innovation only
occurs in small groups. Put three people on a committee and
they may get something done. Ten people, and it gets harder.
Thirty people, and nothing happens. Thirty million, it becomes
impossible. That’s the effect of mass media—it keeps anything
from happening. Mass media swamps diversity. It makes every
place the same—Bangkok or Tokyo or London: there’s a
McDonald’s on one corner, a Benetton on another, a Gap across
the road. Regional differences vanish. All differences vanish. In
a mass-media world, there’s less of everything except the top ten
books, records, movies, ideas. People worry about losing
species diversity in the rain forest. But what about intellectual
diversity—our most necessary resource? That’s disappearing
faster than trees. But we haven’t figured that out, so now we’re
planning to put five billion people together in cyberspace. And
it’ll freeze the entire species. Everything will stop dead in its
tracks. Everyone will think the same thing at the same time.
Global uniformity….
INTERESTINGLY, MONEY ISN’T the only thing that compels better (or worse)
performance. We conducted a variation of this experiment at the University
of Chicago; this time we wanted to look at a different kind of motivator:
public image. We asked participants to solve anagram puzzles, sometimes
privately in a cubicle and sometimes in front of others. Assuming that their
motivation to do well would be higher in public, we wanted to see if being
observed by others would affect their performance, and if it would improve
or impair their ability. We found that though the subjects did want to
perform better when they worked in front of others, they did worse.
We concluded that social pressure, like money, is also a two-edged
sword. It motivates people, but having to perform in front of others raises
stress too, and at some point that stress overwhelms the benefits of
increased motivation.
(8) Rational economics has always been the basis for setting up policies
and designing our institutions. What’s wrong with that?
Neoclassical economics is built on very strong assumptions that, over time,
have become “established facts.” Most famous among these are that all
economic agents (consumers, companies, etc., are fully rational, and that
the so-called invisible hand works to create market efficiency). To rational
economists, these assumptions seem so basic, logical, and self-evident that
they do not need any empirical scrutiny.
Building on these basic assumptions, rational economists make
recommendations regarding the ideal way to design health insurance,
retirement funds, and operating principles for financial institutions. This is,
of course, the source of the basic belief in the wisdom of deregulation: if
people always make the right decisions, and if the “invisible hand” and
market forces always lead to efficiency, shouldn’t we just let go of any
regulations and allow the financial markets to operate at their full potential?
On the other hand, scientists in fields ranging from chemistry to physics
to psychology are trained to be suspicious of “established facts.” In these
fields, assumptions and theories are tested empirically and repeatedly. In
testing them, scientists have learned over and over that many ideas accepted
as true can end up being wrong; this is the natural progression of science.
Accordingly, nearly all scientists have a stronger belief in data than in their
own theories. If empirical observation is incompatible with a model, the
model must be trashed or amended, even if it is conceptually beautiful,
logically appealing, or mathematically convenient.
Unfortunately, such healthy scientific skepticism and empiricism have
not yet taken hold in rational economics, where initial assumptions about
human nature have solidified into dogma. Blind faith in human rationality
and the forces of the market would not be so bad if they were limited to a
few university professors and the students taking their classes. The real
problem, however, is that economists have been very successful in
convincing the world, including politicians, businesspeople, and everyday
Joes not only that economics has something important to say about how the
world around us functions (which it does), but that economics is a sufficient
explanation of everything around us (which it is not). In essence, the
economic dogma is that once we take rational economics into account,
nothing else is needed.
I believe that relying too heavily on our capacity for rationality when
we design our policies and institutions, coupled with a belief in the
completeness of economics, can lead us to expose ourselves to substantial
risks.
HERE’S ONE WAY of thinking about this. Imagine that you’re in charge of
designing highways, and you plan them under the assumption that all
people drive perfectly. What would such rational road designs look like?
Certainly, there would be no paved margins on the side of the road. Why
would we lay concrete and asphalt on a part of the road where no one is
supposed to drive on? Second, we would not have cut lines on the side of
the road that make a brrrrrr sound when you drive over them, because all
people are expected to drive perfectly straight down the middle of the lane.
We would also make the width of the lanes much closer to the width of the
car, eliminate all speed limits, and fill traffic lanes to 100 percent of their
capacity. There is no question that this would be a more rational way to
build roads, but is this a system that you would like to drive in? Of course
not.
IN THE END, I do hope that the debate between standard and behavioral
economics will not take the shape of an ideological battle. We would make
little progress if the behavioral economists took the position that we have to
throw standard economics—invisible hands, trickle-downs, and the rest of it
—out with the bathwater. Likewise, it would be a shame if rational
economists continue to ignore the accumulating data from research into
human behavior and decision making. Instead, I think that we need to
approach the big questions of society (such as how to create better
educational systems, how to design tax systems, how to model retirement
and health-care systems, and how to build a more robust stock market) with
the dispassion of science; we should explore different hypotheses and
possible mechanisms and submit them to rigorous empirical testing.
For instance, in my ideal world, before implementing any public policy
—such as No Child Left Behind or a $130 billion tax rebate or a $700
billion bailout for Wall Street—we would first get a panel of experts from
different fields to propose their best educated guess as to what approach
would achieve the policy’s objectives. Next, instead of implementing the
idea proposed by the most vocal or prestigious person in this group, we
would conduct a pilot study of the different ideas. Maybe we could take a
small state like Rhode Island (or other places interested in participating in
such programs) and try a few different approaches for a year or two to see
which one works best; we could then confidently adopt the best plan on a
large scale. As in all experiments, the volunteering municipalities would
end up with some conditions providing worse outcomes than others, but on
the plus side there would also be those who would achieve better outcomes,
and of course the real benefit of these experiments would be the long-term
adoption of better programs for the whole country.
I realize that this is not an elegant solution because conducting rigorous
experiments in public policy, in business, or even in our personal lives is
not simple, nor will it provide simple answers to all of our problems. But
given the complexity of life and the speed at which our world is changing, I
don’t see any other way to truly learn the best ways to improve our human
lot.
FINALLY, I’LL SAY this: In my mind there is no question that one of the
wonders of the universe is how complex, bizarre, and ever changing human
behavior is. If we can learn to embrace the Homer Simpson within us, with
all our flaws and inabilities, and take these into account when we design our
schools, health plans, stock markets, and everything else in our
environment, I am certain that we can create a much better world. This is
the real promise of behavioral economics.
Thanks
Over the years I have been fortunate to work on joint research projects
with smart, creative, generous individuals. The research described in this
book is largely an outcome of their ingenuity and insight. These individuals
are not only great researchers, but also close friends. They made this
research possible. Any mistakes and omissions in this book are mine. (Short
biographies of these wonderful researchers follow.) In addition to those
with whom I have collaborated, I also want to thank my psychology and
economics colleagues at large. Each idea I ever had, and every paper I ever
wrote, was influenced either explicitly or implicitly by their writing, ideas,
and creativity. Science advances mainly through a series of small steps
based on past research, and I am fortunate to be able to take my own small
steps forward from the foundation laid down by these remarkable
researchers. At the end of this book, I have included some references for
other academic papers related to each of the chapters. These should give the
avid reader an enhanced perspective on, and the background and scope of,
each topic. (But of course this isn’t a complete list.)
Much of the research described in this book was carried out while I was
at MIT, and many of the participants and research assistants were MIT
students. The results of the experiments highlight their (as well as our own)
irrationalities, and sometimes poke fun at them, but this should not be
confused with a lack of caring or a lack of admiration. These students are
extraordinary in their motivation, love of learning, curiosity, and generous
spirit. It has been a privilege to get to know you all—you even made
Boston’s winters worthwhile!
Figuring out how to write in “non-academese” was not easy, but I got a
lot of help along the way. My deepest thanks to Jim Levine, Lindsay
Edgecombe, Elizabeth Fisher, and the incredible team at the Levine
Greenberg Literary Agency. I am also indebted to Sandy Blakeslee for her
insightful advice; and to Jim Bettman, Rebecca Waber, Ania Jakubek, Erin
Allingham, Carlie Burck, Bronwyn Fryer, Devra Nelson, Janelle Stanley,
Michal Strahilevitz, Ellen Hoffman, and Megan Hogerty for their role in
helping me translate some of these ideas into words. Special thanks to my
writing partner, Erik Calonius, who contributed greatly to these pages, with
many real-world examples and a narrative style that helped me tell this
story as well as it could be told. Special thanks also go to my trusting,
supporting, and helpful editor at HarperCollins, Claire Wachtel.
