Keywords: Behavior, Economics, Ethics, Norms, Placebo, Psychology, Rationalization, Suggestion, Trust
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We are pawns. Most of the time we don’t understand what’s really going on. We think we’re in the driver’s seat and steering the course of our lives, but we are wrong. We’re really the victims of our own instincts and impulses. We procrastinate. We underestimate. We let fear make our decisions.
Standard economic theory assumes that we are rational, but we are not. Most of the time, we’re deeply irrational. Just because we’re irrational, however, it doesn’t follow that we’re chaotic. Our behavior isn’t random. As a matter of fact, we make the same mistakes over and over again, and there is nothing random about that. There are predictable patterns in our behavior. We have instincts that help us negotiate a complex world, and these instincts tend to channel us into repetitive behavior so that we don’t have to spend a lot of time making decisions about things that aren’t essential to our survival.
Traditional economics posits a world where people act rationally and make economic decisions based on their own best interests. But this unrealistic, and frankly simplistic, worldview does not advance economic understanding. Economics should be based more on how people really behave. This is the goal of behavioral economics, a field that uses psychological insight to understand economic decision making.
In Predictably Irrational: The Hidden Forces That Shape Our Decisions, Dr. Dan Ariely looks at self-defeating behavior, the power of suggestion, of procrastination, the effects of placebos and many other aspects of our lives that we are often unaware of. Delusions and self-rationalizations lurk behind many of our actions, subtly undermining our best interest. Only until we learn and understand how our primordial passions steer our lives can we regain control. Without this awareness, we are often at the mercy of advertisers and others who know how to use these hidden mechanisms to manipulate our behavior.
Ariely has an impressive resume, and he isn’t shy about mining it for anecdotes to support his argument. Readers are treated to many stories from his extensive back catalog of research experiments. The accounts aren’t just limited to his professional life, either. In addition to innumerable colleagues, readers are introduced to wife Sumi and daughter Amit, discovering intimidate details such as how Suri came to the decision to use an epidural during childbirth.
Ariely seems to enjoy telling stories. Where one or two examples might suffice to explain his thoughts, Ariely uses five. While some readers may wish that the author would hurry up and reach his point, others may enjoy his meandering storytelling style. He provides interesting glimpses into the world of Ivy League professors.
The book concludes on a note of optimism. As irrational creatures, we are victims of illusion, but we aren’t helpless. We can learn to behave differently. Ariely rallies us to overcome our faults. We can develop systems to mitigate our predictable, systematic mistakes. There are tools and policies that will help people make better decisions. Ariely’s research provides concrete proof of what works to help guide us on our way.
Ariely begins with an advertisement for a subscription to The Economist magazine. A website subscription was priced at $59, a print subscription was $125 and a combined web/print subscription was also $125. He presented this ad in full to MIT students and polled their selection among the three options. The web/print subscription was the overwhelming winner (garnering 84 student votes) and the web only subscription was a distant second (with 16 votes) — the print only subscription didn’t receive any takers. Ariely then presented only two options: the web subscription and the web/print subscription, which received 68 and 32 votes, respectively. What this experiment showed is that the print only subscription — priced the same as the web/print subscription — was a decoy, designed to make people think they were getting some kind of a deal.
People don’t usually look at things in absolute terms; they look at them relatively. The way we see things is relative to and dependent on the context in which we see them. Give people a context and you can guide their choices. For example, a chef may put an expensive entrée on the menu to drive popularity for the second most expensive item. With three TVs on sale at different prices, people will pick the middle one. In The Economist example, even though nobody picked the decoy print only subscription, its presence had a big impact on people’s choices. People usually aim for a middle ground on things. These people are behaving irrationally, but their irrationality is predictable.
We tend to compare things in order to judge them, and we like to compare things that are easy to compare. Our comparisons generally follow the path of least resistance. Imagine you are house hunting. You see one modern house and two colonial houses, one of which needs a little work but the seller will cut the price to account for that. Which do you pick?
You’ll probably end up choosing the colonial that doesn’t need work. You don’t really have anything to compare the modern house with, so you feel like you don’t really know much about it. But with the colonials, you know one needs work (the decoy) and the other doesn’t. One is better than the other, so you choose the one that is better.
Ariely reminds us that this is why you should hang out with people who are less attractive than you are. They are your decoys. (But you should never tell them that you brought them along because they’re unattractive — that’s a solid way of forever ruining a friendship.)
