Predictably Irrational by Dan Ariely

[This detailed, chapter-by-chapter précis of Dan Ariely’s Predictably Irrational: The Hidden Forces That Shape Our Decisions is a guest post by George Gibson, a colleague of mine at Xerox. George originally posted it on our internal blogs as a series, and I found it so much fun to read, I asked if I could repost it on ribbonfarm. So here you go.]

Chapter 1: The Truth About Relativity

This was clearly the most interesting of the books from my summer reading list. Let me be clear that though I don’t buy all of the points Dan tries to make, I find them all interesting and worthy of thought. With any luck we can begin a real discussion of his ideas and observations in the commentary. That means I’ll attempt (not always successfully) to keep my opinion out of the body of this piece, and reserve that for any commentary that might develop. The real point here is to get you interested enough to read the book yourself.

“Most people don’t know what they want until they see it in context.” Control the context and you can change their decisions.

This chapter is about how our decision making as skewed from what we might think of as rational by the use of comparisons, anchor points and some about the magic of “FREE!”. The Economist offered three subscription options:

• Electronic alone: $59
• Print alone: $125
• Electronic and print: $125

So what would you guess people would choose? Would anyone choose the Print alone option forgoing a “FREE!” electronic subscription? Not likely. So, why is it even offered? Testing with 100 Sloan School students, 16 chose Electronic alone and 84 chose the combined Electronic and print option. Nobody chose the Print alone option (boy those Sloan folks are smart aren’t they?). However when the irrelevant option, the one nobody chose, was eliminated, another, equally bright, hundred Sloan students divided 68 for Electronic alone and only 32 chose Electronic and print. So…what happened here?

Ariely makes the unpleasant but often correct assertion, “Thinking is difficult and sometimes unpleasant.” Cues that allow us to establish the relative value of various offerings, then, reduce the required thought effort. What the Economist offered was a no-brainer; while we might not be certain if the print subscription was worth more than twice the electronic version, the combination of the two was clearly worth more that the print version alone.

The chapter contains many examples of this effect including movie script jokes, bread makers, houses, vacations, salaries and even potential dates. Two general frameworks are noted as particularly common. First is the inclusion of a slightly degraded offering near the offering you want the customer to accept increases the likelihood that he or she will make your desired choice (read the choice of potential dating partners section of the book for this one). Next is the pick the middle one strategy in which three offerings are presented with the middle of them as the sellers preferred choice. So often the butt of jokes, car companies even provide an interesting example. What portion of the firm’s profits on most platforms come from the middle of the line offering?

There are take-aways here for both the seller and buyer. Politely said, you as a seller can help guide your customer through the bewildering array of choices by providing helpful contextual information (I’ll let each of you put your cynical hat on and restate that one for fun!) As a consumer it is helpful to understand the framing a seller is likely to present you with and do some of that nasty thinking work up front deciding whether or not the seller’s preferred context and yours are the same.

Chapter 2: The Fallacy of Supply and Demand

This chapter is at the heart of Ariely’s argument. Classical economics says that our decisions about resource allocation reflect our relative valuation of the various investment alternatives. If I buy more wine than cheese it’s because I derive greater utility (more than just usefulness by the way) from the juice of the grape. There are clear limits of course, I am unlikely to allow myself to starve and will occasionally buy cheese, or buy cheese when the price is low enough. But the general point remains, I am willing to pay more for those things from which I derive greater utility.

Not so says our man Dan. How much a person is willing to pay for something is determined or at least significantly affected by a variety of factors which have nothing to do with any benefit that he or she derives from that purchase. Do you remember what Tom Sawyer did with his chore, whitewashing a fence? Review that first and you’ll be more open to these arguments.

He starts with the story of black pearls. There were essentially none on the market so there was no objective way of establishing price. What happened was they were shown in advertising and in Harry Winston’s toney store along rubies and diamonds at a very high price. This initial association served to effectively anchor the price and therefore, going forward, future prices were high since the initial frame in which people were introduced to the product was among high priced goods.

He likens this anchor price phenomenon to that of imprinting. We are all goslings, fixed on that first object. He’s done a lot of really neat experiments to support his point. None of them are completely convincing but they certainly are thought provoking.

