Predictably Irrational: The Hidden Forces That Shape Our Decisions
A few years ago, for instance, the AARP asked some lawyers if they would offer less expensive services to needy retirees, at something like $30 an hour. The lawyers said no. Then the program manager from AARP had a brilliant idea: he asked the lawyers if they would offer free services to needy retirees. Overwhelmingly, the lawyers said yes. What was going on here? How could zero dollars be more attractive than $30? When money was mentioned, the lawyers used market norms and found the offer lacking, relative to their market salary. When no money was mentioned they used social norms and were willing to volunteer their time. Why didnt they just accept the $30, thinking of themselves as volunteers who received $30? Because once market norms enter our considerations, the social norms depart.
at Dunkin Donuts, how did we move our anchor to Starbucks? This is where it gets really interesting. When Howard Shultz created Starbucks, he was as intuitive a businessman as Salvador Assael. He worked diligently to separate Starbucks from other coffee shops, not through price but through ambience. Accordingly, he designed Starbucks from the very beginning to feel like a continental coffeehouse. The early shops were fragrant with the smell of roasted beans (and better-quality roasted beans than those at Dunkin Donuts). They sold fancy French coffee presses. The showcases presented alluring snacksalmond croissants, biscotti, raspberry custard pastries, and others. Whereas Dunkin Donuts had small, medium, and large coffees, Starbucks offered Short, Tall, Grande, and Venti, as well as drinks with high-pedigree names like Caffè Americano, Caffè Misto, Macchiato, and Frappuccino. Starbucks did everything in its power, in other words, to make the experience feel differentso 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. GEORGE, DRAZEN, AND I were so excited with the experiments on coherent arbitrariness that we decided to push the idea one step farther. This time, we had a different twist to explore. Do you remember the famous episode in The Adventures of Tom Sawyer, the one in which Tom turned the whitewashing of Aunt Pollys fence into an exercise in manipulating his friends? As Im sure you recall, Tom applied the paint with gusto, pretending to enjoy the job. Do you call this work? Tom told his friends. Does a boy get a chance to whitewash a fence every day? Armed with this new information, his friends discovered the joys of whitewashing a fence. Before long, Toms friends were not only paying him for the privilege, but deriving real pleasure from the taska win-win outcome if there ever was one. From our perspective, Tom transformed a negative experience to a positive onehe transformed a situation in which compensation was required to one in which people (Toms friends) would pay to get in on the fun. Could we do the same? We
But because human being tend to focus on short-term benefits and our own immediate needs, such tragedies of the commons occur frequently .
But suppose we are nothing more than the sum of our first, naive, random behaviors. What then?
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 farsocial 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 cant take the path of market norms. The Beatles proclaimed some time ago that you Cant Buy Me Love and this also applies to the love of learningyou cant buy it; and if you try, you might chase it away.
Giving up on our long-term goals for immediate gratification, my friends, is procrastination.
human beings are inherently social and trusting animals.
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- 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-pg. 241
If you're a company, my advice is to remember that you can't have it both ways. You cant treat your customers like family one moment and then treat them impersonallyor, even worse, as a nuisance or a competitora moment later when this becomes more convenient or profitable.
individuals are honest only to the extent that suits them (including their desire to please others)
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.
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 lunchesif 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? Thats exactly the meaning of free lunches from the perspective of behavioral economicsthe 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.
one that we are just beginning to understand- is that trust, once eroded, is very hard to restore.
Ownership is not limited to material things. It can also apply to points of view. Once we take ownership of an idea whether its 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 cant stand the idea of its loss. What are we left with then? An ideology rigid and unyielding.
people are sometimes willing to sacrifice the pleasure they get from a particular consumption experience in order to project a certain image to others.
People are willing to work free, and they are willing to work for a reasonable wage; but offer them just a small payment and they will walk away.
Resisting temptation and instilling self-control are general human goals, and repeatedly failing to achieve them is a source of much of our misery.
So imagine two scenarios. Lets say its the holidays, and two different neighbors invite you to their parties in the same week. You accept both invitations. In one case, you do the irrational thing and give Neighbor X a bottle of Bordeaux; for the second party you adopt the rational approach and give Neighbor Z $50 in cash. The following week, you need some help moving a sofa. How comfortable would you be approaching each of your neighbors, and how do you think each would react to your request for a favor? The odds are that Neighbor X will step in to help. And Neighbor Z? Since you have already paid him once (to make and share dinner with you), his logical response to your request for help might be, Fine. How much will you pay me this time? Again, the prospect of acting rationally, financially speaking, sounds deeply irrational in terms of social norms. The point is that while gifts are financially inefficient, they are an important social lubricant. They help us make friends and create long-term relationships that can sustain us through the ups and downs of life. Sometimes, it turns out, a waste of money can be worth a lot.
Some special conpanies see trust as the pulic good.
Standard economics assumes that we are rational... But, as the results presented in this book (and others) show, we are far less rational in our decision making... Our irrational behaviors arevneither random nor senseless- they are systematic and predictable. We all make the same types of mistakes over and over, because of he basic wiring of our brains.-pg. 239
Thats 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.
that when given the opportunity, many honest people will cheat.
The danger of expecting nothing is that, in the end, it might be all we'll get.
There are many examples to show that people will work more for a cause than for cash.
Thoreau wrote, Simplify! Simplify! And, indeed, simplification is one mark of real genius.
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.
we are pawns in a game whose forces we largely fail to comprehend.
we usually think of ourselves as sitting the driver's seat, with ultimate control over the decisions we made 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
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.
Without constant suspicion, we can get more out of our exchanges with others while spending less time making sure that others will fulfill their promise to us.