Relativity can help us, but it can also make us miserable when we compare ourselves unfavorably with others. We get envious. And the problem with relativity is that we’re looking at things locally and basing our decisions on the wrong things. To remedy this effect, one thing we can do is reduce the size of our circles — reduce the scale of what we’re comparing ourselves to. If all your friends have Ferraris, analyze whether you need a Ferrari or new friends.
Black pearls didn’t used to be worth that much money until some clever marketing convinced people that they were valuable.
We get imprinted by the first thing we see. For example, when we see a new product, the price sticks to our head as the accepted price. That price becomes the anchor. Information about prices in the media (to which we are exposed to great degree) is usually how we acquire our anchors. And these anchors stay with us, continuing to influence our purchases. They have an enduring effect and are not easily replaced with new anchors.
An MIT study showed that any randomly referenced number, for example the last two digits of a person’s social security number, can become an anchor that affects how you think about the prices of various items. This is arbitrary coherence — the initial price is arbitrary, but it will influence how much you’re willing to pay for something.
First impressions are important. Anchor prices can set expectations to a great extent. They can determine whether someone will experience something as being pleasant or unpleasant. Anchoring affects many of our decisions.
Herding also affects many of our decisions and behaviors. When we watch someone do something, it might look like a good idea, so we do it too. Other people see us doing it and copy our behavior. Next thing you know, there’s a whole bunch of people doing the thing. Then, there is also something called self-herding, which is when we think something is good or bad based on our own previous behavior. If you did something before, you’re apt to do it again. The next thing you know, it becomes a habit. So the important thing, really, is to get somebody to do something in the first instance, because they had different habits before they did that new thing.
There are deep philosophical questions about free will. We may never know the answer to many of our questions, but one place to start is to understand ourselves and be conscious of how we make our decisions. We should pay special attention to the first decision, which can become the first in a series. Little things today can set off big consequences tomorrow.
This throws a wrench into the whole supply and demand theory. As we learned from econ 101, if the price of yogurt goes down, people will buy more yogurt. If I have a widget and you want a widget, the price you pay will have to do with how much utility the widget has for you — how badly you want the widget. It turns out, though, that the free market is more irrational than we thought. What’s really going on is that the old, higher price of yogurt or a widget is an anchor, so people are motivated to buy more. Instead of demand, it would seem that a manufacturer’s suggested price is the driver. Eventually, though, people do adjust to price hikes and adapt new anchors. They get over it. In the long run, it doesn’t really effect demand too much. Long story short: many of our decisions seem rational but deep down, we are reacting on intuition.
Our closets are stuffed with free swag that we’ve accumulated from promotions: the t-shirt from the radio station; the teddy bear that came with the chocolates; the USB drive that we picked up at the conference. And it isn’t just a problem for our closets. We go back for free extra courses at the buffet, even though we aren’t hungry.
It feels good to get something for free. It makes us feel excited. And free is better than a mere discount. In one study, people were offered a choice between Hershey’s chocolate for $0.01 or Lindt chocolate for $0.15. Lindt is the better candy, and people preferred it by a large margin. When researchers reduced the price of both by one cent (Hershey’s was free and Lindt was $0.14), Hershey’s became the crowd favorite. The difference in price was a mere penny, but the Hershey’s were free. People’s behavior was totally irrational, but there you are.
People will jump for something free even when it’s something they don’t want, and this strong emotional impact of a free price is called the zero price effect. We also like free because people are afraid of loss. When something is free, it has the appearance of being risk free; there seems to be no danger of loss. People will even choose free over a better deal. Consider another example: when Amazon offered free shipping with purchases of two or more books, some people who didn’t necessarily want two books probably bought two books anyway, just to score the free shipping. Amazon’s sales rose everywhere — except in France. Why not France? It turns out, the French were still charging a franc for shipping. While only about $0.20, this was enough to affect behavior. Once they got rid of the one franc shipping charge, sales in France rose (fast) like everywhere else.
So, given two options, we generally overreact to the free one. And we don’t think of the price we pay for something that is free. For example, we’ll wait in line for a free sample, without considering our time as a price. Free is incredibly powerful at driving human behavior, and sometimes we make decisions on this basis that aren’t in our best interest. On the other hand, we can use the power of free to drive social policy. If you want people to drive electric cars, figure out a way to make them free. If you want people to get regular checkups and diagnostic health tests, figure out a way to make them free. It’s extremely powerful.