Consider, for example some really interesting experiments suggesting that thinking about a number – any number – before considering what you are willing to pay for an item whose market price you do not know – actually effects what you would be willing to pay for that item. In one of the experiments described a group of students were asked to write down the last two digits of their social security number before they indicated how much they were willing to pay for a bottle of wine, a cordless keyboard, some imported chocolates. Guess what! The amounts they were willing to pay actually correlated with those social security number fragments they had previously written down. Look at the table below! I spend time much time on this particular experiment precisely because the results are so bizarre.

	Range of last 2 Digits of SSN
	00 – 19	20 – 39	40 – 59	60 – 79	80 – 99	Correlation*
Cordless Trackball	$8.64	$11.82	$13.45	$21.18	$26.18	0.42
Cordless Keyboard	$16.09	$28.82	$29.27	$34.55	$55.64	0.52
Design Book	$12.82	$16.18	$15.82	$19.27	$30.00	0.32
Neuhaus chocolates	$9.55	$10.64	$12.55	$13.27	$20.64	0.42
1998 Cotes du Rhone	$8.84	$14.45	$12.55	$15.45	$27.91	0.33
1996 Hermitage	$11.73	$22.45	$18.09	$24.55	$37.56	0.33

* all correlations statistically significant

He cites a number of other experiments and observations that support not only that an anchoring affect, unrelated to market value or derived utility. One of the ones he cites that I have experienced personally is the persistence of old concepts of housing value when you move from one market to another. When Ginny and I moved here from Dayton, Ohio fifteen years ago, we went a long time looking for a house that cost about as much as the one we were leaving. Although Rochester can hardly be described as a high cost area, real estate was roughly twice as expensive per square foot here than in Dayton. It took us literally months to stop looking to replace our Dayton house with one of similar price here and adjust to the new price scale we faced.

I won’t spoil your fun and go through all the examples and neat concepts, “coherent arbitrariness” being among my favorites, but I will reiterate one of his most powerful points. Knowing that it is entirely possible that some factors not related to the real value a product or service crate for you may be affecting how much of that good you consume and how much you are paying for it, be mindful. Carefully examine your purchasing behavior and make sure you actually believe that the money you allocate to consumption of various offerings really advances your overall well being more than the next best use of those funds. So when you’re paying for your $4 cup of coffee at Starbucks (as you know I do), revisit the fundamental decision – should I be buying cheaper coffee at McDonalds or even bringing in coffee from home or should I be drinking water, of the free sort.

But if first anchors are so significant and long lived, how come you ever bought that first cup at $4 let alone the third? That first day you walked into Starbucks wasn’t your first experience with buying coffee. You had plenty of time and experience to establish an anchor backed my years of repeated experience to reinforce it. Howard Shultz had to work hard to make Starbucks fundamentally different than the other places you might by coffee – not just quantitatively but qualitatively. It just had to be unlike the other places you might stop when you wanted coffee – you had to get something more. Their success is the proof of their success there and the most recent stumbling in earnings can be attributed to some extent as the success of McDonalds and Duncan Donuts in making it just about the coffee.

Chapter 3. The Cost of Zero Cost

Why We Often Pay Too Much When We Pay Nothing

“Zero is not just another price….zero is an emotional hot button – a source of irrational excitement.”

The allure of free stuff drives us to make all sorts of irrational purchasing decisions. “Buy 2 get 1 FREE!!,” motivates a fair share of people to buy two of something they wouldn’t have bought one of except to get that free thing. As you’ve picked up by now, Ariely’s MO is to do experiments to probe economic rationality or the lack thereof. In this matter the first experiment involved selling chocolate on the MIT campus albeit in a strange way. Limiting chocolate purchases to one per customer they offered a choice between Lindt truffle and a Hershey Kiss. A huge difference in quality reflected in a substantial difference in price. The truffle sold for $0.15, half off the bulk retail price, and the Kiss sold for $0.01. Students split on their purchases with 73% choosing the truffle and 27% choosing the kiss. Next they lowered the price of each by $0.01; the truffle at $0.14 and the Kiss was FREE!! Now 69% of students choose the Kiss; same price difference, same expected benefit or enjoyment from eating the chocolate but apparently there is an additional benefit of FREE!!

Again my purpose here is to serve as a teaser here not to reiterate the book, I want you to read the book. Let’s just say that he did this experiment a variety of ways and each time the proposition that FREE!! distorts decision making was supported. He has some especially interesting Halloween experiments and some real Amazon experience supporting his assertion.