I wrote the book while visiting the Institute for Advanced Study at
Princeton. I cannot imagine a more ideal environment in which to think and
write. I even got to spend some time in the institute’s kitchen, learning to
chop, bake, sauté, and cook under the supervision of chefs Michel
Reymond and Yann Blanchet—I couldn’t have asked for a better place to
expand my horizons.
Finally, thanks to my lovely wife, Sumi, who has listened to my
research stories over and over and over and over. And while I hope you
agree that they are somewhat amusing for the first few reads, her patience
and willingness to repeatedly lend me her ear merits sainthood. Sumi,
tonight I will be home at seven-fifteen at the latest; make it eight o’clock,
maybe eight-thirty; I promise.
List of Collaborators
On Amir
On joined MIT as a PhD student a year after me and became “my” first
student. As my first student, On had a tremendous role in shaping what I
expect from students and how I see the professor-student relationship. In
addition to being exceptionally smart, On has an amazing set of skills, and
what he does not know he is able to learn within a day or two. It is always
exciting to work and spend time with him. On is currently a professor at the
University of California at San Diego.
Marco Bertini
When I first met Marco, he was a PhD student at Harvard Business School,
and unlike his fellow students he did not see the Charles River as an
obstacle he should not cross. Marco is Italian, with a temperament and
sense of style to match—an overall great guy you just want to go out for a
drink with. Marco is currently a professor at London Business School.
Ziv Carmon
Ziv was one of the main reasons I joined Duke’s PhD program, and the
years we spent together at Duke justified this decision. Not only did I learn
from him a great deal about decision making and how to conduct research;
he also became one of my dear friends, and the advice I got from him over
the years has repeatedly proved to be invaluable. Ziv is currently a
professor at INSEAD’s Singapore campus.
Shane Frederick
I met Shane while I was a student at Duke and he was a student at Carnegie
Mellon. We had a long discussion about fish over sushi, and this has
imprinted on me a lasting love for both. A few years later Shane and I both
moved to MIT and had many more opportunities for sushi and lengthy
discussions, including the central question of life: “If a bat and a ball cost
$1.10 in total, and the bat costs a dollar more than the ball, how much does
the ball cost?” Shane is currently a professor at MIT.
James Heyman
James and I spent a year together at Berkeley. He would often come in to
discuss some idea, bringing with him some of his recent baking outputs,
and this was always a good start for an interesting discussion. Following his
life’s maxim that money isn’t everything, his research focuses on
nonfinancial aspects of marketplace transactions. One of James’s passions
is the many ways behavioral economics could play out in policy decisions,
and over the years I have come to see the wisdom in this approach. James is
currently a professor at the University of St. Thomas (in Minnesota, not the
Virgin Islands).
Leonard Lee
Leonard joined the PhD program at MIT to work on topics related to e-
commerce. Since we both kept long hours, we started taking breaks together
late at night, and this gave us a chance to start working jointly on a few
research projects. The collaboration with Leonard has been great. He has
endless energy and enthusiasm, and the number of experiments he can carry
out during an average week is about what other people do in a semester. In
addition, he is one of the nicest people I have ever met and always a delight
to chat and work with. Leonard is currently a professor at Columbia
University.
Jonathan Levav
Jonathan loves his mother like no one else I have met, and his main regret
in life is that he disappointed her when he didn’t go to medical school.
Jonathan is smart, funny, and an incredibly social animal, able to make new
friends in fractions of seconds. He is physically big with a large head, large
teeth, and an even larger heart. Jonathan is currently a professor at
Columbia University.
George Loewenstein
George is one of my first, favorite, and longest-time collaborators. He is
also my role model. In my mind George is the most creative and broadest
researcher in behavioral economics. George has an incredible ability to
observe the world around him and find nuances of behavior that are
important for our understanding of human nature as well as for policy.
George is currently, and appropriately, the Herbert A. Simon Professor of
Economics and Psychology at Carnegie Mellon University.
Nina Mazar
Nina first came to MIT for a few days to get feedback on her research and
ended up staying for five years. During this time we had oodles of fun
working together and I came to greatly rely on her. Nina is oblivious of
obstacles, and her willingness to take on large challenges led us to carry out
some particularly difficult experiments in rural India. For many years I
hoped that she would never decide to leave; but, alas, at some point the time
came: she is currently a professor at the University of Toronto. In an
alternative reality, Nina is a high-fashion designer in Milan, Italy.
Elie Ofek
Elie is an electrical engineer by training who then saw the light (or so he
believes) and switched to marketing. Not surprisingly, his main area of
research and teaching is innovations and high-tech industries. Elie is a great
guy to have coffee with because he has interesting insights and perspectives
on every topic. Currently, Elie is a professor at Harvard Business School (or
as its members call it, “The Haaarvard Business School”).
Yesim Orhun
Yesim is a true delight in every way. She is funny, smart, and sarcastic.
Regrettably, we had only one year to hang out while we were both at
Berkeley. Yesim’s research takes findings from behavioral economics and,
using this starting point, provides prescriptions for firms and policy makers.
For some odd reason, what really gets her going is any research question
that includes the words simultaneity and endogeneity. Yesim is currently a
professor at the University of Chicago.
Drazen Prelec
Drazen is one of the smartest people I have ever met and one of the main
reasons I joined MIT. I think of Drazen as academic royalty: he knows what
he is doing, he is sure of himself, and everything he touches turns to gold. I
was hoping that by osmosis, I would get some of his style and depth, but
having my office next to his was not sufficient for this. Drazen is currently
a professor at MIT.
Kristina Shampanier
Kristina came to MIT to be trained as an economist, and for some odd but
wonderful reason elected to work with me. Kristina is exceptionally smart,
and I learned a lot from her over the years. As a tribute to her wisdom,
when she graduated from MIT, she opted for a nonacademic job: she is now
a high-powered consultant in Boston.
Jiwoong Shin
Jiwoong is a yin and yang researcher. On one hand he carries out research
in standard economics assuming that individuals are perfectly rational; on
the other hand he carries out research in behavioral economics showing that
people are irrational. He is thoughtful and reflective—a philosophical type
—and this duality does not faze him. Jiwoong and I started working
together mostly because we wanted to have fun together, and indeed we
have spent many exciting hours working together. Jiwoong is currently a
professor at Yale University.
Baba Shiv
Baba and I first met when we were both PhD students at Duke. Over the
years Baba has carried out fascinating research in many areas of decision
making, particularly on how emotions influence decision making. He is
terrific in every way and the kind of person who makes everything around
him seem magically better. Baba is currently a professor at Stanford
University.
Rebecca Waber
Rebecca is one of the most energetic and happiest people I have ever met.
She is also the only person I ever observed to burst out laughing while
reading her marriage vows. Rebecca is particularly interested in research on
decision making applied to medical decisions, and I count myself as very
lucky that she chose to work with me on these topics. Rebecca is currently a
graduate student at the Media Laboratory at MIT.
Klaus Wertenbroch
Klaus and I met when he was a professor at Duke and I was a PhD student.
Klaus’s interest in decision making is mostly based on his attempts to make
sense of his own deviation from rationality, whether it is his smoking habit
or his procrastination in delaying work for the pleasure of watching soccer
on television. It was only fitting that we worked together on procrastination.
Klaus is currently a professor at INSEAD.
Notes
1. James Choi, David Laibson, and Brigitte Madrian, “$100 Bills on the
Sidewalk: Suboptimal Saving in 401(k) Plans,” Yale University, working
paper.
2. Steven Levitt and John List, “Homo economicus Evolves,” Science
(2008).
3. David Brooks, “The Behavioral Revolution,” New York Times (October
27, 2008).
4. Jodi Kantor, “Entrees Reach $40,” New York Times (October 21, 2006).
5. Itamar Simonson, “Get Closer to Your Customers by Understanding How
They Make Choices,” California Management Review (1993).
6. Louis Uchitelle, “Lure of Great Wealth Affects Career Choices,” New
York Times (November 27, 2006).
