Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions 

by Dan Ariely

You have 231 highlighted passages

You have 46 notes

Last annotated on January 25, 2015

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

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.  Read more at location 142

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.  Read more at location 151

Within the domain of science, these assumptions about our ability for perfect reasoning have found their way into economics. In economics, this very basic idea, called rationality, provides the foundation for economic theories, predictions, and recommendations. From this perspective, and to the extent that we all believe in human rationality, we are all economists.  Read more at location 171

there is a large difference between a deep sense of admiration and the assumption that our reasoning abilities are perfect. In fact, this book is about human irrationality—about our distance from perfection.  Read more at location 179

My further observation is that we are not only irrational, but predictably irrational—that our irrationality happens the same way, again and again.  Read more at location 183

What if we make a mistake and do something irrational? Here, too, traditional economics has an answer: “market forces” will sweep down on us and swiftly set us back on the path of righteousness and rationality. On the basis of these assumptions, in fact, generations of economists since Adam Smith have been able to develop far-reaching conclusions about everything from taxation and health-care policies to the pricing of goods and services. But, as you will see in this book, we are really far less rational than standard economic theory assumes. Moreover, these irrational behaviors of ours are neither random nor senseless. They are systematic, and since we repeat them again and again, predictable.  Read more at location 188

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.  Read more at location 199

CHAPTER 1

The Truth about Relativity 

Why Everything Is Relative—Even When It Shouldn’t Be 

****  something important about human behavior: humans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly. (For instance, we don’t know how much a six-cylinder car is worth, but we can assume it’s more expensive than the four-cylinder model.)  Read more at location 227

Let me start with a fundamental observation: most people don’t know what they want unless they see it in context. We don’t know what kind of racing bike we want—until we see a champ in the Tour de France ratcheting the gears on a particular model. We don’t know what kind of speaker system we like—until we hear a set of speakers that sounds better than the previous one. We don’t even know what we want to do with our lives—until we find a relative or a friend who is doing just what we think we should be doing. Everything is relative, and that’s the point.  Read more at location 236

given three choices, most people will take the middle choice  Read more at location 250

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.  Read more at location 255

suppose that I removed the decoy 

...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.  Read more at location 270

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.  Read more at location 280

****  (Note:  heuristics)  RELATIVITY IS (RELATIVELY) easy to understand. But there’s one aspect of relativity that consistently trips us up. It’s this: we not only tend to compare things with one another but also tend to focus on comparing things that are easily comparable—and avoid comparing things that cannot be compared easily.  Read more at location 290

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? 

...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.  Read more at location 361

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.  Read more at location 366

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.  Read more at location 377

****  RELATIVITY HELPS US make decisions in life. But it can also make us downright miserable. Why? Because jealousy and envy spring from comparing our lot in life with that of others.  Read more at location 383

It was for good reason, after all, that the Ten Commandments admonished, “Neither shall you desire your neighbor’s house nor field, or male or female slave, or donkey or anything that belongs to your neighbor.” This might just be the toughest commandment to follow, considering that by our very nature we are wired to compare. Modern life makes this weakness even more pronounced.  Read more at location 385

in 1993, federal securities regulators forced companies, for the first time, to reveal details about the pay and perks of their top executives. The idea was that once pay was in the open, boards would be reluctant to give executives outrageous salaries and benefits. This, it was hoped, would stop the rise in executive compensation, which neither regulation, legislation, nor shareholder pressure had been able to stop. And indeed, it needed to stop: in 1976 the average CEO was paid 36 times as much as the average worker. By 1993, the average CEO was paid 131 times as much. But guess what happened. Once salaries became public information, the media regularly ran special stories ranking CEOs by pay. Rather than suppressing the executive perks, the publicity had CEOs in America comparing their pay with that of everyone else. In response, executives’ salaries skyrocketed. The trend was further “helped” by compensation consulting firms (scathingly dubbed “Ratchet, Ratchet, and Bingo” by the investor Warren Buffett) that advised their CEO clients to demand outrageous raises. The result? Now the average CEO makes about 369 times as much as the average worker—about three times the salary before executive compensation went public.  Read more at location 397

It has been shown repeatedly that the link between amount of salary and happiness is not as strong as one would expect it to be (in fact, it is rather weak). Studies even find that countries with the “happiest” people are not among those with the highest personal income. Yet we keep pushing toward a higher salary. Much of that can be blamed on sheer envy. As H. L. Mencken, the twentieth-century journalist, satirist, social critic, cynic, and freethinker noted, a man’s satisfaction with his salary depends on (are you ready for this?) whether he makes more than his wife’s sister’s husband. Why the wife’s sister’s husband? Because (and I have a feeling that Mencken’s wife kept him fully informed of her sister’s husband’s salary) this is a comparison that is salient and readily available.*  Read more at location 411

The only question you should ask yourself in these cases is whether the trip across town, and the 15 extra minutes it would take, is worth the extra $7 you would save. Whether the amount from which this $7 will be saved is $10 or $10,000 should be irrelevant. This is the problem of relativity—we look at our decisions in a relative way and compare them locally to the available alternative. We compare the relative advantage of the cheap pen with the expensive one, and this contrast makes it obvious to us that we should spend the extra time to save the $7. At the same time, the relative advantage of the cheaper suit is very small, so we spend the extra $7. This is also why it is so easy for a person to add $200 to a $5,000 catering bill for a soup entrée, when the same person will clip coupons to save 25 cents on a one-dollar can of condensed soup.  Read more at location 442

That’s a lesson we can all learn: the more we have, the more we want. And the only cure is to break the cycle of relativity.  Read more at location 461

Understand that relativity is everywhere, and that we view everything through its lens—rose-colored or otherwise.  Read more at location 490

CHAPTER 2

The Fallacy of Supply and Demand 

Why the Price of Pearls—and Everything Else— Is Up in the Air 

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.”  Read more at location 516

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? 

...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.  Read more at location 526

****  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”).  Read more at location 541

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).  Read more at location 563

****  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).  Read more at location 576

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.  Read more at location 582

We wanted to find out whether the first prices that we suggested (10 cents and 90 cents) had served as an anchor. And indeed they had. Those who first faced the hypothetical decision about whether to listen to the sound for 10 cents needed much less money to be willing to listen to this sound again (33 cents on average) relative to those who first faced the hypothetical decision about whether to listen to the sound for 90 cents—this second group demanded more than twice the compensation (73 cents on average) for the same annoying experience.  Read more at location 627

although both groups had been equally exposed to the suggested 50 cents, as their focal anchoring response (to “Hypothetically, would you listen to this sound again for 50 cents?”), the first anchor in this annoying sound category (which was 10 cents for some and 90 cents for others) predominated.  Read more at location 641

We call this type of behavior herding. It happens when we assume that something is good (or bad) on the basis of other people’s previous behavior, and our own actions follow suit. But there’s also another kind of herding, one that we call self-herding. This happens when we believe something is good (or bad) on the basis of our own previous behavior.  Read more at location 669

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.  Read more at location 690

if we were previously anchored to the prices at Dunkin’ Donuts, how did we move our anchor to Starbucks? This is where it gets really interesting. 