Ariely offers an interesting insight for those who eat out regularly with the same group of people and bemoan the hassle of splitting the bill: take turns paying the entire bill. People will enjoy it more because most of the time it will be free to them. When they do pay, they have to pay a much bigger bill — but this is OK because every incremental bit more that you pay hurts less than the last. While $50 might hurt to pay for lunch, but what’s another $10 more? And the next $10 after that is even less painful.
There are social norms and market norms — each with completely different sets of rules. Social norms encourage community. If someone does you a favor, you aren’t obliged to pay it back immediately. Market norms, on the other hand, are less emotional in content. Transactions require immediate payment or terms for payment. Social and market norms usually don’t mix together very well.
Ariely and a colleague did a study that involved assigning people menial tasks. Some were paid a little; some got more (a whole $5). And some were paid nothing at all, rather, they were simply asked to participate, as a favor. Studying findings showed that the people who were paid $5 were more productive than the people who were paid less. But — the people who weren’t paid anything were the most productive of all the groups. Because they weren’t paid money, these people were operating under social norms, not market norms, which was reflected in their behavior and performance.
When market norms become part of the scenario, however, social norms fade. Ariely and his colleague switched up the experiment — this time, instead of giving participants money, they gave one group Snickers, another Godiva and a third a simple “thank you.” This changed things. Now, instead of getting paid, people received gifts. That apparently put people in a social frame of mind, because in this phase of the research, all three groups performed equally. When researchers tried mixing money with gifts, people then switched over to market norms.
All you have to do is mention the cost of the gift and people revert to market norms. Once this has happened, it is hard to return to social norms. Other research has shown that if people are exposed to thoughts about money, they will be less helpful to people who request assistance. Money, it turns out, is a costly way to motivate people. It is really useful in some ways, but social norms cost less and they work better than market norms. If we want to increase national productivity, maybe we should analyze the social contract.
Companies occasionally try to leverage social norms. Slogans such as, “Like a good neighbor, State Farm is there,” are attempts at generating good feelings with customers. The thing is, if companies succeed in cultivating that kind of cozy relationship with customers, the customers will expect a level of reciprocity. Using the State Farm example, playing hardball with due dates and imposing fines can break the spell, making customers disillusioned and hostile. Nevertheless, social norms build loyalty and engage people. It can be worthwhile for companies to cultivate them.
Every year, Filene’s Basement has a big sale on designer wedding dresses. It is a huge event and the savings are enormous. Future brides are notorious for their behavior at this event, manically running around, grabbing dresses and sometimes even fighting each other. Some women buy more than one wedding dress, but who needs more than one? No one. By taking more than one dress, these brides are leaving less for the other shoppers. A traditional economic take would suggest this is a classic case of increased demand. Behavioral economists see more going on: it’s the clash of the market and social realms. These women have abandoned social norms because the situation has stimulated their market norm instincts.
When candy is offered for free, people take one or maybe two. When there is a price, no matter how cheap it is, they don’t think about leaving some for other people — and they take a lot, maybe even all, of the candy. When money is part of a transaction, our social tendencies are subdued. But no one wants to take the last piece of cake. A shared platter is different from one’s own plate. Once something becomes part of the commons, the rules around it change. Once the price of something goes to zero, transactions move to the social domain.
Numerous experiments have been done that involve plates of cookies. At various price points, the results followed the law of supply and demand. When researchers raised the price, they sold fewer cookies. When they lowered the price, they sold more. But when they gave away the cookies for free, people only took one or two.
Among other things, these experiments illustrate the danger of cap and trade programs, where companies pay for permits to pollute. By putting a price on it, policy makers aren’t letting the natural beneficence of the fossil fuel industry express itself. Pollution could increase, and polluting companies would no longer feel moral responsibility for the pollution they generate. A lot would have to happen, however, for pollution to truly be under the control of social norms. Cap and trade isn’t necessarily a bad thing, but it might not be the most appropriate for the problem of industrial pollution.
There’s no easy solution to the problem of crazed shoppers snatching up as many wedding dresses as they can manage. It’s unrealistic to try to get the maniac brides to think of other people — at that point in time all they can think about is their own desires. When emotions run high, social norms suffer.