7. Katie Hafner, “In the Web World, Rich Now Envy the Superrich,” New
York Times (November 21, 2006).
8. Valerie Ulene, “Car Keys? Not So Fast,” Los Angeles Times (January 8,
2007).
9. John Leland, “Debtors Search for Discipline through Blogs,” New York
Times (February 18, 2007).
10. Colin Schieman, “The History of Placebo Surgery,” University of
Calgary (March 2001).
11. Margaret Talbot, “The Placebo Prescription,” New York Times (June 9,
2000).
12. Sarah Bakewell, “Cooking with Mummy,” Fortean Times (July 1999).
13. D. J. Swank, S. C. G Swank-Bordewijk, W. C. J. Hop, et al.,
“Laparoscopic Adhesiolysis in Patients with Chronic Abdominal Pain: A
Blinded Randomised Controlled Multi-Center Trial,” Lancet (April 12,
2003).
14. “Off-Label Use of Prescription Drugs Should Be Regulated by the
FDA,” Harvard Law School, Legal Electronic Archive (December 11,
2006).
15. Irving Kirsch, “Antidepressants Proven to Work Only Slightly Better
Than Placebo,” Prevention and Treatment (June 1998).
16. Sheryl Stolberg, “Sham Surgery Returns as a Research Tool,” New York
Times (April 25, 1999).
17. Margaret E. O’Kane, National Committee for Quality Assurance, letter
to the editor, USA Today (December 11, 2006).
18. Federal Bureau of Investigation, Crime in the United States 2004—
Uniform Crime Reports (Washington, D.C.: U.S. Government Printing
Office, 2005).
19. Brody Mullins, “No Free Lunch: New Ethics Rules Vex Capitol Hill,”
Wall Street Journal (January 29, 2007).
20. “Pessimism for the Future,” California Bar Journal (November 1994).
21. Maryland Judicial Task Force on Professionalism (November 10, 2003):
http://www.courts.state.md.us/publications/professionalism2003.pdf.
22. Florida Bar/Josephson Institute Study (1993).
23. DPA Correlator, Vol. 9, No. 3 (September 9, 2002). See also Steve
Sonnenberg, “The Decline in Professionalism—A Threat to the Future of
the American Association of Petroleum Geologists,” Explorer (May
2004).
24. Jan Crosthwaite, “Moral Expertise: A Problem in the Professional
Ethics of Professional Ethicists,” Bioethics, Vol. 9 (1995): 361–379.
25. The 2002 Transparency International Corruption Perceptions Index,
transparency.org.
26. McKinsey and Company, “Payments: Charting a Course to Profits”
(December 2005).
27. “Email Has Made Slaves of Us,” Australian Daily Telegraph (June 16,
2008).
28. “Studies Find Big Benefits in Marriage,” New York Times (April 10,
1995).
29. Ralph Keeney, “Personal Decisions Are the Leading Cause of Death,”
Operation Research (2008).
30. “Pearls Before Breakfast,” Washington Post (April 8, 2007).
31. John Maurice Clark, “Economics and Modern Psychology,” Journal of
Political Economy (1918).
32. http://www.openleft.com/showDiary.do?diaryId=8374, Openleft.com
(posted September 21, 2008).
33. Dominique de Quervain, Urs Fischbacher, Valerie Treyer, Melanie
Schellhammer, Ulrich Schnyder, Alfred Buck, and Ernst Fehr, “The
Neural Basis of Altruistic Punishment,” Science (2004).
34. Martin Seligman and Steve Maier, “Failure to Escape Traumatic
Shock,” Journal of Experimental Psychology (1967).
35. Michael Crichton, The Lost World (New York: Random House, 1995).
Bibliography and Additional Readings
Below is a list of the papers on which the chapters were based, plus
suggestions for additional readings on each topic.
Introduction
RELATED READINGS
Daniel Kahneman, Barbara L. Fredrickson, Charles A. Schreiber, and
Donald A. Redelmeier, “When More Pain Is Preferred to Less: Adding a
Better End,” Psychological Science (1993).
Donald A. Redelmeier and Daniel Kahneman, “Patient’s Memories of
Painful Medical Treatments—Real-Time and Retrospective Evaluations of
Two Minimally Invasive Procedures,” Pain (1996).
Dan Ariely, “Combining Experiences over Time: The Effects of
Duration, Intensity Changes, and On-Line Measurements on Retrospective
Pain Evaluations,” Journal of Behavioral Decision Making (1998).
Dan Ariely and Ziv Carmon, “Gestalt Characteristics of Experienced
Profiles,” Journal of Behavioral Decision Making (2000).
Note: Entries in this index, carried over verbatim from the print edition of
this title, are unlikely to correspond to the pagination of any given e-book
reader. However, entries in this index, and other terms, may be easily
located by using the search feature of your e-book reader.
A
AARP, 71
addiction:
to e-mail, 255–59
reinforcement schedules and, 257–58
Adventures of Tom Sawyer, The (Twain), 24–25, 39–40, 42–43
advertising, virtual ownership and, 136
AIG, 280, 310
Airborne, 275–78
airlines:
bankruptcy of, 204
frequent-flyer miles and, 227–28
Allen, Woody, 69
Amazon:
FREE! shipping promotion and, 58–59, 62
gift certificate experiment and, 58
Ambady, Nalini, 169
America Online (AOL), 59–60
Amir, On, 196–97, 206, 219–20, 335
anchoring, 25–48
arbitrary coherence and, 26–30, 43–48
compensation for work and, 39–43
enduring effect of, 34–36
free market and free trade and, 47–48
housing prices and, 30–31
imprinting in animals compared to, 25, 34, 43
life decisions and, 43–45
prices and, 25–36, 45–47
Starbucks and, 37–39
supply and demand and, 45–46
switching from old to new anchors and, 31–36
translation of first decisions into long-term habits and, 36–39
angina pectoris, efficacy of surgical procedure for, 173–74, 191
antibiotics, placebo effect and, 189
Antiques Roadshow, 130
arbitrage, xv
arbitrary coherence:
free market and free trade and, 47–48
life decisions and, 43–45
prices and, 26–30, 45–47
supply and demand and, 45–46
arousal, 89–105
painkillers during childbirth and, 103–4
safe driving and, 102–3
safe sex and, 89, 95, 96–97, 99, 100–102, 107
sexual, decision making under, 89–102, 106–8
underprediction of effect of, 98–99
understanding different aspects of ourselves and, 104–5
art, expectations and, 274
arthroscopic knee surgery, 174–76
Asian-Americans, stereotypes about, 169
Assael, James, 23
Assael, Salvador, 23–25, 26
Association of Petroleum Geologists, 211
attractiveness, decoy effect and, 11–14, 15, 245–46
auctions:
arbitrary coherence and, 26–30
online, 135–36
second price, 28n
automobile insurance, 299–301
automobiles:
precautionary devices in, to foil unsafe teenage behavior, 102–3
routine maintenance of, 120–21
test driving, expectations and, 161
automobile sales:
FREE! oil changes and, 60–61
relativity problem and, 2, 19, 21
value in owner’s eyes and, 129, 134, 135
B
bailout plan, 280, 304–6, 310–11
bonus controversy and, 319–20
Bank of America, 280
bankers, 291–96
bailout plan and, 280, 304–6, 310–11
calculating appropriate salaries for, 319–24
collapse of financial institutions and, 280–81, 314
conflicts of interest and, 291, 294–96, 311
erosion of public trust in, 305–6, 309–11
inherent fuzziness of financial world and, 294–95
mortgage policies and, 283–84, 288–90, 303
public outcry over compensation of, 306, 310, 311, 319–20
punitive practices of, 283–84, 301–3, 304
transparency issues and, 311, 324
bankruptcy, 305
Bargh, John, 170
Barlow, John Perry, 86
Bear Stearns, 280, 310
Beatles, 85
Becker, Gary, 291–92
beer:
expectations’ impact on taste of, 157–59, 161–62, 163–64, 172
ordering process and enjoyment of, 231–36
behavioral economics:
conventional economics vs., xxviii–xxx, 239–40, 328–29
free lunches from perspective of, 240–43