...Starbucks did everything in its power, in other words, to make the experience feel different—so different that we would not use the prices at Dunkin’ Donuts as an anchor, but instead would be open to the new anchor that Starbucks was preparing for us. And that, to a great extent, is how Starbucks succeeded.  Read more at location 703

And now to the results (drumroll, please). Those who answered the hypothetical question about paying me were indeed willing to pay me for the privilege. They offered, on average, to pay me about a dollar for the short poetry reading, about two dollars for the medium poetry reading, and a bit more than three dollars for the long poetry reading. (Maybe I could make a living outside academe after all.) But, what about those who were anchored to the thought of being paid (rather than paying me)? As you might expect, they demanded payment: on average, they wanted $1.30 to listen to the short poetry reading, $2.70 to listen to the medium poetry reading, and $4.80 to endure the long poetry reading. Much like Tom Sawyer, then, I was able to take an ambiguous experience (and if you could hear me recite poetry, you would understand just how ambiguous this experience is) and arbitrarily make it into a pleasurable or painful experience. Neither group of students knew whether my poetry reading was of the quality that is worth paying for or of the quality that is worth listening to only if one is being financially compensated for the experience (they did not know if it is pleasurable or painful). But once the first impression had been formed (that they would pay me or that I would pay them), the die was cast and the anchor set.  Read more at location 743

****  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?  Read more at location 765

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.  Read more at location 778

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.  Read more at location 786

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.  Read more at location 799

ANOTHER IMPLICATION OF arbitrary coherence has to do with the claimed benefits of the free market and free trade. The basic idea of the free market is that if I have something that you value more than I do—let’s say a sofa—trading this item will benefit both of us. This means that the mutual benefit of trading rests on the assumption that all the players in the market know the value of what they have and the value of the things they are considering getting from the trade. But if our choices are often affected by random initial anchors, as we observed in our experiments, the choices and trades we make are not necessarily going to be an accurate reflection of the real pleasure or utility we derive from those products.  Read more at location 819

****  One of the lessons from Chapter 2 was that we generally believe we have precise and well-articulated preferences, but in reality, we only think that we know what we want.  Read more at location 838

In the end, following our gut feelings and rationalizing them after the fact is not always bad. It can sometimes lead us to pick a satisfactory outcome or, at the very least, prevent us from ending up with a car we really don’t want.  Read more at location 873

CHAPTER 3

The Cost of Zero Cost 

Why We Often Pay Too Much When We Pay Nothing 

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.  Read more at location 883

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.  Read more at location 891

When we set the price of a Lindt truffle at 15 cents and a Kiss at one cent, we were not surprised to find that our customers acted with a good deal of rationality: they compared the price and quality of the Kiss with the price and quality of the truffle, and then made their choice. About 73 percent of them chose the truffle and 27 percent chose a Kiss. Now we decided to see how FREE! might change the situation. So we offered the Lindt truffle for 14 cents and the Kisses free. 

...But what a difference FREE! made. The humble Hershey’s Kiss became a big favorite. Some 69 percent of our customers (up from 27 percent before) chose the FREE! Kiss, giving up the opportunity to get the Lindt truffle for a very good price. Meanwhile, the Lindt truffle took a tumble; customers choosing it decreased from 73 to 31 percent.  Read more at location 918

The critical issue arises when FREE! becomes a struggle between a free item and another item—a struggle in which the presence of FREE! leads us to make a bad decision.  Read more at location 923

THIS CONCLUSION, INCIDENTALLY, remained the same in other experiments as well. In one case we priced the Hershey’s Kiss at two cents, one cent, and zero cents, while pricing the truffle correspondingly at 27 cents, 26 cents, and 25 cents. We did this to see if discounting the Kiss from two cents to one cent and the truffle from 27 cents to 26 cents would make a difference in the proportion of buyers for each. It didn’t. But, once again, when we lowered the price of the Kiss to free, the reaction was dramatic. The shoppers overwhelmingly demanded the Kisses.  Read more at location 939

****  I believe the answer is this. Most transactions have an upside and a downside, but when something is FREE! we forget the downside. FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is. Why? I think it’s because humans are intrinsically afraid of loss. The real allure of FREE! is tied to this fear. There’s no visible possibility of loss when we choose a FREE! item (it’s free). But suppose we choose the item that’s not free. Uh-oh, now there’s a risk of having made a poor decision—the possibility of a loss. And so, given the choice, we go for what is free.  Read more at location 950

Instead of offering FREE! shipping on orders over a certain amount, the French division priced the shipping for those orders at one franc. Just one franc—about 20 cents. This doesn’t seem very different from FREE! but it was. In fact, when Amazon changed the promotion in France to include free shipping, France joined all the other countries in a dramatic sales increase. In other words, whereas shipping for one franc—a real bargain—was virtually ignored by the French, FREE! shipping caused an enthusiastic response.  Read more at location 1014

WHEN CHOOSING BETWEEN two products, then, we often overreact to the free one. We might opt for a FREE! checking account (with no benefits attached) rather than one that costs five dollars a month. But if the five-dollar checking account includes free traveler’s checks, online billing, etc., and the FREE! one doesn’t, we may end up spending more for this package of services with the FREE! account than with the five-dollar account. Similarly, we might choose a mortgage with no closing costs, but with interest rates and fees that are off the wall; and we might get a product we don’t really want simply because it comes with a free gift.  Read more at location 1025

****  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.  Read more at location 1041

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.”  Read more at location 1048

****  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!  Read more at location 1056

one person should pay the entire bill, and that the people involved should take turns paying over time. Here is the logic: When we pay—regardless of the amount of money—we feel some psychological pain, which social scientists call the “pain of paying.” This is the unpleasantness associated with giving up our hard-earned cash, regardless of the circumstances. It turns out that the pain of paying has two interesting features. First, and most obviously, when we pay nothing (for example, when someone else foots the bill) we don’t feel any pain of paying. Second, and less obviously, the pain of paying is relatively insensitive to the amount that we pay.  Read more at location 1078

****  This diminishing sensitivity to the pain of paying means that the first dollar we pay will cause us the highest pain, the second dollar will cause us less, and so on, until we feel just a tiny twinge for, say, the forty-seventh dollar.  Read more at location 1085

CHAPTER 4

The Cost of Social Norms 

Why We Are Happy to Do Things, but Not When We Are Paid to Do Them 

Social norms are wrapped up in our social nature and our need for community. They are usually warm and fuzzy. Instant paybacks 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.  Read more at location 1137

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.  Read more at location 1140

When social and market norms collide, trouble sets in.  Read more at location 1147

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.  Read more at location 1176

****  Because once market norms enter our considerations, the social norms depart.  Read more at location 1182

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.  Read more at location 1184

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.  Read more at location 1200

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.  Read more at location 1207

THESE RESULTS SHOW that for market norms to emerge, it is sufficient to mention money (even when no money changes hands). But, of course, market norms are not just about effort—they relate to a broad range of behaviors, including self-reliance, helping, and individualism.  Read more at location 1214

Overall, the participants in the “salary” group showed many of the characteristics of the market: they were more selfish and self-reliant; they wanted to spend more time alone; they were more likely to select tasks that required individual input rather than teamwork; and when they were deciding where they wanted to sit, they chose seats farther away from whomever they were told to work with. Indeed, just thinking about money makes us behave as most economists believe we behave—and less like the social animals we are in our daily lives.  Read more at location 1231

SO WE LIVE in two worlds: one characterized by social exchanges and the other characterized by market exchanges. And we apply different norms to these two kinds of relationships. Moreover, introducing market norms into social exchanges, as we have seen, violates the social norms and hurts the relationships. Once this type of mistake has been committed, recovering a social relationship is difficult.  Read more at location 1241

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.  Read more at location 1260

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.  Read more at location 1280

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.  Read more at location 1286

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. 