Chapter 4. The Cost of Social Norms:

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

I’m against wholesale quotations in reviews. So remember that this isn’t a review, it’s meant to be a précis and teaser. This chapter leads off with a story so compelling that I just have to present it verbatim.

You are at your mother-in-law’s house for Thanksgiving dinner, and what a sumptuous spread she has put on the table for you. The turkey is roasted to a golden brown; the stuffing is homemade and exactly the way you like it. Your kids are delighted: the sweet potatoes are crowned with marshmallows. And your wife is flattered: her favorite recipe for pumpkin pie has been chosen for desert.

The festivities continue into the late afternoon. You loosen your belt and sip a glass of wine. Gazing fondly across the table at your mother-in-law, you rise to your feet, pull out your wallet. “Mom, for all the love you’ve put into this, how much do I owe you?” you say sincerely. As silence descends on the gathering, you wave a handful of bills. “Do you think three hundred dollars will do it? No, wait, I should give you four hundred.”

Please fill in the blank with what you think will happen next.

The rest of the chapter is devoted to some experiments (of course) and some anecdotes that describe two separate frames in which we operate: those of social norms and those of market norms. He compiles evidence that social norms are more effective at motivating superior performance than are market norms. The armed forces are an interesting example. You didn’t really think that those soldiers in Iraq and Afghanistan were there for the pay and to save money for college did you? Those are nice perks (well the pay for low rank enlisted soldiers sometimes leaves their families in poverty) but exactly how much money would it take for you to risk your life like that? The actions we barely hear on the news in the car as we travel back and forth to work or have on as background during dinner, the acts of courage and heroism are not motivated by the paycheck but by the social norms of the service. One soldier I know said that you may join for your country but, in a fire fight, you’re fighting for your buddies. Boy, now there’s a powerful force. Powerful but, it turns out fragile. After the dinner above, how long do you think it would be before the narrator’s mother-in-law went out of her way for him?

In this chapter Dan provided the results of a number of experiments showing that there is a particularly interesting difference between the types and performance levels of tasks that can be produced when the reward system is governed by “social norms.” In one set of experiments he had people perform a simple computer task. Three groups were paid varying amounts and one group was asked to do the task as as a favor to the experimenter. Among those paid, those paid more generally produced more in keeping with our idea of market behavior. Those doing the experimenter a favor however, outperformed the highest paid group. You can imagine all sorts of implications. One more interesting twist however was that introducing market norms into the conversation (talking about how much some folks had been paid) before the volunteers worked destroyed the effect.

The most interesting set of things he explored based on these tenets was the implications of personal in firm-level behavior: what should you, and should a firm, leave in the arena of social norms and what in the realm of market norms. Will extra productivity for a firm be most effectively produced by market or social reinforcements? How about employee loyalty in all its manifestations? What effect will a company making clear that its relationship with its employees is purely financial have on the performance of that company’s employees and hence on the company itself. Is this an argument for a return to paternalism? It seems unlikely. Is it at the heart of the oft vaunted ability of small firms to “outperform” larger ones in some aspects of innovation: perhaps.

Chapter 5. The Influence of Arousal

Why Hot is Hotter Than We Realize

One of the things I’ve learned about blogging, although it might not be apparent, is that it’s a good idea to be brief. As you know I seldom say in two words what I can say in five, this is an ongoing challenge for me. This chapter however is one that encourages brevity. The central hypothesis is that arousal, of all sorts, produces a significant distortion of decision making. Decisions made in the heat of the moment are notoriously badly made. Think road rage, think victory celebration, think extreme thirst or hunger (I’ve always wondered, just how hungry the first person was that saw a lobster and thought, “hmmmm, that looks good”). There are all sorts of states of arousal and given that this is a book by an experimentalist at a university you can imagine that he describes experiments using several. ‘Nuff said. You’re simply going to have to read the book to get the details of what junior was doing in the name of behavioral economics to supplement the pittance his parents were forcing him to live on.

