Estimated Reading Time: 11 minutes


Dan Ariely teaches Behavioral Economics at Duke University and has won several scientific awards. He has been featured in leading journals in psychology, economics, neuroscience, medicine and business as well as in major media outlets such as The New York Times, the Wall Street Journal, the Washington Post, the New Yorker etc.

While he was 18 years old he suffered third-degree burns on 70% percent of his body. The ability to participate in daily activities was altered by this incident and he felt partially separated from society. This has enabled him to analyze different behaviors of his and others: why he loved the girl he loved and not another one, why he loved climbing and not history and the most important, what is about life that motivates people and causes us to behave as we do.

He decided to expand his scope of research and try to figure out why individuals make repeated mistakes without the ability to learn much from their experiences. Something similar we encounter in the book Black Box Thinking where Matthew Syed tries to explain how we would all benefit from borrowing the techniques that are used in the aviation industry in case of major accidents when it comes to dealing with our own mistakes. By embracing a Black Box approach for our actions we figure out exactly what went wrong and we make sure the same mistakes don’t happen again. Syed focuses on industries or professions such as healthcare or general prosecutors while Dan Ariely focuses on consumers, business peoples or policy makers and the fact that we are not only irrational in the way we make decisions but we are actually predictably irrational.

Ariely tries to convince us that our behaviors are systematic and we repeat them based on a predictable pattern. They are not random nor senseless.

Relativity: Why everything is relative – even when it shouldn’t be

In the first chapter of the books, Ariely talks about relativity and the fact that people rarely choose things in absolute terms. We can’t estimate the real value of something based on our own intuition. We always focus on the relative advantage of one thing over another and then try to estimate it’s value accordingly.
Most people don’t know what they want until they see it in context but the problem is that often a decoy is employed, tricking people into the “easy” choice.

If I were to ask you which circle is bigger what would you say?
Better think again and hover your mouse on the picture.

 

To prove his point Dan gives us clear examples of marketing practices where this decoy is used to change the behavior of customers.

When you first look at the graphic below (left) you would probably think that the price for the print subscription is an error because it’s the same as the print + online edition. Who would want to order that package?! Right?

economist-both-conditions-with-results

Well … Dan performed a test with some smart students from MIT where he eliminated the “Print Subscription” option. The numbers next to each subscription represents the number of people that opted to buy the respective package.
Now it’s easier to see that the “Print Subscription” package is merely a decoy with the sole purpose of making the customers think that when you buy the “Print & Web subscription” you get the Online Access for free.

When the “Print Subscription” was eliminated fewer customers bought the expensive subscription. Leaving out the decoy generated 80% less revenue for The Economist.

The same type of trick is used by shops when they decide what products to put in display. They will try to sell the middle option so they will display three choices with the price and specifications gradually increasing.

There is another aspect of relativity that trips us up way easier. We do not only compare things one with another but we also tend to focus on comparing things that are easily comparable and avoid comparing things that cannot be compared easily.

For example, if we are offered by a travel agency a city break to Paris with breakfast, a city break to Rome with breakfast and a city break to Rome without breakfast in most cases we will choose the trip to Rome that has a breakfast and we will probably ignore the Paris option.

So if real estate agents or travel companies want to influence your decision into buying a flat or a trip they will probably use the trick described in the graphic below.

attributeab

Although relativity helps us take decisions it can also make us miserable. We are constantly comparing our life with others. The rise of social media accelerates this process as we gain more insights of one’s personal life or at least the way they depict it.

In the ” Book of Burlesques (1916), the American journalist and author H. L. Mencken defined wealth as:

“Any income that is at least $100 more a year than the income of one’s wife’s sister’s husband.”

Why? Because his sister’s wife made sure his wife knew her husband’s salary and she made sure he knew his brother in law’s salary. The moral of the quote is that sometimes it doesn’t matter if you have everything you need and you are comfortable with your lifestyle as long as you compare it with someone’s else. Relativity at it’s best right?!

The fallacy of supply and demand

We can easily explain this chapter with a short reference to a note by Mark Twain about Tom Sawyer:

“Tom said to himself that it was not such a hollow world, after all. He had discovered a great law of human action, without knowing it — namely, that in order to make a man or a boy covet a thing, it is only necessary to make the thing difficult to attain”

The naturalist Konrad Lorenz discovered that baby geese become attached to the first thing that they see. He called this phenomenon imprinting. Using this principle an Italian diamond dealer, James Assael, managed to raise the price for black pearls that were first considered of a lower value than regular pearls by anchoring them next to worlds finest jewels in the ads he commissioned.

The next idea Dan proved is the existence of what is called arbitrary coherence. He proved that anchoring can not only influence the initial price but also further prices. He has done so by running a test at MIT where he asked students to write the last two digits of their social security number as a price. For example, if it was 98 then they would have to write in the corner of a page 98$, but it could also be 10 – 10$.
Then he presented a few products and asked the students if they would pay the respective price for each of the products and if not to say the maximum amount of money they would pay for each object. The results indicated that most of the students would not pay that amount of money for the respective products but what’s interesting is that the students with a higher price that resulted from the last 2 social security numbers paid on average more than the students with a lower number. Practically he proved the existence of arbitrary coherence where anchoring influences not just the initial price but also further prices.

The cost of zero

In this chapter, Dan talks about how zero (free) influences our behavior and it’s actually an emotional hot point for each of us. He explains the huge gap between 1 cent and free and demonstrates all of this through a series of interactive experiments.