...Although some companies have been successful in creating social norms with their workers, the current obsession with short-term profits, outsourcing, and draconian cost cutting threatens to undermine it all. In a social exchange, after all, people believe that if something goes awry the other party will be there for them, to protect and help them. These beliefs are not spelled out in a contract, but they are general obligations to provide care and help in times of need. Again, companies cannot have it both ways. In particular, I am worried that the recent cuts we see in employees’ benefits—child care, pensions, flextime, exercise rooms, the cafeteria, family picnics, etc.—are likely to come at the expense of the social exchange and thus affect workers’ productivity. I am particularly worried that cuts and changes in medical benefits are likely to transform much of the employer-employee social relationship to a market relationship.  Read more at location 1315

My feeling so far is that standardized testing and performance-based salaries are likely to push education from social norms to market norms. The United States already spends more money per student than any other Western society. Would it be wise to add more money? The same consideration applies to testing: we are already testing very frequently, and more testing is unlikely to improve the quality of education. I suspect that one answer lies in the realm of social norms. As we learned in our experiments, cash will take you only so far—social norms are the forces that can make a difference in the long run. Instead of focusing the attention of the teachers, parents, and kids on test scores, salaries, and competition, it might be better to instill in all of us a sense of purpose, mission, and pride in education. To do this we certainly can’t take the path of market norms.  Read more at location 1359

****  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.  Read more at location 1374

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.  Read more at location 1388

for many people the workplace is not just a source of money but also a source of motivation and self-definition. Such feelings benefit both the workplace and the employee. Employers who can foster these feelings gain dedicated, motivated employees who think about solving job-related problems even after the workday is over. And employees who take pride in their work feel a sense of happiness and purpose. But in the same way that market norms may undermine social norms, it may be that market norms also erode the pride and meaning people get from the workplace (for example, when we pay schoolteachers according to their students’ performance on standardized tests).  Read more at location 1434

Both relationships (girlfriend and maid) end when Jerry claims that they’re through and, in the same breath, that she’s fired. What happened is that Jerry mixed two competing norms—social and market—before realizing that they cannot comfortably coexist. Romantic relationships, in both fiction and real life, can provide useful insights into a lot of areas in behavioral economics. But as we’ve already seen, they are particularly useful in helping us think about the strange combinations of social and market norms.  Read more at location 1468

CHAPTER 5

The Power of a Free Cookie 

How free Can Make Us Less Selfish 

TRADITIONAL ECONOMICS takes a very simple and straightforward view of the scene at Filene’s Basement when prices on wedding gowns are so dramatically reduced. When a Vera Wang gown is reduced from $10,000 to $249, the excitement (“demand,” in economic-speak) over the gown dramatically increases. More precisely, demand increases for two reasons. According to the first law of demand, it increases because more women are now in the market for designer gowns (they can now afford them). And according to the second law of demand, it increases because at these prices women might buy multiple units. This second law is less relevant for wedding gowns, where women presumably need just one, but central in cases where we need multiple units (cookies, sweaters, etc.). Still, even in the case of wedding dresses, multiple women have been sighted leaving Filene’s Basement with more than one gown. These two laws are the nuts and bolts of the standard economic rule of demand. (Admittedly, the Filene’s event isn’t just any occurrence of “increased demand.” It’s more like an all-out bridal battlefield.)  Read more at location 1506

the second law of demand, you’d assume that once the price drops from 1¢ to zero, each of the students who took candy would take more units. And since the number of students who stopped by was almost three times as large, you might expect that together these two forces of demand will make the total demand in our free condition much larger than the demand in the monetary condition. So how many more Starbursts did our students pick up when they were free? Trick question: They picked up fewer Starbursts! When the Starbursts cost a cent apiece, the average number of candies per customer was 3.5, but when the price went down to zero, the average went down to 1.1 per customer. The students limited themselves to a large degree when the candy was free. In fact, almost all the students applied a very simple social-norm rule in this situation—they politely took one and only one Starburst. This, of course, is the opposite of the second law of demand.  Read more at location 1565

****  What these results mean is that when price is not a part of the exchange, we become less selfish maximizers and start caring more about the welfare of others. We saw this demonstrated by the fact that when the price decreased to zero, customers restrained themselves and took far fewer units. So while the product (candy, in our case) was more attractive to more people, it also made people think more about others, care about them, and sacrifice their own desires for the benefit of others. As it turns out, we are caring social animals, but when the rules of the game involve money, this tendency is muted. THE RESULTS FROM our experiment also help explain one of the great mysteries in life: why, when we are dining out with friends, taking the last olive feels like such a big deal.  Read more at location 1575

Now I have eaten a lot of sushi in my life, and I can’t remember a time either when I was dining alone or when I got my own personal portion of sushi when I left anything on the plate. Somehow, when it’s just me who’s eating, I always manage to finish it all. But when the sushi is served in a large plate in the middle of the table, it just feels like taking the last one would be, well, a bit déclassé. “I really can’t eat any more,” I might say to my friends. “Go ahead. You take it.” What is this sushi magic? Simply put, the communal plate transforms the food into a shared resource, and once something is part of the social good, it leads us into the realm of social norms, and with that the rules for sharing with others.  Read more at location 1592

When we dropped the chocolate prices from 10¢ to 5¢, the predictions of both laws of demand were verified, and in total we saw an increase in demand of about 240 percent. Similarly, when the price went from 5¢ to 1¢, the predictions of both laws of demand were verified, and in total we saw an increase in demand of about 400 percent. But, as we saw in our first experiment when we reduced the price from 1¢ to free, the first law of demand was verified (more people stopped for chocolate) but the second law of demand was disconfirmed (the people who took chocolate took less not more), and in total, with more people taking less, we saw a decrease in demand of about 50 percent.  Read more at location 1607

The apparently voracious people in the monetary condition took an average of 30 truffles each. Those in the free condition took a polite average of 1.5. And how do you think effort-as-payment for truffles went over? This group fell somewhere in the middle, but closer to the free condition: our participants took an average of 8.6 truffles each in exchange for finding pairs of s’s (or an average of about 21 fewer than those in the monetary condition). These results suggest that effort falls somewhere in the middle of the range. It does not produce the same level of social self-consciousness that free does, but participants did seem to consider the implications of their actions on others when they decided how many truffles to take. We found that when effort is part of the equation, it manages to keep a large part of the social norms, though by no means all of it. As it turns out, the old maxim “Time is money”—or, in our case, “Effort is money”—is not exactly correct. Perhaps a more accurate reframing of our findings would be that effort is somewhere on the spectrum between market and social norms.  Read more at location 1636

we might want to consider the dark side of putting a price on pollution. If a company can be charged for spewing poisons into the environment, it might well decide, after a cost-benefit analysis, that it can go ahead and pollute a lot more. Once pollution is a market and companies pay for their right to pollute, morality and concern for the environment are nonissues. On the other hand, if pollution is something that cannot be purchased or traded, it would more naturally fall into the domain of social norms.  Read more at location 1657