A study conducted at Berkeley endeavored to see how well people could predict their behavior during an emotional state — specifically, sexual arousal. The participants were all men (it was decided that male sexuality would be an easier variable to control). Researchers asked participants a series of questions about: their sexual proclivities, whether they would commit a variety of immoral acts, like rape; and about safe sex practices. The exact questions are listed at the end of the chapter. Later, the men were given similar questions with instructions to answer them while in a state of sexual arousal.
There was a huge difference between the answers. It’s as if participants had no idea what kinds of people they were when they were aroused. When aroused, they were willing to break all kinds of rules and engage in wild behavior. It’s like Dr. Jekyll and Mr. Hyde. We are like Jekyll and Hyde. Superego and id.
Good people, in the heat of passion, become monsters and engage in unspeakable acts. And none of them seem to know this about themselves or are able to predict it in advance. No amount of experience seems to teach them. This suggests that preaching abstinence is just plain silly. When people are in the throes of passion, they are no good at “just saying no.” People who don’t understand their passions won’t be able to control those passions. (And condoms should be freely available and accessible to those unable to control their passions.)
Teenagers, then, should be taught to walk away from temptation well before it becomes a problem. This isn’t the same as “just say no.” With “just say no” people are supposed to turn off their passion at will. That doesn’t work. Instead, teens should be taught that such situations should be well avoided before the situation gets out of hand. (I don’t have kids, but to those with teenagers, does that ever work?)
And while we’re talking about “Kids These Days,” they have to learn to be more serious when they drive. There they are, with a car full of chattering friends, music blaring, pretty girls… and French fries. All these distractions make them more prone to accidents. We need to develop ways that intervene when kids are too riled up. For example, the OnStar system could be set to notify parents if a car’s speed goes above a certain level. There could be immediate and unpleasant consequences, for example OnStar could blast people with air conditioning — or call their mom. Whatever it takes to bring people’s behavior back down to a calm state.
We need to understand our emotional selves to be able to make informed decisions. We need to explore both sides of ourselves. But people might not really be as integrated as they believe themselves to be. The individual might actually be made up of several different selves.
Americans save much less money than we used to, and we save less than citizens of other countries. We own many consumer goods. We buy on credit. We don’t save. We don’t exercise. We procrastinate.
The problem is that when we make our plans, we’re in a cool emotional state. But real life circumstances bring hot emotion. We’re slaves to instant gratification. I want the cake now; I’ll begin my diet tomorrow. The result is lots of procrastination.
Ariely did a test. With one group of students, he told them they could establish their own deadlines for papers, but they’d be penalized if they didn’t meet those deadlines. They could have set all their deadlines for the last day of the semester, but most of the students seemed to recognize that spacing through the semester would deter them from procrastinating too much. Another class was given no deadlines. They could turn their papers in whenever the students wanted to get them in. A third class was given a rigid schedule for completing papers. The result: The class with rigid deadlines got the best grades, and the class that could set their own deadlines did better than the class that had the most flexibility.
We all procrastinate sometimes, but people who recognize it in themselves are better able to overcome it. They develop self-control. Problems of self-control result not only in procrastination, but also doing some tasks more frequently than we should — for example, obsessively checking email.
Rewards can be predictable or unpredictable. Every time I pull the lever I get a prize, or else sometimes I get a prize when I pull the lever but there’s no pattern to it. When it is unpredictable, or variable, people (and lab rats) work harder. They keep pulling that lever to see if they’ll get more treats. When it’s predictable, humans and their rat counterparts will both knock off at quitting time. (This is why slot machines are so addictive.)
Email is unpredictable like that. Lots of times you get junk mail, but sometimes you get a letter from a friend or something important. We love getting the cool stuff, so we keep checking our inboxes. There are ways to get control of such behavior, though.
Ariely caught Hepatitis C and had to inject himself daily with Interferon, which gave him unpleasant side effects. But he loves movies, so after taking the medication, he watched movies. With time, he came to associate the Interferon with movies, which he loved, instead of the side effects like vomiting, which he (obviously) hated. It’s hard to stay the course if something makes you feel bad, no matter how much you understand that it’s good for you. So we need to find positive reinforcements.