The major assertion of this chapter is that when we’re calm and detached, we repeatably and significantly underestimate the effect of altered mental states on our decision making. Of course we all know that when we’re angry or in love or afraid or hot on the trail of a particularly desirable objective like in a auction bidding war or when we’ve had one too any drinks our decision making can suffer. Look at the bad decisions made by the folks at Enron, Arthur Anderson or any of a host of other companies. We know altered states of many kinds can cause us to make bad decisions and so, forewarned we are forearmed right? Not so much it turns out. The experimental subjects in this chapter recognized that when they were excited they would make decisions that were significantly different than those they would make in a in the so called, cold light of day. They were asked to predict behaviors or alternatives that they expect would change in the grips of some emotionally charged state. However, when actually provoked and queried again Dan’s experiments found that they consistently and significantly underestimated the magnitude of the effect. His prescription is a prevent defense. If you know that a certain situations can cause you to make bad decisions, don’t put yourself in those situations. This is another example of one of the jokes that, as you know I believe, run the universe. It goes like this.

Patient: Doctor, doctor, it hurts when I go like this.

Doctor: Don’t go like that.

I’ll let you read the details but let’s all ask ourselves this; knowing that we are highly likely to underestimate how much our decision making will be changed in states of emotional turmoil of varying sorts, how will we protect ourselves from being either patsies of our emotions or manipulated by those willing to exploit this lever for their gain?

Chapter 6: The Problem if Procrastination and Self-Control

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

Procrastination is probably the most common source of self-inflicted wounds you or I are likely to suffer during our lives. Not necessarily the source of the most significant ones but surely the greatest number. From the petty (the “people” door on my garage has decayed to the point that I will have to replace it) to the profound (I kept meaning to start saving for retirement or dieting and exercising) procrastination can leave nasty tracks in our lives.

Dan’s experiments here are perhaps the most limited of those he describes in the book. Given the detail he presents it’d be hard to judge their import if he turned up something new. Let me describe the experiment. He compared three groups of students in a graduate consumer behavior course. Each class was required to turn in three papers over the course of the semester. One class was given strict and equally spaced deadlines with a penalty for failing to meet the deadline, A second class was told that they could turn the papers in anytime before the end of the semester and that there was no reward for being early. The third class was allowed to sign up for deadlines spaced however they liked but, having committed to those deadlines, there was a penalty for failing to meet them. Guess which group got the best grades?

The group given the hard deadlines took first. The group with no deadlines took last. The interesting point is that the other group, those with self-selected deadlines did nearly as well as the first group. Apparently, this tool, letting them pre-commit to a performance standard was nearly as powerful as the externally imposed deadline. Now since the experimenter graded the papers there is, of course, some question about bias. There is also a significant degree of randomness in this sort of grading process. In fact a great discussion of this is in the other book from my reading list that I strongly recommend to you, “The Drunkards Walk.” If Dan’s finding was revolutionary then we might have some significant reservations. Pre-commitment is, however, a well established technique. Really want to get something done? Write a $500 check to some campaign or social cause based organization whose ends you strongly oppose. Then give it to a friend and say, “If I don’t accomplish X by Y send this check to these folks.” You’d be amazed at what you can accomplish. This whole tack is a well established result from game theory. Now let’s talk about some of the ways Dan pictures using it.

Huge components of our health care costs are the results of preventable diseases. What if your insurance company withdrew $200 dollars from your paycheck to cover the expense of a regular and complete physical with the understanding that you would get that money back IFF you kept your appointment for all of the required testing? Maybe out on the lunatic fringe of health care thinking but interesting. In this and other similar situations Dan suggests both these voluntary pre-commitment models and the alternative of a Leviathan.
One of the most amusing suggestions he makes regards spending control, especially credit card use. You may have heard the ice method. Some people, to counter their impulsive use of consumer credit, put their card(s) in a glass of water in the freezer. Thawing it (them) out to use takes time allowing that arousal that we talked about last chapter to fade. Of course there are simpler ways. Dan actually took one of these suggestions to the executives of a major NY bank. Why, he said, can’t a credit card record and automatically react in accordance with pre-committed spending patterns. When you exceed your chosen limit (which might be spending category specific) for instance, it would decline more charges, or generate an email reporting your errant ways to your spouse. He reports that the executives listened and thought it was a good idea but never called him back. I would pay cash for a recording of the conversation they had after he left.

There are lots of other approaches to controlling procrastination of course. We’ll talk more about these later in the year. I confess that this is a trait I personally fight. Let me just make two recommendations other than pre-commitment. One is the time management tool suite called “Getting Things Done” popularized by David Allen, or alternately an approach which you can find described in a book called “Making Work Work.” Julie Morgenstern.