CHAPTER 6

The Influence of Arousal 

Why Hot Is Much Hotter Than We Realize 

WITHIN THREE MONTHS, some fine Berkeley undergraduate students had undergone a variety of sessions in different orders. In the set of sessions conducted when they were in a cold, dispassionate state, they predicted what their sexual and moral decisions would be if they were aroused. In the set of sessions conducted when they were in a hot, aroused state, they also predicted their decisions—but this time, since they were actually in the grip of passion, they were presumably more aware of their preferences in that state. When the study was completed, the conclusions were consistent and clear—overwhelmingly clear, frighteningly clear. In every case, our bright young participants answered the questions very differently when they were aroused from when they were in a “cold” state. Across the 19 questions about sexual preferences, when Roy and all the other participants were aroused they predicted that their desire to engage in a variety of somewhat odd sexual activities would be nearly twice as high as (72 percent higher than) they had predicted when they were cold.  Read more at location 1773

The results showed that when Roy and the other participants were in a cold, rational, superego-driven state, they respected women; they were not particularly attracted to the odd sexual activities we asked them about; they always took the moral high ground; and they expected that they would always use a condom. They thought that they understood themselves, their preferences, and what actions they were capable of. But as it turned out, they completely underestimated their reactions. No matter how we looked at the numbers, it was clear that the magnitude of underprediction by the participants was substantial. Across the board, they revealed in their unaroused state that they themselves did not know what they were like once aroused. Prevention, protection, conservatism, and morality disappeared completely from the radar screen. They were simply unable to predict the degree to which passion would change them.  Read more at location 1786

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.  Read more at location 1808

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  Read more at location 1819

(Note: Self)  What did our experiments suggest? It may be that our models of human behavior need to be rethought. Perhaps there is no such thing as a fully integrated human being. We may, in fact, be an agglomeration of multiple selves. Although there is nothing much we can do to get our Dr. Jekyll to fully appreciate the strength of our Mr. Hyde, perhaps just being aware that we are prone to making the wrong decisions when gripped by intense emotion may help us, in some way, to apply our knowledge of our “Hyde” selves to our daily activities.  Read more at location 1888

CHAPTER 7

The Problem of Procrastination and Self-Control 

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

Go back 25 years, and double-digit savings rates were the norm. 

...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.  Read more at location 1978

****  (Note:  relates to neuro addictions like checking email, internet,etc)  IN CHAPTER 6 we discussed how emotions grab hold of us and make us view the world from a different perspective. Procrastination (from the Latin pro, meaning for; and cras, meaning tomorrow) is rooted in the same kind of problem. When we promise to save our money, we are in a cool state. When we promise to exercise and watch our diet, again we’re cool. But then the lava flow of hot emotion comes rushing in: just when we promise to save, we see a new car, a mountain bike, or a pair of shoes that we must have. Just when we plan to exercise regularly, we find a reason to sit all day in front of the television. And as for the diet? I’ll take that slice of chocolate cake and begin the diet in earnest tomorrow. Giving up on our long-term goals for immediate gratification, my friends, is procrastination.  Read more at location 1995

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,  Read more at location 2051

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.  Read more at location 2056

Thoreau wrote, “Simplify! Simplify!” And, indeed, simplification is one mark of real genius.  Read more at location 2139

I hope that you’re not that addicted to e-mail, but too many of us suffer from an unhealthy attachment to it. A recent Australian report found that workers spent an average of 14.5 hours, or more than two working days a week, checking, reading, arranging, deleting, and responding to e-mail.8 Add to this the rise of social networks and news groups, and you can most likely double the time we spend in virtual interaction and message management.  Read more at location 2213

Skinner found that the variable schedules were actually more motivating. The most telling result was that when the rewards ceased, the rats who were under the fixed schedules stopped working almost immediately, but those under the variable schedules kept working for a very long time. This variable schedule of reinforcement also works wonders for motivating people. It is the magic (or, more accurately, dark magic) that underlies gambling and playing the lottery. How much fun would it be to play a slot machine if you knew in advance that you would always lose nine times before winning once, and that this sequence would continue for as long as you played? It would probably be no fun at all! In fact, the joy of gambling comes from the inability to predict when rewards are coming, so we keep playing. So, what do food pellets and slot machines have to do with e-mail? If you think about it, e-mail is very much like gambling. Most of it is junk and the equivalent to pulling the lever of a slot machine and losing, but every so often we receive a message that we really want.  Read more at location 2244

Several years ago I heard an interview on NPR with the Delany sisters, who lived to be 102 and 104. There was one particular part of the interview that remained with me. The sisters said that one of their secrets for a long life was never marrying, because they never had husbands to “worry them to death.”  Read more at location 2265

CHAPTER 8

The High Price of Ownership 

Why We Overvalue What We Have 

On the basis of Jack Knetsch, Dick Thaler, and Daniel Kahneman’s research on the “endowment effect,” we predicted that when we own something—whether it’s a car or a violin, a cat or a basketball ticket—we begin to value it more than other people do.  Read more at location 2365

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.  Read more at location 2421

The first quirk, as we saw in the case of the basketball tickets, is that we fall in love with what we already have.  Read more at location 2429

The second quirk is that we focus on what we may lose, rather than what we may gain.  Read more at location 2438

The third quirk is that we assume other people will see the transaction from the same perspective as we do.  Read more at location 2444

****  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.  Read more at location 2449

****  (Note:  theology and philosophy)  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.  Read more at location 2483

ownership fundamentally changes our perspective. In the same way that we think our own kids are more wonderful and special than our friends’ and neighbors’ children (regardless of whether our children deserve such esteem), we overvalue everything that we own, whether it’s a pair of basketball tickets or our domiciles.  Read more at location 2508

****  (Note:  self)  OUR PROPENSITY TO overvalue what we own is a basic human bias, and it reflects a more general tendency to fall in love with, and be overly optimistic about, anything that has to do with ourselves.  Read more at location 2541

CHAPTER 9

Keeping Doors Open 

Why Options Distract Us from Our Main Objective 

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.  Read more at location 2552

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.)  Read more at location 2648

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.  Read more at location 2655

HOW CAN WE unshackle ourselves from this irrational impulse to chase worthless options? In 1941 the philosopher Erich Fromm wrote a book called Escape from Freedom. In a modern democracy, he said, people are beset not by a lack of opportunity, but by a dizzying abundance of it. In our modern society this is emphatically so. We are continually reminded that we can do anything and be anything we want to be. The problem is in living up to this dream. We must develop ourselves in every way possible; must taste every aspect of life; must make sure that of the 1,000 things to see before dying, we have not stopped at number 999. But then comes a problem—are we spreading ourselves too thin? The temptation Fromm was describing, I believe, is what we saw as we watched our participants racing from one door to another. Running from door to door is a strange enough human activity. But even stranger is our compulsion to chase after doors of little worth—opportunities that are nearly dead, or that hold little interest for us.  Read more at location 2666