We’d have longer lifespans if we were better at decision making. We don’t pay enough attention to long term benefits. But if we can find the right approach, we can coax ourselves into good behavior. We can watch movies while we run on treadmills.
Duke University has a popular spectator sport program, but not a big stadium. There isn’t enough room in the stadium for all fans to get tickets, so intricate and elaborate rituals have evolved around the distribution of tickets. Tickets are valuable and in demand:
- People who have tickets won’t sell them for less than (on average) $2,400.
- People who don’t have tickets are willing to pay as much as (on average) $170.
The conclusion that Ariely draws is that the things we own are more valuable to us than they are to other people. Ownership creates value.
Our society is focused on ownership. Transactions are core social actions. The things that we own help to inform our identities. Since it’s so important, we should approach our ownership decisions rationally and systematically. But we do not, for these reasons:
- We love what we already own.
- We focus on potential loss and not potential gain.
- We think others see things from our perspective.
The more that you work on something, the more ownership you’ll feel for it. And we can feel ownership for a thing before we own it — for example, when you bid on something at auction, you feel like it’s your own territory that you must defend through additional (and increasingly higher) bids. This is why companies have trial promotions. If you try it for a short while, it’ll feel like something you own, and you will want to protect against losing it.
Ownership changes our perspective. Going back to our state before we owned something feels like a loss. Ariely tries to look at transactions like he’s not an owner, which puts a little distance between him and the item in question.
Consider the real estate bubble in 2008: Nearly all property lost a lot of value. People seemed to understand this, but at the same time, they still overestimated the value of their own houses.
Homes are especially important because we invest so much in them — we don’t just put money, we put work into our homes.
Ariely detailed his own home story. While working at MIT, he and his wife Sumi bought a house in Cambridge and had it remodeled until it was just right. They LOVED their little house. Then they got jobs at Duke (where the stadium is reputedly small), and they bought a new house in Durham, North Carolina. They put the Cambridge house up for sale, but imagine their surprise when they discovered everyone else didn’t share their exact same taste. People didn’t appreciate the remodeling as much as they should have, and the Arielys had to undo some of the work before their house sold. And it was an expensive lesson, because they wasted time and money figuring out why their house wouldn’t sell.
An ancient Chinese commander came up the river with his troops to attack the enemy. After his army embarked and marched off, he burned down their boats so that they would fight harder. See — they didn’t have the security of a fallback plan.
We, however, like to keep our options open. We make provisional plans and devise alternatives just in case, but all of these options come with a cost: time, money, attention … something. We buy a car with extra features that cost more money. We put our children through loads of extracurricular activities that don’t always interest them.
Sometimes, like when we have to pick a major in college, we don’t want to close the door to one possibility in order to pursue another. It is the same problem when you date two people and must pick between them. Ariely details findings from a computer game experiment that illustrated how people can spend so much time rushing from one option to another that they can miss out on beneficial opportunities. When participants could only keep options open by tending to them periodically, this made them even more frenetic. People can’t stand losing options! But it is irrational and costly to chase worthless options.
We have so many opportunities that we are paralyzed with choice. Not only do we waste time running from door to door, we waste time running to low value doors. Sometimes we spend so much time on low-value doors that we miss out on other opportunities. We miss out on things because we’re pursuing the wrong things. We spend too much time at work and miss out on watching our children grow up. People lose perspective.
Sometimes, we need to close doors. We need to drop out of time sucking commitments. We have to set priorities. But even after we narrow our choices, there are difficulties. For example, it can be especially difficult to decide between two similar options. This situation makes us particularly indecisive, and indecisiveness can be expensive. Imagine a donkey standing in the middle of a barn. On either side of the barn are tasty piles of hay. The donkey can’t decide which one he wants to go and nibble on. He sits there for hours, days, unable to decide. Eventually, he dies of starvation.
Indecisiveness also has consequences. (Hamlet, anyone?!) Sometimes you just need to poop or get off the toilet. The donkey has to pick one pile of hay or the other. Some decisions could be made with a coin toss but, instead, people make a big deal out of them. It should be easy — but it’s not. Even the author sometimes has trouble deciding, like that time he had to decide whether to stay at MIT or take the job offer at Stanford.