practical usefulness of, xvi
see also specific topics
Bell, Joshua, 270–73, 274
Benartzi, Shlomo, 242
Bender, Walter, 92
benefits (compensation):
goodwill created by, 83
recent cuts in, 82
stating financial value of, 254
see also bonuses
Berkeley, University of California at, 91
arousal experiment at, 91–97, 98–99
Bertini, Marco, 159–60, 335–36
Bible, 208, 215
blogging, about overspending and debt problems, 122–23
bonuses:
cash vs. gift as, 253–54
erosion of public trust and, 306
morally outraged taxpayers and, 319–20
relationship between job performance and, 320–21, 322–24
variable reinforcement schedule and, 257
brain:
brand associations of Coke and Pepsi and, 166–68
honesty and reward centers in, 203, 208
revenge center in, 308
brand associations, taste of Coke vs. Pepsi and, 166–68
bread-making machines, 14–15
Brooks, David, xviii
Brouillet, Jean-Claude, 23–24
budgets, planning fallacy and, 298
Buffett, Warren, 17
bundling of services, 120–21
Burning Man, Black Rock Desert, Nev., 86–88
Burrows, Lara, 170
Bush, George W., 280
C
cable television, “trial” promotions and, 136–37
“Can’t Buy Me Love,” 85
Carmon, Ziv, 129, 130, 181, 336
Carolina Brewery, Chapel Hill, N.C., 231–37
cash, see money caudate nucleus, 203
cause and effect, incomprehensible relationships between, 313–14
CEOs, compensation of, 16–17, 18, 310
Charlemagne, 188
Charles II, king of England, 188
cheating on tests, 198–202
conflicts of interest and, 292–93, 294
extreme cheating and, 221–22
honor code statements and, 212–13
moral benchmarks and, 206–8, 213
with nonmonetary currency rather than cash, 219–22, 294
self-restraint in, 201–2, 208, 213
checking accounts:
FREE!, 60, 301–2
spreading cost of, 304
Chen, Mark, 170
childbirth, painkillers during, 103–4
China:
adoptions in, 134
lack of trust in, 214
savings rate in, 109
chocolate:
in free exchange (Halloween) experiment, 56–58
pricing of, FREE! items and, 51–54, 64–65
rational cost-benefit analysis and, 64–65
Citigroup, 280
Clark, John Maurice, 281
Clark, Margaret, 68
closets, consumerism and size of, 110
clothing, worn and returned to store for full refund, 196, 223
Cobb, Leonard, 173–74
coffee:
questioning outlays for, 44
at Starbucks vs. Dunkin’ Donuts, 37–39, 47
upscale ambience and, 39, 159–60
cognitive limitations, taking account of, 327
Coke, taste tests of Pepsi and, 166–68
cold remedies, price and efficacy of, 184
colds, antibiotics as placebo for, 189
collateralized debt obligations (CDOs), 279–80
comparisons, see relativity
compensation:
cash vs. gift rewards and, 82–83, 253–54
for bankers, calculating correct amount of, 319–24
of CEOs, 16–17, 18, 310
poetry reading experiment and, 40–42
erosion of public trust and, 306, 310, 311
Obama’s call for “commonsense” guidelines for, 323–24
recent cuts in benefits and, 82
social exchange in workplace and, 80–83
and transformation of activity into work, 39–43
see also bonuses; salaries
compensation consulting firms, 17
conditioning, placebo effect and, 179
condoms:
importance of widespread availability of, 100–102
and willingness to engage in unprotected sex when aroused, 89, 95, 96–
97, 99, 107
conflicts:
expectations and perception of, 156–57, 171–72
neutral third party and, 172
conflicts of interest, 291–96
in banking and financial industries, 291, 294–96, 311
cheating and, 292–93, 294
elimination of, 295–96, 311
in health care, 293, 295
theory of rational crime and, 291–92
conformity, ordering food and drink and, 238
Congress, U.S., 151, 152, 228
ethics reforms in, 204–6
consumerism, 109–10
context effects, 240
control, perception of:
learned helplessness and, 312–16
mistaken, 243
corporate scandals, xiv, 196, 204, 214, 219, 222–23
cost-benefit analysis:
dishonesty and, 202–3, 204, 292–93
relative value and, 64–65
theory of rational crime and, 291–92
credit cards, 110, 204, 304
FREE! offers and, 247–48
“ice glass” method for, 122
self-control, author’s proposal for, 123–26, 242
two-cycle billing and, 228
Crichton, Michael, 317–18
crime, rational, theory of, 291–92
Crocodile Dundee, 7–8
Cypert, Kim, 166–68
D
dating:
decoy effect and, 10–14, 15, 245–46
and likelihood of engaging in immoral behaviors when aroused, 94–95,
96, 97, 107
separation of social and market norms and, 69, 75–76, 250
day care, tardiness fines at, 76–77
deadlines, setting one’s own, 112–16, 117, 118–19
debt blogging, 122–23
decision making:
and indecision in face of two choices, 151–53
large vs. small decisions and, xii, xiii, xvi
sexual arousal and, 89–102, 106–8
see also first decisions; options
decoy effect, 5–6, 8–15
bread-making machines and, 14–15
dating and, 10–14, 15, 245–46
Economist subscriptions and, 1–3, 4–6, 9–10
house purchases and, 8–9
menu pricing and, 4
vacation packages and, 10
visual representation of, 9
Delany sisters, 259–60
delayed gratification, unpleasant medical treatments and, 260–64
demand:
price changes and, 46–47
supply and, in standard economic framework, 45–46
democracy, dizzying abundance of options in, 148
depression, incomprehensible cause-and-effect relationships and, 313, 315–
16
derivatives-backed securities, 295
Descartes, Rene, 43
diet, procrastination and self-control and, 110–11, 116
discounts:
discounting of quality along with, 183–87
relativity and, 19–20
dishonesty, 195–230
congressional initiatives against, 204–6
contemplation of moral benchmarks and, 206–9, 213
corporate scandals and, 196, 204, 214, 219, 222–23
cost-benefit analysis and, 202–3, 204
decline of professional ethics and, 209–11, 213–14
easier when removed from cash, 217–30
expense reports and, 223–24
human nature and, 226–27
oaths and, 208–9, 211–13
rationalization of, 219, 222, 224, 225–27, 229
risk of being caught and, 201, 204
small acts of, 197, 204, 217–18, 227–28
standard-issue criminal activities and, 195, 196–97
wardrobing and, 196, 223
see also cheating on tests; honesty
Dr. Jekyll and Mr. Hyde (Stevenson), 98
doctors, see medical profession
“door game,” 143–48
dopamine, 168
dorsolateral aspect of prefrontal cortex (DLPFC), 167
drinks:
energy, impact of price and hype on efficacy of, 184–87
expectations and taste of, see taste
ordering process and enjoyment of, 231–38
driving:
teenage, foiling unsafe behavior in, 102–3
test, expectations and, 161
drugs, war on, customs agents’ willingness to risk life in, 84
Duke University basketball tickets, 127–33
Dunkin’ Donuts, moving anchor to Starbucks from, 37–39
DVD players, FREE! DVD offers and, 55
E
earmarking, congressional restrictions on, 204–5
Ebbers, Bernie, 223
economics, standard:
arbitrary coherence at odds with, 43, 45, 47–48
behavioral economics vs., xxviii–xxx, 239–40
cost-benefit analysis in, 64–65
human rationality assumed in, xxix, xxx, 239–40
supply and demand in, 45–46
Economist subscription offers, 1–3, 4–6, 9–10
education, 84–86
igniting social passion for, 85–86
“No Child Left Behind” policy and, 85
“elderly,” behavior affected by priming concept of, 170–71
e-mail addiction, 255–59
overcoming, 259
reinforcement schedules and, 257–59
empirical tests:
public policy and, 328–29
in science, xxv–xxvi, 325
employees:
payment of, see compensation; salaries
social vs. market norms in companies’ relations with, 80–84, 252–54
theft and fraud at workplace ascribed to, 195–96
endowment effect, 129–35