One of my friends told me, for instance, that the single best year of his marriage was when he was living in New York, his wife was living in Boston, and they met only on weekends. Before they had this arrangement—when they lived together in Boston—they would spend their weekends catching up on work rather than enjoying each other.  Read more at location 2680

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.  Read more at location 2702

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.  Read more at location 2717

CHAPTER 10

The Effect of Expectations 

Why the Mind Gets What It Expects 

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.  Read more at location 2790

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.  Read more at location 2811

****  WHEN WE BELIEVE beforehand that something will be good, therefore, it generally will be good—and when we think it will be bad, it will bad.  Read more at location 2814

which type of input is more important—knowledge before the experience, or an input of information after an experience has taken place? The significance of this question is that if knowledge merely informs us of a state of affairs, then it shouldn’t matter whether our participants received the information before or after tasting the beer: in other words, if we told them up front that there was vinegar in the beer, this should affect their review of the beer. And if we told them afterward, that should similarly affect their review. After all, they both got the same bad news about the vinegar-laced beer. This is what we should expect if knowledge merely informs us. On the other hand, if telling our participants about the vinegar at the outset actually reshapes their sensory perceptions to align with this knowledge, then the participants who know about the vinegar up front should have a markedly different opinion of the beer from those who swigged a glass of it, and then were told.  Read more at location 2826

As it turned out, the students who found out about the vinegar after drinking the beer liked the beer much better than those who were told about the vinegar up front. In fact, those who were told afterward about the vinegar liked the beer just as much as those who weren’t aware that there was any vinegar in the beer at all.  Read more at location 2839

Telling the participants about the vinegar after rather than before they tasted the beer doubled the number of participants who decided to add vinegar to their beer. For the participants in the “after” condition, the beer with vinegar didn’t taste too bad the first time around (they apparently reasoned), and so they didn’t mind giving it another try.  Read more at location 2855

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.  Read more at location 2866

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.  Read more at location 2873

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.  Read more at location 2901

EXPECTATIONS ALSO SHAPE stereotypes. A stereotype, after all, is a way of categorizing information, in the hope of predicting experiences. The brain cannot start from scratch at every new situation. It must build on what it has seen before. For that reason, stereotypes are not intrinsically malevolent. They provide shortcuts in our never-ending attempt to make sense of complicated surroundings. This is why we have the expectation that an elderly person will need help using a computer or that a student at Harvard will be intelligent.* But because a stereotype provides us with specific expectations about members of a group, it can also unfavorably influence both our perceptions and our behavior. Research on stereotypes shows not only that we react differently when we have a stereotype of a certain group of people, but also that stereotyped people themselves react differently when they are aware of the label that they are forced to wear (in psychological parlance, they are “primed” with this label).  Read more at location 2916

****  The performance of the two groups differed in a way that matched the stereotypes of both women and Asian-Americans. Those who had been reminded that they were women performed worse than those who had been reminded that they were Asian-American. These results show that even our own behavior can be influenced by our stereotypes, and that activation of stereotypes can depend on our current state of mind and how we view ourselves at the moment. Perhaps even more astoundingly, stereotypes can also affect the behavior of people who are not even part of a stereotyped group.  Read more at location 2931

In one notable study, John Bargh, Mark Chen, and Lara Burrows had participants complete a scrambled-sentence task, rearranging the order of words to form sentences (we discussed this type of task in Chapter 4). For some of the participants, the task was based on words such as aggressive, rude, annoying, and intrude. For others, the task was based on words such as honor, considerate, polite, and sensitive. The goal of these two lists was to prime the participants to think about politeness or rudeness as a result of constructing sentences from these words (this is a very common technique in social psychology, and it works amazingly well). After the participants completed the scrambled-sentence task, they went to another laboratory to participate in what was purportedly a second task. When they arrived at the second laboratory, they found the experimenter apparently in the midst of trying to explain the task to an uncomprehending participant who was just not getting it (this supposed participant was in fact not a real participant but a confederate working for the experimenter). How long do you think it took the real participants to interrupt the conversation and ask what they should do next? The amount of waiting depended on what type of words had been involved in the scrambled-sentence task. Those who had worked with the set of polite words patiently waited for about 9.3 minutes before they interrupted, whereas those who had worked with the set of rude words waited only about 5.5 minutes before interrupting.  Read more at location 2935

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.  Read more at location 2955

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.  Read more at location 2969

****  The experimental question was this: can outstanding art shine through a filter of mundane and dingy expectation? Journalist Gene Weingarten asked Joshua Bell, generally considered one of the best violinists in the world, to pose as a street performer and play some of the finest music ever composed* at a Metro station in Washington, D.C., during the morning rush hour. Would people notice that this guy was better than most buskers? Would they stop to listen? Would they throw a dollar or two his way? Would you? If you were like 98 percent of the people who passed through L’Enfant Plaza Station that morning, you would have hurried by, oblivious of the performance. Only 27 out of 1,097 (2.5 percent) put money into Bell’s open Stradivarius violin case and only 7 (0.5 percent) stopped to listen for more than a minute. Bell played for a little less than an hour and made about $32, which is probably not bad for your basic street performer, but no doubt humbling to a man used to making far, far more for one minute of playing. Weingarten interviewed a number of people who passed through the station that morning. Of the people who stopped, one recognized Bell from a performance the night before. Another was a serious violinist himself. Another was a Metro worker who, after years of listening to ordinary, albeit occasionally talented, buskers, discerned that Bell was better than average. Aside from these few—and disturbingly to classical music fans, and Bell’s fans in particular—people did not stop to listen. Many didn’t even look at Bell. When interviewed, passersby said either that they didn’t notice the music at all, or that it sounded like a slightly better than average street performer playing everyday classical music. No one expected a world-class musician to be playing technically dazzling pieces in a Metro station.  Read more at location 2995

“What if we did the opposite experiment?” I asked. “What if we put a mediocre player in Carnegie Hall with the Berlin Philharmonic? The expectations would be very high but the quality would not. Would people discern the difference and would their pleasure be quashed?” Bell thought for a moment. “In this case,” he said, “the expectations would triumph over the experience.” Furthermore, he said he could think of a few people who were not great violinists but received wild applause because they were in the right environment.  Read more at location 3014

this is how most of us navigate the world. Across many domains of life, expectations play a huge role in the way we end up experiencing things. Think about the Mona Lisa. Why is this portrait so beautiful, and why is the woman’s smile mysterious? Can you discern the technique and talent it took for Leonardo da Vinci to create it? For most of us the painting is beautiful, and the smile mysterious, because we are told it is so. In the absence of expertise or perfect information, we look for social cues to help us figure out how much we are, or should be, impressed, and our expectations take care of the rest.  Read more at location 3046

****  THE BRILLIANT SATIRIST Alexander Pope once wrote: “Blessed is he who expects nothing, for he shall never be disappointed.” To me, it seems that Pope’s advice is the best way to live an objective life.  Read more at location 3051

As it turns out, positive expectations allow us to enjoy things more and improve our perception of the world around us. The danger of expecting nothing is that, in the end, it might be all we’ll get.  Read more at location 3056

CHAPTER 11

The Power of Price 

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

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.12 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?  Read more at location 3061

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.  Read more at location 3071

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.