The author had a friend who was a journalist and who met with members of the Irish Republican Army. While he was interviewing IRA members, they discovered the governor of the British prison (an enemy of theirs) had been assassinated. They were happy to hear the news; it was a victory for the cause. But the British, not surprisingly, regarded this political assassination in a whole different light. They were boiling with rage. The incident was held up as proof that negotiations with the IRA were useless. Two different sides to the same situation.
In a research project at MIT, students at a pub were offered a choice between two beers: one was standard commercial beer and the other was commercial beer with a little bit of balsamic vinegar added. First, people got a taste of each and then choose which they wanted to drink. If the researchers didn’t tell people exactly what the difference was between the beers, they usually picked the beer with vinegar added. If they were told ahead of time, however, nobody wanted the vinegar beer. They all went for the straight commercial brew. This shows that people’s expectations affect how they perceive something.
In another beer experiment, this time researchers gave people the option of the two beers, without explaining how they were different. After the subjects made their decision about which beer they liked better, the researchers told them that one was commercial and the other commercial with some vinegar. Most of these people preferred the vinegar beer initially, and then, after they found out it was beer with vinegar added, they still liked it! This teaches us that if you want to sell something, you should fully disclose any faults, but only after the customer has fallen in love with it.
Presentation helps set expectations. Buy nice wine glasses to impress your dinner guests and prep them to enjoy a fine meal. Expectations are so important. They create stereotypes, which are shortcuts in thinking. These aren’t always bad, either. Stereotypes affect how people see themselves and how they perform.
This may surprise you: some surgical procedures are commonly practiced for decades before anyone gets around to systematic scientific experiments that would prove or disprove their value. And sometimes, when studies are finally done, it’s shown that people got relief from the procedures due to the placebo effect. In other words, the procedures only helped because people thought they would.
In the 19th Century, people used Mummy powder (at the risk of stating the obvious: dried, powdered Mummies) as a treatment for many different ailments. Throughout time, all sorts of strange things have been used medicinally, and the placebo effect made lots of people think these peculiar cures worked.
But they only work because of the power of suggestion. Specifically, two things make placebos work:
- Faith: whether that’s faith in the medicine itself, the doctor who prescribed it, the institute that provided it, etc.
- Conditioning: things become familiar, and we learn to expect things. (If you order pizza every night, you’ll start salivating as soon as the delivery person rings the bell.)
Ariely discusses an experiment showing that people get more pain relief from an analgesic that they believe is more expensive than one they think is cheap. Electrical shocks are administered as part of the study. (The whole thing sounds really unpleasant and potentially unethical, but Ariely doesn’t address this.) Similarly, energy drinks give people a bigger kick if they’re more expensive, regardless of caffeine content. Seriously: people drinking discount energy drinks don’t perform as well on mentally challenging puzzles. And subjects that saw a statement that energy drinks improved mental performance themselves performed better than any other group.
People who take a minute to think about it realize that the price of an energy drink couldn’t actually affect their performance. This breaks the spell, and the placebo effect loses its hold.
But since placebos can actually help people feel better, maybe we should make use of them. Medieval European monarchs laid hands on their subjects in healing rituals, and these practices continued into the 19th Century. A practice that so many people participated in and that lasted so long must have been helpful, right? It’s sort of easy to be dismissive of these things, but they harness deep psychological mind-body connections. It’s totally valid.
Doctors actually make use of the placebo effect rather often. They prescribe drugs sometimes knowing that they don’t really need to, except that it will make people feel better. (Not that they really want to be doing this. A lot of times they’re in denial about it and can’t even admit it to themselves.)
Not surprisingly, there are all kinds of ethical issues with placebos. Is it OK to charge a lot of money for drugs if that will make them seem more effective to the people taking them? Is it OK to give people sugar pills and tell them it is medicine?
Practicing fake surgeries, as was done in some of the aforementioned experiments, is really problematic. But then, not doing the research is also kind of unethical, yes? Maybe people are getting surgery that doesn’t help, and we don’t realize it because we’ve never done empirical studies. Ethics are hard.
Ariely tells a story of responding to an offer for free cable. After it was all hooked up, the cable company charged him for installation and other stuff. Turns out, he neglected to read the fine print. The free cable wasn’t so free after all. Because of these kinds of marketing shenanigans, people have come to understand that they must always be looking for a catch. This constant vigilance makes people less trusting in general.