Chapter 7: The High Price of Ownership

Why We Overvalue What We Have

Do you know of anyone whose house stays on the market not just for months but for years? How about somebody who’s been driving around with a “For Sale” sign in their car window long enough for you to think it might actually be an accessory? What these folks have in common is a valuation of what they are offering that does not match the value in among the people to whom they are making the offer. These are two quick examples but it turns out there are lots of other ways in which we tend to overestimate the market value of the things we own. It’s been called the investment effect. It might be because we price in the positive feelings we have derived from owning the object (we took such great family outings in that car) in ways that are irrelevant to potential buyers. It may be that we experience the parting with the object as a loss that prices in those good feelings and it is well demonstrated that we have a tendency to avoid loss that exceeds our desire for gains even at constant expected value. I’m not sure Dan adds a lot new on this topic, although it is certainly a way in which we evidence irrational consumer behavior, except an experiment based on a rather peculiar basketball ticketing process at Duke. None the less, this is useful stuff to be reminded of from time to time.

I must admit that although one of my nephews is on faculty there, I had not heard of Duke’s peculiar way of rationing basketball tickets for important games. I won’t go through the whole thing hear – it’s a pleasure left for the reader – but suffice it to say that it’s a multi-day process that involves camping out and jumping through the odd hoop and that process just gets you into a lottery for a ticket. Dan, who did his Ph.D. there, and a colleague from INSEAD, contacted folks who had gotten tickets and those who hadn’t and tried to arrange sales. All had demonstrated the fervent desire to go to the game by participating in the ritual described but, while those that had gotten tickets said they would sell them for (on average) $2400, those who hadn’t gotten them would only agree to pay (on average) $175.

This effect of ownership, even if it’s temporary (“FREE!! 10 day home trial”, “return it without charge if you’re not satisfied”) or virtual (how dare that idiot outbid me for my watch) is quite general. Merchandisers use it to their advantage all the time. As with many of these chapters, Dan’s point is, knowing that this effect is real, examine your behavior when you get in these situations. So doing you can avoid much frustration and avoid being manipulated into making decisions that are not really in your best interest.

Chapter 8. Keeping Doors Open

Why Options Distract Us from Our Main Objective

I’m a big options fan. I like real options thinking and have seen it used to generate real value in R&T environments. I was, therefore, not wild when I read this title. Was there something fundamentally wrong with my attachment to options? Well, let’s take a couple of famous examples. The oldest comes from Sun Tsu in the world’s oldest job application, “The Art of War,” written in the 6^th century BC. I know I’ve talked about this book before and I assure you I will talk about it again. If you haven’t read it yet make it next on your list. Master Tsu advises generals:

“do not attack an enemy that has his back to a hill,”

and further

“do not thwart an enemy retreating home. If you surround the enemy, leave an outlet; do not press an enemy that is cornered.

Such cornered foes are too formidable. Exploiting this same dynamic he advises:

Throw your soldiers into positions whence there is no escape, and they will prefer death to flight. If they will face death, there is nothing they may not achieve. Officers and men alike will put forth their uttermost strength. Soldiers when in desperate straits lose the sense of fear. If there is no place of refuge, they will stand firm. If they are in hostile country, they will show a stubborn front. If there is no help for it, they will fight hard.”

Indeed, Xiang Yu, in 210 BC, exploited this in Cortez and, doubtless, many more. Having crossed the Yangtze, he burned his boats and had all the cooking pots destroyed. Win or die; a clear message for the troops and one that cleared their minds and free up assets from having to protect those assets.

As always, Dan and some colleagues run some experiments on students. They design several computer games in which players had 100 “clicks” which they could use to choose one of three rooms and once in a room click to get cash. Different rooms give different pay-offs and generally people figured out pretty quickly which room paid the most per click and then spent their time in that room. However, when the game was changed such that rooms that hadn’t been visited in some prescribed number of clicks disappeared, players would go back and click on those rooms to keep them available even though it cost (on average) 15% of their earnings.