...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.”  Read more at location 3085

****  Exploring the placebo effect in this chapter, we’ll see not only that beliefs and expectations affect how we perceive and interpret sights, tastes, and other sensory phenomena, but also that our expectations can affect us by altering our subjective and even objective experiences—sometimes profoundly so. Most important, I want to probe an aspect of placebos that is not yet fully understood. It is the role that price plays in this phenomenon. Does a pricey medicine make us feel better than a cheap medicine?  Read more at location 3100

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.  Read more at location 3107

****  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. 

...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.15 Encainide, flecainide, and mexiletine were widely prescribed off-label drugs for irregular heartbeat—and were later found to cause cardiac arrest.16 When researchers tested the effect of the six leading antidepressants, they noted that 75 percent of the effect was duplicated in placebo controls.17 The same was true of brain surgery for Parkinson’s disease.  Read more at location 3124

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

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

...I vividly recall lying in the burn ward in terrible pain. As soon as I saw the nurse approaching, with a needle almost dripping with painkiller, what relief! My brain began secreting pain-dulling opioids, even before the needle broke my skin. Thus familiarity may or may not breed contempt, but it definitely breeds expectations. Branding, packaging, and the reassurance of the caregiver can make us feel better.  Read more at location 3147

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.  Read more at location 3194

the answers from the discounted SoBe group: they averaged 6.5 questions right. What can we gather from this? Price does make a difference, and in this case the difference was a gap of about 28 percent in performance on the word puzzles. So SoBe didn’t make anyone smarter. Does this mean that the product itself is a dud (at least in terms of solving word puzzles)? To answer this question, we devised another test. The following message was printed on the cover of the quiz booklet: “Drinks such as SoBe have been shown to improve mental functioning,” we noted, “resulting in improved performance on tasks such as solving puzzles.” We also added some fictional information, stating that SoBe’s Web site referred to more than 50 scientific studies supporting its claims. What happened? The group that had the full-price drinks still performed better than those that had the discounted drinks. But the message on the quiz booklet also exerted some influence. Both the discount group and the full-price group, having absorbed the information and having been primed to expect success, did better than the groups whose quiz cover didn’t have the message. And this time the SoBe did make people smarter. When we hyped the drink by stating that 50 scientific studies found SoBe to improve mental functioning, those who got the drink at the discount price improved their score (in answering additional questions) by 0.6, but those who got both the hype and the full price improved by 3.3 additional questions. In other words, the message on the bottle (and the quiz cover) as well as the price was arguably more powerful than the beverage inside.  Read more at location 3229

We tried this in a series of experiments, and found that consumers who stop to reflect about the relationship between price and quality are far less likely to assume that a discounted drink is less effective (and, consequently, they don’t perform as poorly on word puzzles as they would if they did assume it). These results not only suggest a way to overcome the relationship between price and the placebo effect but also suggest that the effect of discounts is largely an unconscious reaction to lower prices.  Read more at location 3245

****  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.  Read more at location 3260

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?  Read more at location 3280

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.  Read more at location 3288

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.  Read more at location 3296

CHAPTER 12

The Cycle of Distrust 

Why We Don’t Believe What Marketers Tell Us 

I generally consider myself a fairly trusting person, but with all the dubious offers and news about the bad behavior of businesses, I feel myself becoming less trusting and more suspicious. It seems that I’m always looking for the catch, and it turns out that I’m not alone in this paranoid mindset. Some years ago, two very perspicacious researchers, Marian Friestad and Peter Wright, suggested that people in general are starting to understand that the offers companies put before us are in their best interest and not ours. As a consequence, we’ve become more distrustful—not only of those who are trying to swindle us but of everyone.  Read more at location 3393

we decided to measure a behavior that would tell us people’s degree of distrust, and our tool of choice was a free money experiment. One lovely spring day, we set up a booth at a big commercial center in Cambridge, Massachusetts, manned by some undergraduate students. Above our booth was a large sign that read “Free Money.” 

...When we offered $1, only 1 percent of those who passed our booth actually stopped to check it out. When we offered $5, a few more did, and so on up to $50. But even when we offered $50, only 19 percent of passersby stopped and took a bill. We were surprised and slightly disappointed with this low level of trust; 19 percent is not a high level of success, particularly when free money is (literally) on the table.  Read more at location 3426

The Tragedy of the Commons 

Trust, like money, is a crucial lubricant for the economy. When people trust other people, a merchant, or a company, they are more likely to buy, lend, and extend credit. In the old days, business was conducted on a gentleman’s handshake. But when the handshake results in a swindle, trust disappears and all subsequent transactions—whether between cheaters or the genuinely good-hearted—become more difficult.  Read more at location 3437

Today, psychologists, economists and environmentalists use the phrase “the tragedy of the commons” to describe the same basic principle: when we use a common resource at a rate that is slower than the rate at which it replenishes, all is well. However, if a few individuals get greedy and use more than their share, the system of consumption becomes unsustainable, and in the long term, everybody loses. In essence, the tragedy of the commons is about two competing human interests. On one hand, an individual should care about the sustainability of shared resources in the long term because everyone, including the individual, benefits from it. At the same time, in the short term, the individual benefits immediately from taking more than his or her fair share. (Social scientists refer to such betrayers of social contracts as “defectors.”) Of course, if we all cared about the common good or thought about the long-term consequences of our actions, we might not run into resource-sharing problems. But because human beings tend to focus on short-term benefits and our own immediate needs, such tragedies of the commons occur frequently.  Read more at location 3448

Take the wild salmon population, for example. While it is ideal for fishermen in general to limit their own catches so that the salmon population can be sustained, it’s more profitable for an individual fisherman to overfish in a given year. But if too many fishermen even slightly surpass the sustainable limit, the overall fish population becomes depleted. (For this reason, salmon fishermen are now constrained by law to a limited number every year). The current energy crisis is another example of the tragedy of the commons. Although there is a finite amount of fossil fuel in the world, some countries, industries, businesses, and individuals use far more than others while making little effort to minimize their impact on the common pool. Even public resources such as clean air, land, trees, and water fall victim to this problem.  Read more at location 3456

Erosion of Trust over Time 

Today, it’s easy for one individual to start selling “wonder pills” that promise to help you lose weight, keep or regrow your hair, enhance your sex life, and energize your workday. Unsuspecting people who buy such concoctions get all the benefits of placebos and, in the process, lose plenty of money. Meanwhile, the dishonest pill-purveyors gain substantially while further eroding the overall level of trust (at least for those who didn’t benefit from the placebo effect). This erosion not only makes it harder for the next wonder pill salesperson to peddle goods (which by itself is a good thing), but also makes it more difficult for us to believe those who truly deserve to be trusted.  Read more at location 3503

How Deep Is Your Mistrust? 