energy drinks, impact of price and hype on efficacy of, 184–87
Enron scandal, xiv, 196, 204, 219
envy, comparisons and, 15–19
epidurals, 103–4
Escape from Freedom (Fromm), 148
Europe, savings rate in, 109
evolution, dangers of globalization and, 317–18, 319
exercise, procrastination and, 111
expectations, 155–72, 269–75
art and, 274
beer experiments and, 157–59, 161–62, 163–64, 172
brand associations of Coke and Pepsi and, 166–68
conflicts and, 156–57, 171–72
depth of description in caterers’ offerings and, 164
exotic-sounding ingredients and, 164–65
football plays and, 155–56, 171
garage sales and, 162–63
knowledge before vs. after experience and, 161–64
marketing hype and, 186–87
music and, 270–73, 274
physiology of experience altered by, 161–64, 166–68, 293–94
placebo effect and, 173–94; see also placebo effect
restaurant meals and, 269–70
sports car test drives and, 161
stereotypes and, 168–71
taste and, 157–68, 270
upscale coffee ambience and, 159–60
wineglasses and, 165
expense reports, dishonesty in, 223–24
experience, not learning from, xxvii
experiments:
extrapolation of findings in, xxxi–xxxii
isolating individual forces in, xxxi
see also empirical tests; specific topics
F
Fannie Mae, 280, 310
Fastow, Andrew, 219
Federal Depositor Insurance Corporation (FDIC), 280
Federal Reserve, 280, 284–85
Fehr, Ernst, 307–8
financial industry:
conflicts of interest and, 295–96
globalization and loss of diversity in, 318–19
inherent fuzziness in, 294–95
profit made from our mistakes by, 298–304
regulation of, 296
see also bankers
financial meltdown of 2008, 279–329
bailout plan and, 280, 304–6, 310–11, 312, 314, 319–20
bankers’ behavior in, 291–96
collapse of financial institutions in, 280–81, 314
compensation for bankers and, 306, 310, 311, 319–24
conflicts of interest and, 291–96
empirical testing of approaches to, 328–29
global market and, 316–19
Greenspan’s confession and, xvii-xix
housing market collapse and, 265–66, 279
learned helplessness and, 314–16
limitations of rational economics and, 281–82, 324–28
media coverage of, 315–16
mortgage practices and, 279–80, 283–90
planning fallacy and, 297–304
psychological fallout from not understanding what’s going on in, 311–
16
public trust and, 304–11
shared suffering in, 303
fines, in social context, 76–77
first decisions:
power of, 44
shape of our lives and, 43
translation of, into long-term habits, 36–39
see also anchoring
first impressions:
imprinting and, 25, 34, 43
see also arbitrary coherence
Fiske, Alan, 68
food:
expectations and taste of, 164–65, 270
ordering process and enjoyment of, 237–38
see also taste
food labels, allure of “zero” on, 61–62
football plays, expectations and perception of, 155–56, 171
Ford Motor Company, 119–21
401(k)s, xiii
France, Amazon’s FREE! shipping promotion in, 59, 62
Freddie Mac, 280, 310
Frederick, Shane, 157, 161, 336
FREE!, 49–63, 247–50
Amazon gift certificate offer and, 58
AOL price structure and, 59–60
checking accounts or mortgages and, 60, 301–2
chocolate pricing experiment and, 51–54, 64–65
credit cards and, 247–48
exchanges and, 55–58
fear of loss and, 54–55
high-definition DVD players and, 55
history of zero and, 50
museum admission fees and, 61
oil changes with car purchases and, 60–61
preventive health care and, 62–63
rational cost-benefit analysis and, 64–65
restaurant meals with friends and, 248–50
shipping offers on orders over a certain amount and, 58–59, 62
social policy and, 62–63
time considerations and, 61
free, working for, 71
free lunches, 240–44
free market, 47–48
free trade, 47–48
Frenk, Hanan, xxv
frequent-flyer miles, 227–28
Freud, Sigmund, 98, 203
friendly requests, social norms and, 68, 70–71, 73–74, 77–78
Fromm, Erich, 148
functional magnetic resonance imaging (fMRI), taste test of Coke and Pepsi
and, 166–68
furniture, assembling, pride of ownership and, 135
fuzziness, in financial world, 294–95
G
gambling, 258
garage sales, 129–30, 162–63
gasoline, price increases and demand for, 47
Gell-Mann, Murray, 244
gender stereotypes, 169
Gerbi (Italian physician), 177
gift certificate experiment, 58
gifts:
Burning Man based on exchange of, 86–88
cash vs., as employee reward, 82–83, 253–54
mere mention of money and, 73–74
in social situations, 250–52
social vs. market norms and, 72–74
globalization, 316–19
diversity, competition, and efficiency lessened by, 318–19
Gneezy, Uri, 76–77, 320–21
Gone with the Wind (Mitchell), 150
Goode, Miranda, 74–75
Google, 83
goslings, imprinting in, 25, 34, 43
government:
social contract between citizens and, 84
see also Congress, U.S.
Greenspan, Alan, xvii–xix
gridlock, legislative, 151, 152
Guidelines for Lawyer Courtroom Conduct (Sweeney), 213
guilt, social norms and, 77
H
habits:
first decisions translated into, 36–38
questioning, 44
Halloween experiment, 56–58
Hamlet (Shakespeare), xxviii–xxix, 232
Harford, Tim, 291–92
Harvard Business School, 197–98
honesty experiment at, 198–202
health care, 110–11
bundling of medical tests and procedures and, 119–21
conflicts of interest in, 293, 295
defeating procrastination in, 117–21
FREE! procedures and, 62–63
mandatory checkups and, 118
patient compliance and, 260–64
placebo effect and, 173–94, 275–78; see also placebo effect
price of medical treatments and, 176, 180–87, 190
public policy and spending on, 190
scientifically controlled trials and, 173–76
self-imposed deadlines and, 118–19
helping, thinking about money and, 74, 75
herding, 36–38
self-herding and, 37–38
Heyman, James, 69–71, 136, 336–37
HIV-AIDS, 90
Holy Roman emperors, placebo effect and, 188
Home Depot, 78
Honda, 120, 121
honesty, 195–230
contemplation of moral benchmarks and, 206–9, 213
dealing with cash and, 217–30
importance of, 214–15
as moral virtue, 203
oaths and, 208–9, 211–13, 215
reward centers in brain and, 203, 208
Smith’s explanation for, 202, 214
superego and, 203–4, 208
see also dishonesty
Hong, James, 21
honor codes, 212–13
hormones, expectation and, 179
house sales:
anchoring and, 30-31
relativity and, 8–9, 19
value in owner’s eyes and, 129, 135, 265–69
housing market:
bubble in, 289–90
decreasing valuations and, 265–66, 279
I
ice cream, FREE!, time spent on line for, 61
“Ikea effect,” 135
immediate gratification:
e-mail and, 255–59
unpleasant medical treatments and, 261–64
imprinting, 25, 34, 43
see also anchoring
indecision, 151–53
individualism, 68
thinking about money and, 74, 75
ingredients, exotic-sounding, 164–65
innovation, increased globalization and, 316–18
insurance fraud, 196, 223
insurance industry, 296
punitive finance practices of, 299-301
spreading cost of, 304
interest-only mortgages, 287–88
interferon, 260–64
internal mammary artery ligation, 173–74, 191
inventiveness, 68
IRA (Irish Republican Army), 156–57
Iran, lack of trust in, 214–15
irrational behaviors, xxix–xxx
opportunities for improvement and, 240–44
systematic and predictable nature of, xxx, 239
see also specific topics
IRS (Internal Revenue Service), 196
J
Japan, savings rate in, 109
jealousy, comparisons and, 15–19
Jerome, Jerome K., 273–74
job performance. 320–24
public scrutiny and, 322
relationship between compensation and, 320–21, 322–24
Jobst suit, 192–94
Johnston, David Cay, 204
JP Morgan Chase, 280
judgment and decision making (JDM), xxviii
see also behavioral economics