This chapter makes the point that options can serve as distraction as well as valuable alternatives. Olympic athletes are seldom concert violinists. Mastery and focus often turn in better results than trying to be all things to all people. My undergraduate honors advisor was, and likely is still, a complete success as a chemist. When, as a graduate student, I took his advanced organic synthesis course, I felt like I was taken to the top of a tall mountain and shown the vast landscape of chemical synthesis. He achieved that mastery as the result of considerable focus. “George,” he said to me at one point, “you should be spending 80% of your waking hours at the bench.”

This sort of behavior is contrary to much of what our culture offers us today. Our environment bombards us with variety. You can know more and more about more with just a few clicks of a mouse. Failure to be well-rounded is viewed as a significant deficit. On the other hand, the person who tries to do too many things can end up never doing any one of them well enough to have impact. Like most things, of course, there are two ways to get this wrong. Being monomaniacal may have its benefits but it comes at a price. Having strong family relationships, for example, can buffer you from the occasional bad days you may experience at work.

There is another interesting aspect of the sometimes bewildering array of choices that confronts us; a retreat to systems in which less choice is allowed. The power and even ascendancy of authoritarian regimes and rigid philosophical systems are sometimes viewed as reactions to the world’s increasing complexity. Hardly a new idea, “Escape from Freedom,” by the philosopher Eric Fromm is probably the best treatment on the topic. However Dan has an interesting slant, pointing out that increasing the complexity of a decision makes it more likely that decision makers will rely on external (hence manipulable) cues.

While it would be a mistake for us to fail to exploit options thinking and the development of options for our business and personal lives, trying to do too many things at once is a clear route to failure.

Chapter 9: The Effect of Expectations

Why The Mind Gets What It Expects

We all know that our expectations affect our experiences. Generally however, since we are aware of this tendency we “smart people” think we set that aside for the most part. In this chapter Dan describes a number of experiments that he performed as well as a number of experiments by others that point out just how subtle and persuasive our expectations are.

Setting up shop in the “Muddy Charles,” the pub in MIT’s Walker Memorial Building, he and collaborators started handing out free samples of beer. Students were given samples of two types and then asked to choose which of these they’d like a larger glass. The beers started with the same brew but a few drops of balsamic vinegar were added to one. (They actually started with Budweiser but some folks “objected to calling Budweiser beer” so they switched to Sam Adams.) They measured how many people ordered each of the samples and then asked people to describe what they thought about the new beer. Some of these folks were not told what the difference between the two beers was, some were told about the vinegar before they tried it and some were told after. Guess what happened. When they got the information actually changed their rating of the experimental suds. Knowing it contained vinegar beforehand changed their described experience when doing the taste test.

There’s actually a lot more to this experiment and Dan presents a number of other experiments including some employing functional MRI. Here in a version of the classic Coke-v-Pepsi challenge it can be demonstrated that at a brain activity level the experience of drinking one as opposed to the other id modified by knowledge of which they were drinking

By far the most interesting examples – and I really can’t bring myself to spoil the fun you’ll have reading them – have to do with stereotypes. Especially interesting are those dealing with groups to whom several “conflicting” stereotypes can be applied. In these case preconditioning the subjects with certain words chosen to “remind” them of one or the other of these produced behavior that reflected the provoked stereotype. You’ve just got to read this stuff trust me.

Chapter 10. The Power of Price

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

We all know about the placebo effect; that wild and wonderful way in which our mind affects our perception of, and in some cases our real experience of the healing effects of one medication or the other. It’s sort of an extension of the last chapter’s theme; the mind gets what it expects. You’ll remember that Dan spent a long time in a hospital burn unit recovering from a serious accident he’d had while training for the IDF, well you won’t be surprised that he had a lot of time to think about the placebo effect.

As part of his investigations into the perception of pain, as a newly minted asst prof, he bought a vice and would crush people’s fingers in it and ask them things like:

“How much did that hurt?”

“How much would I have to pay you to let me do that to you again?”

(You just can’t make this stuff up!) In this chapter he explores some aspects of the economic side of the placebo effect. He has experimenters pose as representatives from a drug company. They gave people a series of electrical shocks of varying magnitude, asked them about the pain they experienced. Next they were given a pain reliever, well vitamin C actually, but they were told either that it was a new and expensive one or a cheap one. When the shocks were repeated guess what? Those who thought they were getting the high-priced stuff reported that it worked pretty well, and much better than the folks who got the cheap stuff. (Now let’s review what this means for the spiraling costs of US health care.) By the way, the more recently the folks had had experience with significant pain the better it worked. As usual he did a number of experiments like this and I won’t spoil you fun.