Following our “free money” experiment, Ayelet, Stephen, and I set up an experiment to see just how deep the level of mistrust of companies really goes. Specifically, we wanted to find out the degree to which people would doubt obviously truthful statements when these statements were associated with a brand.  Read more at location 3530

We started out by asking people whether they thought that completely unambiguous statements such as “the sun is yellow” and “a camel is bigger than a dog” were true or false, and 100 percent of the participants agreed they were true. Then we asked another group of people to evaluate the same statements, with the added information that they were made by either Proctor & Gamble, the Democratic Party, or the Republican Party. Would giving these statements a corporate or political origin color our participants’ impressions and would they be more likely to suspect the truthfulness of these statements? The sad answer was yes. When we suggested that, say, the Democratic Party had issued the statement that “the sun is yellow,” our participants were more likely to question it. (“Sure it’s yellow, but it also has red spots on the surface and sometimes it looks white, so is it really just yellow?”) If the Republican Party or P&G issued the statement that “a camel is bigger than a dog,” the participants again were less certain and hedged their bets.  Read more at location 3532

As it turned out, the participants liked the stereo much more if they were told that the information they read came from an unbiased source such as Consumer Reports. They also said they would pay, on average, about $407 for the system, far more than the $282 offered by those who read the Cambridge Audio brochure. Sadly, it appeared that mistrust in marketing information runs so deeply that it colors our entire perception—even in the face of firsthand, direct experience—causing us to enjoy the experience much less than we otherwise would. (And this happens with relatively trusted brands. Just imagine what would happen with distrusted ones.)  Read more at location 3551

Some special companies see trust as a public good (like clean air and water), and customers return the trust. One company in which I personally have a lot of faith is Timberland, the maker of outdoor clothing. I once attended a talk by Jeff Swartz, the CEO, in which he detailed many of the ways that Timberland is trying to reduce CO2 emissions, recycle, use sustainable materials, and treat its employees fairly. At the end of Jeff’s talk, another CEO asked him, “What are the returns on these investments?” Jeff answered that he has been trying to find an economic return for these actions but that he had not yet found it in the data. He further added that it would be nice if being environmentally and socially responsible was also financially rewarding but that he didn’t really feel it was necessary. He simply wanted to make sure that his company followed the moral principles he wanted his kids to live by. After hearing this, I went and bought my first pair of Timberland shoes.  Read more at location 3595

But the second, more important moral—one that we are just beginning to understand—is that trust, once eroded, is very hard to restore.  Read more at location 3616

CHAPTER 13

The Context of Our Character, Part I 

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

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.  Read more at location 3634

****  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).  Read more at location 3649

****  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.  Read more at location 3713

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).  Read more at location 3725

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.  Read more at location 3737

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.  Read more at location 3739

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.  Read more at location 3745

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.  Read more at location 3802

****  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.  Read more at location 3819

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.  Read more at location 3872

****  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.  Read more at location 3880

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.  Read more at location 3906

Appendix: Chapter 13

The Ten Commandments*

Catholic - I, the Lord, am your God. You shall not have other gods besides me.

Jewish - I am the Lord your God who has taken you out of the land of Egypt.

Protestant - You shall have no other gods but me.

Catholic - You shall not take the name of the Lord, your God, in vain.

Jewish - You shall have no other gods but me.

Protestant - You shall not make unto you any graven images.

Catholic - Remember to keep holy the Lord’s Day.

Jewish - You shall not take the name of the Lord your God in vain.

Protestant - You shall not take the name of the Lord your God in vain.

Catholic - Honor your father and your mother.

Jewish - You shall remember the Sabbath and keep it Holy.

Protestant - You shall remember the Sabbath and keep it Holy.

Catholic - You shall not kill.

Jewish - Honor your mother and father.

Protestant - Honor your mother and father.

Catholic - You shall not commit adultery.

Jewish - You shall not murder.

Protestant - You shall not murder.

Catholic - You shall not steal.

Jewish - You shall not commit adultery.

Protestant - You shall not commit adultery.

Catholic - You shall not bear false witness.

Jewish - You shall not steal.

Protestant - You shall not steal.

Catholic - You shall not covet your neighbor’s wife.

Jewish - You shall not bear false witness.

Protestant - You shall not bear false witness.

Catholic - You shall not covet your neighbor’s goods.

Jewish - You shall not covet anything that belongs to your neighbor.

Protestant - You shall not covet anything that belongs to your neighbor. 

CHAPTER 14

The Context of Our Character, Part II 

Why Dealing with Cash Makes Us More Honest 

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.  Read more at location 3979

To get at the true nature of dishonesty, then, we needed to develop a clever experiment, one in which the object in question would allow few excuses. Nina, On, and I thought about it. Suppose we used symbolic currency, such as tokens. They were not cash, but neither were they objects with a history, like a Coke or a pencil. Would it give us insight into the cheating process?  Read more at location 3996

Would the insertion of a token into the transaction—a piece of valueless, nonmonetary currency—affect the students’ honesty? Would the token make the students less honest in tallying their answers than the students who received cash immediately? If so, by how much? Even we were surprised by the results: The participants in the first group (who had no way to cheat) solved an average of 3.5 questions correctly (they were our control group). The participants in the second group, who tore up their worksheets, claimed to have correctly solved an average of 6.2 questions. Since we can assume that these students did not become smarter merely by tearing up their worksheets, we can attribute the 2.7 additional questions they claimed to have solved to cheating. But in terms of brazen dishonesty, the participants in the third group took the cake. They were no smarter than the previous two groups, but they claimed to have solved an average of 9.4 problems—5.9 more than the control group and 3.2 more than the group that merely ripped up the worksheets. This means that when given a chance to cheat under ordinary circumstances, the students cheated, on average, by 2.7 questions. But when they were given the same chance to cheat with nonmonetary currency, their cheating increased to 5.9—more than doubling in magnitude. What a difference there is in cheating for money versus cheating for something that is a step away from cash! If that surprises you, consider this. Of the 2,000 participants in our studies of honesty (described in the previous chapter), only four ever claimed to have solved all the problems. In other words, the rate of “total cheating” was four in 2,000.* But in the experiment in which we inserted nonmonetary currency (the token), 24 of the study’s 450 participants cheated “all the way.” How many of these 24 extreme cheaters were in the condition with money versus the condition with tokens? They were all in the token condition (24 of 150 students cheated “all the way” in this condition; this is equivalent to about 320 per 2,000 participants). This means that not only did the tokens “release” people from some of their moral constraints, but for quite a few of them, the extent of the release was so complete that they cheated as much as was possible. This level of cheating is clearly bad, but it could have been worse. Let’s not forget that the tokens in our experiments were transformed into cash within a matter of seconds. What would the rate of dishonesty have been if the transfer from a nonmonetary token to cash took a few days, weeks, or months (as, for instance, in a stock option)? Would even more people cheat, and to a larger extent?  Read more at location 4010

****  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.  Read more at location 4032

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.  Read more at location 4055

CHAPTER 15

Beer and Free Lunches 

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

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.  Read more at location 4153