“Just say no” campaign, 100, 101
K
Kahneman, Daniel, 19, 129
Keeney, Ralph, 264
knee surgery, arthroscopic, 174–76
Knetsch, Jack, 129
Knight-McDowell, Victoria, 277
Koran, 215
L
“Lake Wobegone Effect,” 268–69
Latin America, lack of trust in, 214
Lay, Kenneth, 219
learned helplessness, 312–16
experiments on, 312–14
in financial meltdown, 314–16
recovering from, 315–16
Leaves of Grass (Whitman), 40–41
Lee, Leonard, 21, 157–59, 161, 337
legal profession:
attempts at improving ethics of, 213–14
decline of ethics and values in, 209–10
Lehman Brothers, 280, 310
leisure, blurring of partition between work and, 80, 81
Leland, John, 122–23
Leo III, Pope, 188
Leonardo da Vinci, 274
Levav, Jonathan, 231–37, 337
Levitt, Steven, xvi
Li, Jian, 166–68
Lincoln, Abraham, 177
Linux, 81
List, John, xvi
loans:
punitive finance practices and, 300–301, 304
see also mortgages
lobbyists, congressional restrictions on, 205
Loewenstein, George, 21, 26, 30–31, 39, 89,, 320–21, 337–38
Logic of Life, The (Harford), 291–92
Lorenz, Konrad, 25, 43
loss:
aversion to, 134, 137, 138, 148–49
fear of, 54–55
Lost World, The (Crichton), 317–18
loyalty:
in business-customer relations, 78–79
of employees to their companies, 80–84
M
Macbeth (Shakespeare), 188
Madoff, Bernard, 291
Maier, Steve, 312-13
major, college students’ choice of, 141–42
manufacturer’s suggested retail price (MSRP), 30, 45
marketing:
high price tag and, 24–25
hype of, related to satisfaction derived from product, 186–87, 190–91
relativity and, 1–6, 9–10
“trial” promotions and, 136–37
zero cost and, 49–50
market norms, 67–88
companies’ relations with their customers and, 78–80
companies’ relations with their employees and, 80–84, 252–54
doing away with, 86–88
education and, 85
mere mention of money and, 73–75
mixing signals of social norms and, 69, 73–74, 75–77, 79, 214, 250–52
reducing emphasis on, 88
social norms kept separate from, 67–69, 75–76, 77–78
willingness to risk life and, 84
working for gifts and, 72–74
working under social norms vs., 69–72
Maryland Judicial Task Force, 210
Mazar, Nina, 196–97, 206, 219–20, 224, 320–21, 338
McClure, Sam, 166–68
Mead, Nicole, 74–75
medical benefits, recent cuts in, 82
medical care, see health care
medical profession:
conflicts of interest and, 293, 295
decline of ethics and values in, 210
salaries of, as practicing physicians vs. Wall Street advisers, 18–19
memory of previous prices, price changes and, 46–47
Mencken, H. L., 17–18
menu pricing, in restaurants, 4
Merrill Lynch, 280, 310
Mills, Judson, 68
mistakes, repeated, and failure to learn from experience, xxvii
Mitchell, Margaret, 150
MIT Sloan School of Management, 92
Mona Lisa (Leonardo), 274
money:
benefits of, 86
dishonesty with nonmonetary objects vs., 217–30
doing away with, 86–88
impact of mere mention of, 73–75
switch away from, to electronic instruments, 230
Montague, Latané, 166–68
Montague, Read, 166–68
moral benchmarks, dishonesty curbed by contemplation of, 206–9, 213
morality:
in “cold” vs. aroused state, 94–95, 96, 97
see also cheating on tests; dishonesty; honesty
mortgage-backed securities, 279–80, 294–95, 305
mortgages, 60
calculating optimal amount of, 283–90
government regulation of, 290
interest-only, 287–88
subprime, 303
Moseley, J. B., 174–76
movie reviews, enjoyment affected by, 166
mummy powder, 177–78
museums, free-entrance days or times at, 61
music, expectations and, 270–73, 274
N
need for uniqueness, ordering food or drinks and, 237–38
New England Journal of Medicine, 175
news reports, on financial meltdown, 315–16
New York Times, 4, 18, 21, 122–23
Niskanen, William A., 205–6
“No Child Left Behind” policy, 85
Norton, Mike, 135
nucleus accumbens, 203, 208
O
oaths, honesty and, 208–9, 211–13, 215
Obama, Barack, 323–24
Ofek, Elie, 159–60, 338
online auctions, 135–36
open-source software, 81
options, 139–53
abundance of, in modern democracy, 148
aversion to loss and, 148–49
college students’ choice of major and, 141–42
consciously closing, 150–51
“door game” and, 143–48
downside of, 140
important, vanishing of, 149
romantic relationships and, 142, 148, 150
sale prices and, 148–49
similar, choosing between, 151–53
Xiang Yu’s story and, 139–40
ordering food or drinks, 231–38
enjoyment of choices and, 232, 235–36, 237, 238
need for uniqueness and, 237–38
out loud vs. in private, 231–32, 233–36, 237–38
strategy for, 238
Orhun, Yesim, 136, 338–39
osteoarthritis, arthroscopic knee surgery and, 174–76
outsourcing, 81–82
overdraft fees, 301–2
ownership, 127–38
aversion to loss and, 134, 137, 138
Duke University basketball tickets and, 127–33
of points of view, 137–38
pride of, putting work into something and, 135
“trial” promotions and, 136–37
value in owner’s eyes increased by, 129–35, 265–69
virtual, online auctions and, 135–36
P
pain, experience of, xxiii–xxiv, xxvi–xxvii
expectation and, 179
painkillers:
epidural, during childbirth, 103–4
price and efficacy of, 180–84
parking illegally, theory of rational crime and, 291–92
passion:
underprediction of effect of, 98–99
see also arousal
patient compliance, 260–64
Paulson, Henry, 304–6, 310, 311–12
pay, see compensation; salaries
payday loans, 304
paying, pain of, restaurant meals with friends and, 248–50
pearls, 23–25
black, demand for, 24–25, 26
Pennebaker, James, 315, 316
Pepsi, taste tests of Coke and, 166–68
perception:
expectations and, 155–72, 293–94; see also expectations; taste
inherent biases in, xxvi–xxvii
Perfectly Legal (Johnston), 204
personal lives:
arbitrary coherence and, 43–45
separation of social and market norms and, 67–69, 75–76, 77–78
petroleum geologists, decline of ethics and values among, 211
pharmaceuticals, 210
conflicts of interest and, 293, 295
marketing hype and efficacy of, 190–91
price and efficacy of, 180–84, 190
Pittinsky, Todd, 169
Pittman, Bob, 60
placebo effect, 173–94
Airborne and, 275–78
author’s experience with Jobst suit and, 192–94
conditioning and, 179
energy drinks and, 184–87
faith in drug, procedure, or caregiver and, 179
Gerbi’s worm secretions and, 177
knowingly treating patients with, 187–90
marketing hype and, 186–87, 190–91
moral dilemmas in experiments on, 191, 194
mummy powder and, 177–78
origin of term, 176–77
pharmaceuticals and, 180–84, 190
power of suggestion and, 178–79
price and, 176, 180–87, 190
royal touch and, 188
surgical procedures and, 173–76, 178, 191
planning fallacy, 297–304
automobile insurance and, 299–301
FREE! checking and, 301–2
saving for a rainy day and, 303–4
pleasure, spending decisions and, 44
pleasure centers in brain, 168, 308
poetry reading experiment, 40–42
points of view:
expectations and, 155–57
ownership of, 137–38
Pope, Alexander, 275
pork-barrel spending, 204–5
positivity bias, 268–69
Prelec, Drazen, 26, 27, 39, 339
presentation, taste of food and, 165
preventive medicine, 110–11, 117–21
see also health care
prices:
anchoring and, 25–36, 45–47
arbitrary coherence and, 26–30, 45–47
demand and changes in, 46–47
high, desirability of a product and, 24–25
of housing, 30–31
implied difference in quality and, 180
manufacturer’s suggested retail (MSRP), 30, 45
placebo effect and, 176, 180–87, 190
supply and demand and, 45–46
switching from old to new anchors and, 31–36
upscale coffee ambience and, 39, 159–60
see also FREE!