There are two sorts of implications he explores that are worth our thought. First, how general is this phenomenon? It certainly applies to food and drink, to cars to a whole lot of things. Does that mean that we are manipulated into paying higher prices for goods that are essentially equivalent to lower price alternatives? Would we be better off if we brought this into our conscious mind as we decide whether the most recent genes are worth it?

The next thing he brings up is really an ethical question. He cites several examples where surgical procedures were found to produce no better results than sham operations. A patient who thinks he or she received one of these surgical procedure reports just as much benefit as someone who actually had the procedure. While the medical community wasn’t actually intending the procedures benefits to derive from the placebo effect it turns out that’s exactly what happened. There is also the less dramatic exploitation of the effect that many doctors practice when they prescribe antibiotics for colds and sore throats, the vast majority of which are viral. They prescribe, patients get better and the offending microbe was not at all affected by the active ingredient. It, of course, turns out, that in some instances at least, people treated with placebos actually do get better faster than those untreated. There will be some Nobels given out for figuring out exactly how that works. So, the interesting ethical questions Dan brings up are, knowing the placebo effect is real, should doctors use in intentionally and if so how and when? Also if we want to protect people from unnecessary surgery do we have an obligation to test surgical procedures against sham surgery in humans?

Like I have said all along, this book is worth the time, even more for the questions than for the answers.

Chapter 11: The Context of Our Character, Part 1

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

Dan starts this chapter with some interesting observations. I haven’t independently confirmed them but I’m willing to give him the benefit of the doubt and assume they’re right.

2004

Total loss due to robbery	$525M
Average loss per robbery	$1,300
Total loss to robbery, burglary, larceny-theft and auto theft	$16B
Workplace loss to theft and fraud	$600B
Loss from fraudulent insurance claims	$24B
Underpayment of income tax (per IRS)	$350B
Fraudulent clothing returns to retail outlets	$16B

Do we think about the people who perpetrate these crimes differently? In our most fundamentalist moments we’d say no. A theft is a theft. But do we actually act that way as a society? Let’s change tacks. Does the self concept of the guy or gal walking out of work with a package of Post-It™ notes differ fundamentally from the folks speeding away from the convenience store they’ve just knocked over? How about the person who keeps the extra cash when they’ve been given too much change? If we judge by how much attention and cash we pay to catch the perpetrators and the answer seems clear. Does the amount of loss due to the actions of people we do not generally think of as criminals mean that many “honest” people cheat? Bring on the experiments!

Dan and a number of collaborators do a number of varieties of one experimental theme using his favorite subjects, college students from around the country. The basic outline of the experiment is as follows. A control group is established by giving a group of students some timed test (50 general information questions, 15 math problems,…) and, allowing them no way to cheat, grade their papers paying them $0.10 per correct answer. The next group has to transfer their answers from their work sheet to a grid on which the correct answers are highlighted and they are to write at the top of the grid sheet how many answers they got correct. The worksheet and the grid are handed to the experimenter who them pays the student $0.10 for every correct answer he or she claimed. Another group was treated the same as the previous but then told to shred their worksheet and grid and then simply tell the experimenter how many answers they had gotten right at which point the experimenter paid them as before. A final group tested as before, was told to shred their worksheet and grid and simply take the correct amount of money from a jar containing about $100. Guess what happened and write down your guess.

No really don’t look, guess first.

The second experimental group, which had handed in their work sheet and grid sheet, cheated by about 10%.How about the other groups? Have you got your guess recorded?

They cheated by about the same amount. Even when they could have simply taken all the money the students cheated just a little. And it wasn’t the case that there were a few bad apples that drove the results. The means for the group shifted but the distribution remained the same.

Apparently we are pretty good at rationalizing small amounts of dishonesty.

Now, same experiment (including the shredding of the work sheet and the grid) but now the experimental groups are asked to do a little memory test or given a verbal reminder before the test. One group was asked to write down a list of 10 books they had read in high school, another was asked to write down as many of the 10 commandments as they could remember, a group at Princeton was told that this test was governed by Princeton’s storied honor code, yet another was told that the tests were governed by MIT’s honor code (there is, by the way, no such thing). Have you guessed what happened?