In one experiment, a booth had a sign on it saying “Free Money” and a stack of bills was visible on the table. Participant response depended on how much money was being given. When it was $1, only one percent of the people who walked by stopped at the booth. When $50 was being given away, 19% of passersby stopped. The more money was at stake, the more it was worth to at least check it out.
Those who did stop were suspicious and usually asked some questions before taking the money. But most people did not stop. A few of those who passed by the booth were asked why they ignored it; they said they suspected it was just some marketing ploy.
Trust is important to a well-functioning economy. Transactions require trust. When trust has been abused and someone’s been swindled, transactions become harder for them. Enter the tragedy of the commons. People used to share open fields to graze their animals. Eventually, some of the farmers took advantage and overgrazed the land, which starved the animals and hurt everyone.
This should be more of a warning than we allow. We share lots of resources and we should maintain them for all. We should think about the long term consequences. For example, one fisherman may benefit from overfishing, but in the long run, it’s bad for all fishermen when the stocks are depleted.
When we all cooperate, trust is high. But when we see someone cheat the system, trust deteriorates. Many people and companies don’t realize how important trust is. Once broken, it’s hard to regain, and broken trust has many bad long term effects.
An honest person has to figure out how to stay honest (if they choose) in an untrusting and untrustworthy world. And the temptation to cheat is strong. For example, everyone exaggerates their attributes on dating sites. If you don’t lie about your weight or income, people will think you’re fatter and poorer than you are, because they know everybody cheats. You are penalized for your honesty. Likewise, everyone puffs themselves up on their resumes. You have to do it because everybody else is doing it. You will suffer by comparison if you do not.
In an experiment to gauge mistrust, first experimenters asked people if statements like “the sun is yellow” and “a camel is bigger than a dog” were true. One hundred percent of these people said “yep, sure, you betcha, we agree.” The next step of the experiment was to brand these statements as coming from Procter & Gamble, the Democratic Party or the Republican Party. (“Democrats say the sun is yellow” and “P & G issued a statement that a camel is bigger than a dog.”) People began arguing the statements.
- “Yes, the sun is yellow, but does it not have spots? Isn’t it actually more white than anything?”
- “A really big dog is probably bigger than a baby miniature camel.”
People became suspicious of the statements because of the sources ascribed to them. This might be depressing to think about (especially at this moment in time), but look on the bright side: humans are social animals and our instincts draw us back to trusting each other.
Companies have to build trust by being accountable when they err. They should address complaints. They should strive to be transparent.
There is lots of dishonesty and theft in this world. There are the obvious culprits, like burglars, but they are a drop in the bucket compared to white collar crime and employee theft. In essence, there are two kinds of dishonesties in this world: there’s the standard criminal variety, like robbing a bank, and there’s stretching the rules. The impulse for such daily acts of lessor evil (for example, swiping a pen from the bank or exaggerating a business expense) became fodder for a study. The results show that when it was lucrative to cheat on a test, nearly everyone cheated a little bit. When cheating was made even easier, though, people cheated a tiny bit more but it was still a fairly small amount.
Adam Smith said that people will generally stay within the bounds of honesty because it benefits them to do so. As social animals, people need their fellow humans. A policy of honesty will earn us few enemies. This approach assumes people do a sort of cost benefit analysis, weighing the rewards and penalties of dishonest behavior. Ariely disagrees with this approach, and says morality is something bigger than these sorts of social economics.
Since honesty is important to us, it’s weird that we are dishonest fairly often. The problem is that we’re not normally on the alert for moral transgressions. Sure, when something big comes up, we wrestle with it and probably do the right thing. But without our superegos’ vigilance, we’ll keep doing cost benefit analysis on the little things and come up short.
External controls, such as laws and regulations, are enacted in an attempt to curtail dishonesty. But then people do their best to circumvent the law. The laws don’t have their desired effect. Why have laws at all if people break them?
Is there a better way to get rid of dishonesty? In one experiment where participants could cheat on a test, some of the subjects were asked ahead of time to remember and list the Ten Commandments. This group of people didn’t cheat at all. The Ten Commandments woke their sleeping superegos. In a similarly experiment, a group of subjects first signed an honor code statement. None of those people cheated either. Of course, in a secular society, we want to avoid overt religious symbols, but maybe there’s some kind of oath or something we can have to remind people to be cool.
Professional organizations need to strengthen their ethics codes. Ethics are social norms. If we allow them to be replaced by market norms, it will be a long time before we can change it back. We should try to hold on to the social norms.