procrastination, 109–26, 255
effectiveness of external voice and, 116–17, 118
health care and, 110–11, 117–21
recognizing and admitting problem with, 115–16
root of word, 111
routine automobile maintenance and, 119–21
setting one’s own deadlines and, 112–16, 117, 118–19
of university students, 111–16
productivity, social norms in workplace and, 80–84
profession, origin of word, 209
professional ethics, 215
attempts at improvement of, 213–14
decline in, 209–11
professional oaths, 208–9, 213
punishment:
immediate, desired behavior resulting in, 263
unpredictable, learned helplessness and, 312–16
purchases, price imprinting and, 30
Q
Qin (Ch’in) dynasty, 139
R
Rapp, Gregg, 4
rational economic model, xii–xvii, xxix, xxx, 239–40, 279, 281–82, 307,
318, 324–29
reciprocity, social vs. market norms and, 68–69
regulation, 325
of banking and financial industries, 296
mortgage limits and, 290
self-destructive behaviors restrained by, 118, 290
reinforcement schedules, fixed vs. variable, 257–59
overcoming e-mail addiction and, 259
relativity, 1–21
bread-making machines and, 14–15
changing focus from narrow to wide and, 19–20
compensation of bankers and, 324
controlling circles of comparison and, 19, 21
dating and, 10–14, 15, 245–46
dealing with problem of, 19–21
decoy effect and, 5–6, 8–15, 245–46
Economist subscription offers and, 1–3, 4–6, 9–10
house purchases and, 8–9, 19
jealousy and envy springing from, 15–19
prices for various products and, 29
restaurant menu pricing and, 4
salaries and, 16–19
television pricing and, 3–4
tendency to compare things that are easily comparable and, 8–9
traveling and, 246–47
vacation planning and, 10
visual demonstration of, 7
relocation, anchoring to housing prices and, 30–31
restaurants:
expectations and, 269–70
FREE! approach to dining with friends in, 248–50
with lines to get in, 36, 37
menu pricing of, 4
ordering in, 231–38; see also ordering food or drinks
social norms of dating and, 75–76
retirement, saving for, xiii
from perspective of standard economics vs. behavioral economics, 241
revenge, 307–9
as enforcement mechanism, 309
pleasure of, 307–8
rewards:
delayed gratification and, 261–64
financial, job performance and, 320–21
reinforcement schedules and, 257–58
unpredictable, learned helplessness and, 312–16
see also bonuses
robberies, 195
romantic relationships:
options in, 142, 148, 150
separation of social and market norms and, 69, 75–76, 250
see also dating
Roth, Al, xviii
royal touch, 188
Rustichini, Aldo, 76–77
S
safe sex, 100–102
and willingness to engage in unprotected sex when aroused, 89, 95, 96–
97, 99, 107
salaries, 16–19, 88
of bankers, calculating right amount of, 319–24
of CEOs, 16–17, 18, 310
co-workers’ comparisons of, 16
excessive, erosion of public trust and, 310, 311
executive, public outcry over, 306, 310, 311, 319–20
happiness and, 17–18
and move from hourly rates to monthly pay, 80
performance-based, in education, 85
relinquishing dreams for increase in, 18–19
“save more tomorrow” mechanism and, 242
willingness to risk life and, 84
see also bonuses; compensation
sale prices, 148–49
relativity and, 19–20
Sarbanes-Oxley Act of 2002, 204, 205–6
savings, 109–11
decline in rate of, 109–10
defeating procrastination in, 122–26
401(k)s and, xiii
planning fallacy and, 303–4
for retirement, from perspective of standard economics vs. behavioral
economics, 241
“save more tomorrow” mechanism and, 242
self-control credit card and, 123–26
Sawyer, Tom, 24–25, 39–40, 42–43
Schmalensee, Richard, 92
schools:
soda machines at, 204
see also education
second price auctions, 28n
Securities and Exchange Commission (SEC), 205
self-control, 109–26, 255–65
credit cards and, 123–26
decline in savings rate and, 109–10
e-mail and, 255–59
effectiveness of external voice and, 116–17
patient compliance and, 260–64
procrastination of university students and, 111–16
self-destructive behaviors, 264–65
government regulation and, 118
self-herding, 37–38
self-reliance, 68
thinking about money and, 74–75
self-shame, debt blogging and, 122–23
Seligman, Martin, 312-13
sensei (martial arts master), offering pay to, 71–72
Seven Pounds, 255
sex:
and likelihood of engaging in immoral behaviors, 94–95, 96, 97, 107
and preferences in “cold” vs. aroused state, 89, 94, 96, 97, 106
safe vs. unprotected, 89, 95, 96–97, 99, 100–102, 107
in social vs. market context, 68–69
as taboo subject for study, 92
sex education, 101
sexual arousal:
decision making under, 89–102, 106–8
see also arousal
Shakespeare, William, xxviii–xxix, 188, 232, 239–40
Shampanier, Kristina, 51, 339
Shin, Jiwoong, 142–43, 147, 339–40
Shin, Margaret, 169
shipping, FREE! on orders over a certain amount, 58–59, 62
Shiv, Baba, 181, 340
Shultz, Howard, 39
Sicherman, Nachum, 71–72
Silva, Jose, 114
Simonshon, Uri, 30–31
Sinclair, Upton, 227
Skilling, Jeffrey, 219, 222–23
Skinner, B. F., 257–58
Skype account of author, theft from, 224–26
Smart Cards, 124
Smith, Adam, xv, xxx, 133, 138, 202, 214, 281, 282
SoBe Adrenaline Rush experiments, 184–87
social norms, 67–88, 250–54
Burning Man and, 86–88
companies’ relations with their customers and, 78–80
companies’ relations with their employees and, 80–84, 252–54
education and, 84–86
friendly requests and, 68, 70–71, 73–74, 77–78
gifts in social situations and, 250–52
giving greater emphasis to, 87–88
market norms kept separate from, 67–69, 75–76, 77–78
mere mention of money and, 73–75
mixing signals of market norms and, 69, 73–74, 75–77, 79, 214, 250–
52
offering to pay for Thanksgiving and, 67–68, 76
return to, once market norm is removed, 77
romantic relationships and, 69, 75–76, 250
willingness to risk life and, 84
working for gifts and, 72–74
working under market norms vs., 69–72
social policy, power of FREE! and, 62–63
social pressure, job performance and, 322
Socrates, 44
sounds, annoying, anchoring experiments with, 31–36
sports:
conflicts of interest and, 293–94
expectations and perception of, 155–56, 171, 293–94
Starbucks, 37–39
moving anchor from Dunkin’ Donuts to, 37–39
moving up to higher price bracket at, 38, 47
State Farm, 78
stereotypes, 168–71
behavior of people not part of stereotyped group affected by, 169–71
behavior of stereotyped people affected by, 168
purpose of, 168
Stevenson, Robert Louis, 98
stock incentives, 323
stock market, 283
current mistrust of, 309
financial meltdown and, xvii-xix, 280–81, 309, 314
fuzzy signifiers and, 295
learned helplessness and, 314
rational economic model and, xii–xxix
single global market and, 316, 318–19
striatum, 308
subprime mortgages, 303
subprime mortgage crisis and its consequences, 279–329
see also financial meltdown of 2008
subscription pricing, 1–3, 4–6, 9–10
superego, 203–4, 208
supply and demand:
memory of previous prices and, 46–47
in standard economic framework, 45–46
surgery, 210
placebo effect and, 173–76, 178, 191
price and efficacy of, 176
Sutton, Willie, 230
Sweeney, Dennis M., 213
T
taste, 157–68
of beer, expectations and, 157–59, 161–62, 163–64, 172
of coffee, upscale ambience and, 159–60
of Coke vs. Pepsi, 166–68
depth of description in caterers’ offerings and, 164
exotic-sounding ingredients and, 164–65
presentation and, 165
wineglasses and, 165
taxes, 204
cheating on, 196
demand impacted by, 46–47
teenagers:
safe driving and, 102–3
sexual activity of, 90, 100–102
television:
cable, “trial” promotions and, 136–37
emotional coverage of financial meltdown on, 315–16
relativity and displays of, 3–4
Ten Commandments, 15–16, 207–9, 213, 216
tests:
standardized, 85
see also cheating on tests
Thain, John, 310
Thaler, Dick, 129, 242
Thanksgiving, offering to pay for, 67–68, 76
Theory of Moral Sentiments, The (Smith), 281
30-day money-back guarantees, 137
Thoreau, Henry David, 121
Three Men in a Boat (Jerome), 273–74
Tomlin, Damon, 166–68
Traveling, relativity and, 246–47
Treasury Department, U.S., 306
“trial” promotions, 136–37
Troubled Assets Relief Program (TARP), 280, 304–6, 310–11
trust, 304–11
erosion of, in financial meltdown, 304–6, 309–10
rebuilding of, 310–11
revenge and, 307–9
Trust Game, 306–8
Tversky, Amos, 19
Twain, Mark, 24–25, 39–40, 42–43
two-cycle billing, 228
U
unexpected events, planning fallacy and, 297–304
uniqueness, need for, 237–38
university students:
choice of major by, 141–42
procrastination among, 111–16
V
vacation planning, 10
Veladone-Rx experiment, 181–84
ventromedial prefrontal cortex (VMPFC), 167
Vickrey, William, 28n
violence, political points of view and, 156–57
virtual ownership, online auctions and, 135–36
Vohs, Kathleen, 74–75
volunteering, 71
vulnerabilities, awareness of, 44
W
Waber, Rebecca, 181, 182–83, 340
Wachovia, 280, 310
wardrobing, 196, 223
Washington Mutual, 280, 310
Washington Post, 270–71
Weingarten, Gene, 270–71
Weisberg, Ron, xxv
Wells Fargo, 280
Wertenbroch, Klaus, 112, 340
Whitman, Walt, 40–41
“Whoever you are holding me now in hand” (Whitman), 40–41
Wilde, Oscar, 255
Williams-Sonoma, 14–15
wineglasses, taste affected by, 165
wine prices, 26–27, 29
Winston, Harry, 24
working:
activity transformed into, by compensation, 39–43
blurring of partition between leisure and, 80, 81
for free, 71
for gifts vs. payment, 72–73
under nonmonetary social norms vs. market norms, 69–72
Wray, Nelda, 175
X
Xiang Yu, 139–40
Y
Young, Jim, 21
Z
zero, 49–63
on food labels, 61–62
history of, 50
see also FREE!