In all of the groups asked to remember something that reminded them of an ethical benchmark no one cheated. Now these are successful college students at some of the best schools in the country so you’d hope they’d had some underpinning in ethics, and of course there was little at stake so we could expect different results in different groups and among these groups in different contexts, nonetheless this experiment is striking. Simply being recently reminded that there is a difference between ethical and unethical conduct changed their behavior. Dan draws the comparison with the codes of conduct to which professions of varying sorts used to ascribe. He asserts that as the professional societies and identities have become weaker forces in the practice of their respective crafts, we have passed that boundary he talked about earlier from the arena of social norms to that of market norms with a concomitant cost to society.

Unsurprisingly there’s a lot more to this chapter and, as always, I do not want to spoil the fun you’ll have when you read the book yourself. But I think that there’s enough here to provoke discussion. If most “good, honest” people cheat a little what does that say about society as a whole and how might we actually promote a turn to more ethical behavior, or has that die been cast?

Chapter 12: The Context of Our Character, Part 2

Why Dealing With Cash Makes Us More Honest

The fundamental finding Dan reports here is encapsulated in the title. He finds that, in his experiments, people are less likely to steal cash than they are to run off with non-monetary instruments. Again, he cites a number of experiments, but the sense of the lot can be summed up in just one. When he put 6 packs of Coke in MIT dorms they all disappeared in 72 hours. When instead, he put 6 one dollar bills in the same refrigerators they all survived. In his usual fashion he explored just how close to case you had to be to see this effect. If they were given tokens that you nearly instantly exchanged for cash would it increase cheating (yes it turns out)?

This is one of his most broadly provocative points. If tokens increase cheating, how about even more abstract instruments?

• How about credit cards – lots of cheating there
• How about the anonymity granted by the net – lots of cheating there
• How about stock options – lots of back dating there
• How about cooking the books – lots of cheating there

It seems really likely that Jeff Skilling and Ken Lay would likely never simply have mugged folks and taken their cash, but somehow cooking the books was OK. There is clearly, at least for some folks, a mechanism which allows the incremental dishonesty to creep in without triggering our “If I do this I’ll be a bad person,” alarm.

On the whole I find this chapter a little depressing. It certainly points out some things that, if they are truly extensible, should make us have significant reservations about the increasing abstraction of vessels of monetary exchange, a trend likely to continue. So I am left at the end of this chapter with a dilemma I seldom faced in this book, disquiet with no obvious remedy. I can more carefully examine my own behavior and I can become more protective in my use of non-cash instruments but the entire chapter begs for broader experimentation. I’ll leave you with a quotation from HL Mencken. If you don’t know his work, dabble some in it. It’s an excellent source for uncomfortable laughter.

“The difference between a moral man and a man of honor is that the latter regrets a discreditable act, even when it has worked and he has not been caught. “

— H. L. Mencken, ‘Prejudices: Fourth Series,’ 1924

Chapter 13: Beer and free lunches

What Is Behavioral Economics, And Where Are The Free Lunches?

There’s an old joke in economics – two economists are walking down the street and they see a $20 bill on the ground. One begins to bend over to reach for it, the other stops him saying, “If that were a real $20 bill someone would have already picked it up.”

OK – so there’s a lot of the standard model in a nutshell. It’s sort of like that classic statement of the second law of thermodynamics, “you can never win, you can, at best, break even.” There are several more sets of experiments described in this chapter of course. These focus on restaurants, people’s behavior in ordering food and beer (a recurring theme) and their satisfaction with the outcomes. It turns out that people order different things if they are the first or last in a group to order. The orders previously given by group members influence what the remaining members order. You can easily imagine at least two ways that might happen, a drive toward conformity or a drive toward displaying uniqueness, I’m not going to spoil your fun by describing the experiments and the details of the results. Generally, however, it turns out that you are likely to enjoy your selection more if you make up your own mind and stick to it. This is, then, a source of a free lunch. Having information about largely subliminal process that influence your decision making can allow you to escape the traps such processes help us fall into. So, order what you like and enjoy it more. The extra enjoyment is free.

Indeed the real point of the majority of this fun book is just that: don’t blindly believe that economic rationality prevails at all times. Study real behavior, make the invisible processes visible to you and stop being the tool of others – this is the real free lunch.

Felix qui potuit rerum cognoscere causas!

This closes this series and I must say it’s been a lot of fun. Thanks for lending me an eye.