We found that when people order out loud in sequence, they choose differently from when they order in private. When ordering sequentially (publicly), they order more types of beer per table—in essence opting for variety. A basic way to understand this is by thinking about the Summer Wheat Ale. This brew was not very attractive to most people. But when the other beers were “taken,” our participants felt that they had to choose something different—perhaps to show that they had a mind of their own and weren’t trying to copy the others—and so they chose a different beer, one that they may not have initially wanted, but one that conveyed their individuality. What about their enjoyment of the beer? It stands to reason that if people choose beer that nobody has chosen just to convey uniqueness, they will probably end up with a beer that they don’t really want or like. And indeed this was the case. Overall, those who made their choices out loud, in the standard way that food is ordered at restaurants, were not as happy with their selections as those who made their choices privately, without taking others’ opinions into consideration. There was, however, one very important exception: the first person to order beer in the group that made its decisions out loud was de facto in the same condition as the people who expressed their opinion privately, since he or she was unencumbered, in choosing, by other people’s choices. Accordingly, we found that the first person to order beer in the sequential group was the happiest of his or her group and just as happy as those who chose their beers in private.  Read more at location 4194

****  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.  Read more at location 4224

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.  Read more at location 4229

****  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?  Read more at location 4243

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.”  Read more at location 4255

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.  Read more at location 4260

****  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.  Read more at location 4297

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.  Read more at location 4304

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.”  Read more at location 4317

The below: paraphrasing is from experiencing this book in audio form in December, 2013:

Predictably Irrational: The Hidden Forces that shape our decisions

By Dan Ariely

I listened to this very interesting book.  The notes will be my own commentary, dated 12/9/13.

In this book, Dan Ariely uses research in the field of behavioral economics to discuss the various "predictably irrational" ways in which humans execute decision-making.  Coming on the heels of "Hidden in Plain Sight" - which focused on a theory that the entire material universe was a self-contained closed system void of absolutes, in which every physical reality is a product of relativity - this book started quite appropriately, with the concept of  social relativity.  The author contends that all human decision are made based upon relative values, not absolute ones.  It is why we cut coupons to save 50 cents, but spend $20 to eat out rather than make spaghetti.  

In the first chapter he talked about value decoys.  He said humans almost always use simple and easy comparisons (as opposed to complex).  When given a direct comparison, we usually prefer something that fares well in a direct comparison over something that (may be better, but) has no direct comparison.  He cited research where an online mag subscription was available for $60 [1].  Print was $125 [2].  Print and online package was $125 [3].  In that situation, 80 folks chose [3], 0 chose [2], 15 chose [1].  However, when print [2] was lowered to $60, almost everyone chose [1].  Why?  Because [3] no longer looked like online was free; it no longer looked like a value.  The power of comparison is even stronger in his other examples.  Imagine two equally pretty girls [A] and [B].  Then the same picture photoshopped to make the same photos look less attractive, [A-], [B-].  When given the options of A,B or A-, people chose A.  When given the choice of  A,B,B-, people chose B-.  Given a choice between houses with the same situation, A, B, B-, they typically choose B-.  The take-away: comparive value is a major driver of human decision-making.  If I start a Legacy prodution, I need to include an ultra-expensive package as a decoy.  Seriously, I do.  That is how I can make $1500 look like good value.  Make it the 3rd most expensive option.

He talks at great length about the power of Anchoring, a cognitive bias whereby a number (essentially) randomly suggested to us can “anchor” all of our subsequent value judgments.  The authors consider this an example of “arbitrary coherence,” in other words, we work off is often an arbitrary suggestion and follow coherent decision making based on the arbitrary premise.  Ariely asserts that our first “anchor”, or initial experience or decision in involving a new subject, usually provides the “anchor” for all of our subsequent interactions with that experience.  I the first time I buy gas, it’s $3, I will see $1.50 as a great value.  If someone else first bought gas for $0.50, will see $1.50 as a terrible value (in an ultra-simple example of my own contrivance).

Next on Ariely’s list of intriguing concepts is “the power of free.”  It turns out zero is not just another number when it comes to cost/benefit analysis for consumers.  In a study, consumers were offered high-end Lindt chocolate truffles for 0.15 per, or Hersey Kisses for .01 per.  70% chose Lindt.  Apparently they are great.  Then, each product was lowered by .01, which should have no effect based on standard economic theory as the price difference remains the same (0.14).  Lindt for 0.14 or Kisses for 0.00, free.  70% chose Kisses.  Various versions of this have been tried, and it seems “free” drives consumers to predictable irrationality.  Another great comparison involves Amazon free shipping.  When Amazon first offered free shipping in the U.S. for $25 purchases, sales exploded.  However, in France, the deal was $1 Franc (about 0.20 US) for shipping.  Sales hardly budged.  Later, they followed the rest of the company in offering free shipping and sales predictably surged.  

I wonder if free is related to the idea that it becomes a “social” acquisition rather than a “market” acquisition?  Ariely contends that we view the world through lenses, a “social” lense and “market” lense.  They each bring very different standards for expectation and evaluation.  Each is used at different times, for different reasons and in different situations.  The author that contends, alone, each works quite well.  But when they are mixed or combined, bad things can happen.  An example would be offering money when someone has invited you over for dinner.  Ariely’s research shows that the ‘social” paradigm is much more powerful, but also much more fragile.  Once broken, it takes a long time to return.  The “market” paradigm on the other hand does engender loyalty or particular trust, but is also inoffensive as “it’s just business.”  In comparing market to social norms, Ariely says, "money is often the most expensive way to get something done... and is often not the most effective."  He cites the American education system as a situation where market norms have prevailed, and throwing more money at the problem has done nothing to improve results.  

Ariely also addresses our inability to know ourselves.  More specifically, the degree to which we underestimate the power of emotion.  In some studies conducted by the author, what young men thought they would like when aroused differed somewhat dramatically from (they underestimated) what they reported being interested in when actually aroused.  The author extrapolated this research to suggest that, more broadly, we underestimate the extent to which emotion alters our decision-making process.

The author proceeds to focus on various cognitive biases like “endowment belief”, which is the tendency to place greater value on things we possess than those we don’t.  When we possess something, we tend to associate a sense of loss with the removal of the object or idea, even if we never possessed it to begin with.  This effect can apply to the material or meta-physical, and it results in (often dramatic) overvaluation of our current possessions or circumstances.

Arielly next touches on one of the favorite subjects: the power of belief.  He cites a host of studies where a placebo matched the effectiveness of a medical procedure or medication.  Arielly then ties is to the price of items, and our projection of quality onto items of higher cost.  We see a higher price tag, assume it must be “better”, expect it to be, and so it is.  Numerous studies reveal that our actual (objective) experience is reflective of our expectations and beliefs.  For example, if people were told there was vinegar in beer A before a taste test, it always lost to beer B.  If they were not told, beer A consistently won.  The experienced conformed to align with the belief.

The final area of examination was social influences on decision-making in a public setting.  The research was conducted using group restaurant orders, and comparing those who ordered meals privately with those who ordered publically in sequential order (4 eaters, 4 items (beers) to choose from).  The researchers found that those who ordered privately were, after the meal’s conclusion, happier with their orders.  When meals were ordered publically in sequential order, patrons tended to make unique orders so that the table had a wider variety of options, but very few of the orders were actually shared when consumed.  Practically speaking, there was a tendency to evidence “uniqueness.”  Interestingly, when the same study was done in Hong Kong (where conformity, rather than independence, is more socially desirable), patrons tended to order more uniformly when public sequential ordering took place, and were equally unhappy with their orders.