Along with fellow teachers and students, he offered Lindt Truffles (high-quality chocolates) and Hershey Chocolates (regular quality chocolates) to potential customers in a public building. He first set the price for Hersheys at 30 cents each and 15 cents for the Hersheys. At this point, all the customers acted with a good deal of rationality and valued the quality of Lindt Truffles. About 73 percent of them bought Lindt Truffles and 27 percent chose a kiss. They gradually lowered the prices for both chocolates until the Hersheys cost 2 cents, 1 cents and the results were similar. People were still paying a lot more for the quality chocolate than just 1 cent for the Hersheys. Everything took a U-turn when they offered the Hersheys for free. Some 69 percent of them chose Hershey chocolate.

A similar scenario happened when Amazon offered free shipping worldwide for books and the sales went through the roof except for the sales from France. When they looked into the problem it seems that the local subsidiary chose to charge the customer one franc (20 cents). So Free is a special hot emotional button that has a great impact on our behavior and any other amount of money no matter how low or apparently insignificant can never achieve the same results. Zero is not just a different discount! Zero is a different place!

The cost of social norms

In this chapter, Dan emphasizes on the fact that our lives are separated into two worlds. One where social norms dictate and the other one where markets dominate. The social norms consist of actions among friends and families that are not based on money and there is an implicit agreement that they will return the favor. You will never charge a friend of yours to move his sofa to his new flat.

In contrast to this vague and implicit dealing of the social world, the market world is the opposite. We set a price and we know the exact amount of money that we are going to receive for the respective task and everyone is clear on this. We negotiate a fixed salary when we take up a new job and we know the exact amount of hours we need to work in a month.

Dan advises us that once the market norms enter our considerations, the social norms depart. To make it easier for us to understand this he reminded us of the case where AARP asked lawyers to help needy retirees with legal work for a small amount a money 30$ per hour and all of them refused. The same AARP asked another set of lawyers to offer the same services for free. Overwhelmingly, the lawyers said yes. When money was mentioned they were anchored in the market world and found the offer lacking, relative to their market salary. When no money was mentioned they used social norms and felt they worked for a greater cause.

Using various tests Dan concluded that gifts fall in the social norms world as long as the other person does not know the price of the gift. If he/she knows the price you could just easily offer them the amount of money in cash because it would have the same effect.

Police officers, firefighters, and soldiers don’t risk their life for the weekly pay. It’s the social norms and the pride in what they do and a sense of duty. The U.S. customs officers are daily put in the path of the same dangers as police officers but we rarely hear about gun standouts near borders. They will never risk their life for the government salary they receive.

The high price of ownership

“One man’s ceiling is another man’s floor”

When we own something we begin to value it more than other people do. That’s why the seller of a house usually values it more than the potential buyer. We focus more on what we are going to lose than what we are going to gain.
In this chapter, Dan tells us a story about a couple who adopted a Chinese little girl. When they reached the orphanage, the director took each couple in a room and presented them their child. Everybody commented that the choices were a perfect match but what they did not know is that they were random. This is a great example of nature’s ability to become instantly attached to what we have.

What is interesting is that we begin to feel ownership before we own something and that is the basic principle behind the whole auctioning system and why it is a profitable way to sell things. The partial ownership determines customers to increase their bid in order to fully own the product.

Trials are another way we are tricked using the false ownership method. Once we claim a gold package, of course, we claim ownership of it and find it difficult to go back to the regular subscription. The Same principle applies to the “30-day money back guarantee” offers.

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 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 (as they grabbed) 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”

In this chapter, Dan urges it’s readers to unshackle themselves from the irrational impulse to chase worthless options in their love life or life in general.

The effect of expectations

To prove that tastes and experiences are based on expectations Dan ran a series of tests at the local pub of MIT.
He offered students a regular beer and also a beer called MIT Brew that is basically a Budweiser beer with two drops of vinegar added. After tasting both beers the students without foreknowledge about vinegar preferred the taste of the MIT Brew while the students that were told before or even after they tasted it about the presence of vinegar preferred the regular beer.

If you tell someone to taste a food but you warn them that is not that tasty even if they find it tasty the brain will play a trick on them and slightly influence their opinion regarding the food. Expectations are not limited to food. When you invite some to a movie and you can increase their enjoyment by mentioning it got great reviews.

You are all familiar with the famous tests about the taste of Pepsi and Coke. Dan performed the same tests but in a special condition – in a functional magnetic resonance imaging machine. Half of the participants knew which drink they were drinking while another half did not. When they did not know the brand the center of the brain associated with strong feelings of emotional connection – called the ventromedial prefrontal cortex was stimulated. The reaction of the brain for both sugars was identical and was caused by sugar. But when the participants knew the brand, mainly for the Coke brand, the dorsolateral aspect of the prefrontal cortex, an area involved in higher human brain functions such as high order cognitions or ideas was also activated. The association of the Coke brand, not the chemical properties generated higher order brain mechanism and this is the advantage that Coke has in the marketplace.

The brain cannot start from scratch each time and this is why expectations also shape stereotypes. Stereotypes provide shortcuts in our attempt to make sense of complicated surroundings. This is why we will always believe that older people need help when using a computer or that a student at Harvard will be intelligent.

The context of our character

Dan splits dishonesty into two types:
1. The type that evokes the image of a pair of crooks circling a bank trying to find out the amount of money is in the bank before they rob it. On the basis of cost-benefit calculation, they decide whether to rob the place or not.
2. The type of people who consider themselves honest – the people who have “borrowed” a pen from a conference or taken an extra can of soda from the fridge.

The question is how predominant is the second type and how far will they go? Through a series of tests, Dan found out that everybody in type 2 cheats and steals a little as long as it will give them a slight advantage but they stop when it includes cash.

For example, students cheat when they have the chance to do so, but they don’t cheat as much as they could. When the students were reminded about morality (they had to read the 10 commandments) moments before they took the exam they were more honest. Dan left soda cans unattended in the fridge and they vanished, but this didn’t happen when he left money unattended.