Zillow.com, 265
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* For more on what happened, see the Introduction.
* One of the main lessons of finance is that diversification is very important. When we work for a company, we already have a lot
invested in it, in terms of our salary, so investing even more in the same company is very bad in terms of diversification.
* I don’t think that there was any causal connection between the publication of Predictably Irrational and the financial meltdown,
but you must admit that the timing is curious.
* As a convention in this book, every time I mention that conditions are different from each other, it is always a statistically
significant difference. I refer the interested reader to the end of this book for a list of the original academic papers and additional
readings.
* Now that you know this fact, and assuming that you are not married, take this into account when you search for a soul mate.
Look for someone whose sibling is married to a productivity-challenged individual.
* Of course, physicians have other problems as well, including insurance forms, bureaucracy, and threats of lawsuits for
malpractice.
* The price the highest bidder paid for an item was based not on his own bid, but on that of the second highest bidder. This is
called a second price auction. William Vickrey received the Nobel prize in economics for demonstrating that this type of auction
creates the conditions where it is in people’s best interest to bid the maximum amount they are willing to pay for each item (this is
also the general logic behind the auction system on eBay).
† When I’ve tried this kind of experiment on executives and managers (at the MIT Executive Education Program), I’ve had
similar success making their social security numbers influence the prices they were willing to pay for chocolates, books, and other
products.
* The result was not due to wealth, taxes, or other financial reasons.
* To ensure that the bids we got were indeed the lowest prices for which the participants would listen to the annoying sounds, we
used the “Becker-DeGroot-Marschak procedure.” This is an auction-like procedure, in which each of the participants bids against
a price randomly drawn by a computer.
* We will return to this astute observation in the chapter on social and market norms (Chapter 4).
* I am not claiming that spending money on a wonderful cup of coffee every day, or even a few times a day, is necessarily a bad
decision—I am saying only that we should question our decisions.
* We posted the prices so that they were visible only when people got close to the table. We did this because we wanted to make
sure that we did not attract different types of people in the different conditions—avoiding what is called self-selection.
* For a more detailed account of how a rational consumer should make decisions in these cases, see the appendix to this chapter.
* Similar to the other experiments, when we increased the cost of both certificates by $1, making the $10 certificate cost $1 and
the $20 certificate cost $8, the majority jumped for the $20 certificate.
* This general procedure is called priming, and the unscrambling task is used to get participants to think about a particular topic—
without direct instructions to do so.
* For a complete lists of the questions we asked, see the appendix to this chapter.
* These results apply most directly to sexual arousal and its influence on who we are; but we can also assume that other emotional
states (anger, hunger, excitement, jealousy, and so on) work in similar ways, making us strangers to ourselves.
* The architecture department at MIT is in fact very good.
* I’m often surprised by how much people confide in me. I think it’s partly due to my scars, and to the obvious fact that I’ve been
through substantial trauma. On the other hand, what I would like to believe is that people simply recognize my unique insight into
the human psyche, and thus seek my advice. Either way, I learn a lot from the stories people share with me.
† Matrimony is a social device that would seem to force individuals to shut down their alternative options, but, as we know, it too
doesn’t always work.
* The French logician and philosopher Jean Buridan’s commentaries on Aristotle’s theory of action were the impetus of this story,
known as “Buridan’s ass.”
* We were also hoping to measure the amount of vinegar students added to the beer. But everyone who added vinegar added the
exact amount specified in the recipe.
* There is a nice T-shirt on sale at the MIT bookstore that reads “Harvard: Because not everyone can get into MIT.”
* We do understand quite precisely how a placebo works in the domain of pain, and this is why we selected the painkiller as our
object of investigation. But other placebo effects are not as well understood.
* As claimed by the Harvard Business School.
† We often conduct our experiments at Harvard, not because we think its students are different from MIT’s students, but because it
has wonderful facilities and the faculty members are very generous in letting us use them.
* The distribution of the number of correctly solved questions remained the same across all four conditions, but with a mean shift
when the participants could cheat.
* Do you know the Ten Commandments? If you’d like to test yourself, write them down and compare your list with the list at the
end of this chapter. To be sure you have them right, don’t just say them to yourself; write them down.
† Can the Ten Commandments raise one’s math scores? We used the same two memory tasks with the control condition to test that
premise. The performance in the control condition was the same regardless of the type of memory task. So the Commandments do
not raise math scores.
* There are several versions of the Ten Commandments. I randomly chose this Roman Catholic version.
* Theoretically, it is possible that some people solved all the problems. But since no one in the control conditions solved more
than 10 problems, the likelihood that four of our participants truly solved 20 is very, very low. For this reason we assumed that
they cheated.
* When it comes to credit cards, the appeal of free! is further enhanced because most of us are overoptimistic about our financial
future, and overconfident about our ability to always pay our bills on time.
* I teach about 200 graduate students each year, and in early 2009 I asked for a show of hands to the question of how many
students had ever used e-mail or text messaging while driving. All but three raised their hands (and one of the three who did not
was visually impaired!).
* I did experience such a negative association with eggs. Soon after I was injured, the doctors fed me thirty raw eggs daily through
a feeding tube. To this day, even the smell of eggs turns me off.
* In fact, goose liver pâté is basically equal parts goose liver and butter, with some wine and spices.
* The music included Bach’s “Chaconne,” Franz Schubert’s “Ave Maria,” Manuel Ponce”s “Estrellita,” a piece by Jules Massenet,
a Bach gavotte, and a reprise of “Chaconne.”
* I suspect that Airborne incorporates many elements to maximize the placebo effect (bubbles, foaming, medicinal color,
exaggerated claims, and so on) and, as a consequence, had a real beneficial impact on my immune system and my ability to fight
off illnesses. Placebos are all about self-fulfilling prophecies, and Airborne is one of the best.
* An interest-only mortgage is a loan that works as follows: over the life of the loan, the borrower is required to pay only the
interest, and as a result, at the end of the loan period the balance is the same as the initial loan. For example, if you took a 10-year
loan of $300,000 at a 6.25 percent interest rate, a regular mortgage would cost you $3,368.40 a month, whereas an interest-only
mortgage for the same amount and at the same interest rate would cost you only $1,562.50 a month. Of course, if you took the
regular mortgage, you would owe nothing by the end of the 10 years and would also own your home, but if you took the interest-
only mortgage, you would still owe $300,000 (at which point you will take on a new mortgage, and so on).
* For a helpful perspective, see M. P. Dunleavy, “Making Frugality a Habit,” New York Times (January 9, 2009).
* Since 1990, the number of places in the United States that give “payday” loans has grown faster than the rate at which Starbucks
shops have opened.