People will steal soda from a communal refrigerator, but they will not steal money. They’ll take a pen from work, but they won’t touch the petty cash jar. Cheating is easier when it’s psychologically removed from money. It’s easier to rationalize the behavior.
The people responsible for Enron’s collapse probably would not beat old ladies over their heads and steal their purses. But they did steal the pension money of a lot of old women. They were able to rationalize it to themselves in a way that wouldn’t be possible if the theft were more direct.
Ariely details yet another experiment where people were allowed to cheat on a test. Instead of money for correct answers, one group was given tokens, which they then had to cash in for money. This group of people stole way more money than any other group.
Given the chance, most people will cheat, but they don’t realize it. Most people are blind to how susceptible we all are to temptation. For example, people who would never steal money from an insurance company don’t think twice about inflating their claims. Some people return clothes to a store after they’ve worn them, as a way to dress for free. (FYI — this practice is called “wardrobing,” and it costs stores money because lots of the clothes aren’t in good enough shape to put back on the shelves.) People on business accounts pad their expenses. Usually they have their rationalizations for doing so.
Somebody hacked Ariely’s Skype account and ended up charging his PayPal account. (He belabors descriptions of Skype and PayPal in a manner that is sort of unintentionally amusing.) Ariely thinks this was most likely not done by a professional, because a professional wouldn’t waste their time on making a few long distance calls. They’d have bigger fish to fry. Realistically, it was probably some harmless, young whippersnapper. But the kid who ripped off Ariely probably wouldn’t have stolen cash from him. The perpetrator probably rationalized that they weren’t actually harming anyone by hacking into the Skype account. Side note: it’s rather disturbing to think that the nature of the internet might tempt more people into dishonesty because it’s removed a level from reality.
Even good people can be blind to the ethics of a situation and can rationalize away bad behavior. Companies can behave ethically and unethically, just as individuals can. They nickel and dime people, act cheap and mean, hide surprises in the small print.
People need to become more aware of the connection between non-monetary currency (like tokens) and cheating. As a society, we’re moving away from cash, so this makes it more important than ever. We should arrange things so we don’t live in a world structurally designed to tempt us into dishonesty.
There is this bar, the Carolina Brewery. Some professors wanted to see if people were influenced in their choice of beer by the people in their group who had ordered before them. Would they want what their friends were drinking or would they want something different?
People were given the choice between four different beers to sample. They were also given a survey to fill out. Some people had to tell the waiter out loud which beer they wanted; others wrote their choice on paper and handed it to the waiter. In other words, one set ordered their beer publicly, so that the others could hear what they ordered, while the other set ordered more or less privately.
When people ordered the beer out loud, there was more variety per table. People were inclined to order something different from what their friends ordered. But according to their surveys, these people were less likely to enjoy their choice. The exception to this was that the first person in a group to order beer was as likely to be satisfied with their choice as the people who wrote their orders down. The first person was presumably free to make their selection based on what they wanted without having to deal with social pressure to order something else.
Later, at Duke, they did a similar experiment with wine samples. In that study, they found a correlation between ordering something different from others and a quality called need for uniqueness. This personality trait reflects a desire by some to be different from those around them. When people order food and drink, sometimes they are trying to project an image. Unfortunately, they might end up eating something that wasn’t what they really preferred. Similar studies carried out in less individualistic cultures show people more inclined to order what their friends ordered. In doing so, they reinforce their similarity to the group. These people were also at risk of ordering something they didn’t actually enjoy.
Some advice: decide what you want to eat and stick to it, even after you’ve heard what your companions are ordering.
People are funny animals; they are predictably irrational. Standard economics assume that we are rational, but we are not. Our behavior, however, isn’t random. In fact, we make the same mistakes repeatedly. Economics should be more based on how people actually behave (a.k.a. behavioral economics). We should develop systems to mitigate our predictable, systematic mistakes. There are tools and policies that can help people make better decisions.
We are pawns. Most of the time we don’t understand what’s really going on. We think we’re in the driver’s seat and steering the course of our lives, but we are wrong. We are victims of illusion, but we aren’t helpless. We can learn to behave differently. We can use technology to help us overcome our weaknesses.
Visit www.predictablyirrational.com if you’d like to participate in studies.
New York Times Review (freemium)
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