My favorite type of book: pointing out and understanding all of the counter-intuitive things people do.
Most people don't know what they want unless they see it in context.
We don't know what kind of racing bike we want until we see it in the Tour De France.
We don't know what kind of speaker system we like until we hear a set of speakers that sounds better than the previous one.
We don't know what we want to do with our lives - until we find a relative or friend who is doing just what we think we should be doing.
Everything is relative, and that's the point.
Like an airplane pilot landing in the dark, we want runway lights on either side of us, guiding us to the place where we can touch down our wheels.
The decoy effect : is is the secret agent in more decisions than we could imagine.
For vacation, choosing between Rome and Paris. Tough choice! Don't know.
Offer a 3rd option : Rome without the free breakfast. Call it "-Rome", or the decoy.
Now considering 3 options: Rome, -Rome, Paris.
The comparison with the clearly inferior option makes Rome with the free breakfast seem even better.
-Rome makes Rome look so good that you judge it to be even better than the difficult-to-judge Paris.
Arbitrary coherence. ("baby duckling"). Anchoring. Imprinting.
Once prices are established in our mind, they shape not only what we are willing to pay for an item, but also how much we are willing to pay for related products. (This makes them coherent.)
Important clarification: price tags themselves are not anchors. They become anchors when we contemplate buying a product or service at that particular price. That's when the imprint is set. From then on, we are willing to accept a range of prices, but we will always refer back to the original anchor.
People who move to a new city remain anchored to the prices they paid for housing in their former city. People who move from cheap to moderate cities don't increase their spending to fit the new market. They spend what they were used to in the previous market, even sacrificing comfort.
==== THE FALLACY OF SUPPLY AND DEMAND
How did Starbucks charge more for coffee, then? If we were previously anchored to the prices at Dunkin' Donuts, how did we move our anchor to Starbucks?
Schultz worked diligently to separate Starbucks from other coffee shops, not through price, but ambience - to feel like continental coffeehouse.
Where everyone else had small, medium, large - Starbucks had short, tall, grande, venti, as well as drinks with high-pedigree names like Caffé Americano, Caffé Misto, and Frappuchino. Starbucks did everything in its power to make the experience feel different. So different that we would not use the prices at Dunkin' Donuts as an anchor, but instead would be open to the new anchor that Starbucks was preparing for us.
Teacher said he was going to be reading Walt Whitman poetry that Friday evening, and due to limited space had to run an auction to determine who could attend. Before the auction, though, he privately asked half the students to write down whether, hypothetically, they would be willing to pay him $10 for a 10-minute poetry reading - and the other half to write down whether, hypothetically, they would be willing to listen to him recite poetry for 10 minutes if he paid them $10.
This, of course, served as the anchor. Then he asked for the students to bid on the poetry reading.
Those who answered the hypothetical question about paying him were willing to pay. They offered, on average, $1, $2, $3 for short, medium, long reading.
Those who answered the hypothetical question about being paid demanded payment. On average, they wanted $1.30, $2.70, $4.80 for short, medium, long reading.
Like Tom Sawyer's fence, he was able to take an ambiguous experience and make it into a pleasurable or painful experience.
Mark Twain quote:
Work consists of whatever a body is obliged to do.
Play consists of whatever a body is not obliged to do.
There are wealthy men who drive 4-horse passenger coaches 20-30 miles on a daily line in the summer because the privilege costs them considerable money, but if they were offered wages for the service, that would turn it into work, and they would resign.
We decide whether or not to eat burgers, smoke, run red lights, marry, have children, vote Republican, etc. Theory says we base these decisions on our fundamental values - our likes and dislikes. But could it be that the lives we have so carefully crafted are largely just a product of arbitrary coherence? Could it be that we made arbitrary decisions at some point in the past and have built our lives on them ever since, assuming the original decisions were wise? Is that how we choose our careers, spouses, clothes, and hairstyle? Were these just partially random first imprints that have run wild?
We can actively improve on our irrational behaviors. Start by becoming aware of our vulnerabilities.
If you're planning on a purchase, ask yourself:
- How did that habit begin?
- What amount of pleasure will you be getting out of it?
- Is the pleasure as much as you thought you would get?
- Could you cut back a little and better spend the remaining money on something else?
Train yourself to question your repeated behaviors.
In particular, pay attention to the first decision you make in what is going to be a long stream of decisions. (Clothing, food, etc.)
When we face such a decision, it may seem this is just one decision without large consequences, but in fact the power of the first decision has a long-lasting effect that will percolate for years to come.
==== THE COST OF ZERO COST:
A table set up in a busy area, offering chocolate:
Lindt truffle = 27 cents. Hershey's Kiss = 2 cent. Result? 75% chose truffle, 25% chose kiss.
Lindt truffle = 15 cents. Hershey's Kiss = 1 cent. Result? 73% chose truffle, 27% chose kiss.
Lindt truffle = 14 cents. Hershey's Kiss = free. Result? 31% chose truffle, 69% chose kiss.
Rational economic theory would have said that as the everything between the situations was the same, th customers should have chosen the truffle by the same margin of preference.
"FREE!" makes us do irrational things : you go to the store to get good hiking socks, but come out with a package of cheap bad socks because it came with a "FREE!" second pair. Or buying an expensive HDTV becomes it comes with free Blu-Ray DVDs.
Most transactions have an upside and a downside, but when something is "FREE!" we forget the downside.
"FREE!" gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is.
Why? Because humans are intrinsically afraid of loss. The real allure of "FREE!" is tied to this fear. There's no visible possibility of loss.
We can use "FREE!" to drive social policy.
Want people to drive electric cars? Don't just lower the registration and inspection fee, make it free!
If health is a concern, focus on early detection as a way to eliminate the progression of severe illness. Make these critical procedures free.
Most policy strategists don't realize that "FREE!" is an ace in their hand.
It's counterintuitive, but in these times of budget cutbacks, making something free can have a great deal of power.
==== THE COST OF SOCIAL NORMS:
We live simultaneously in two different worlds: one where social norms prevail, and one where market norms make the rules.
Social norms include friendly requests that people make of one another. "Could you help me move this couch?"
Social norms are wrapped up in our social nature and our need for community. They are usually warm and fuzzy.
Instant paybacks are not required. Like moving a couch or opening a door, you are not expected to immediately reciprocate.
Market norms have nothing warm and fuzzy. The exchanges are sharp-edged: wages, prices, rents, interest, costs-and-benefits.
Market relationships are not necessarily mean or evil - they also include self-reliance, inventiveness, and individualism - but they do imply comparable benefits and prompt payments.
When you are in the domain of market norms, you get what you pay for - that's just the way it is.
When we keep social norms and market norms on their separate paths, life hums along pretty well.
Sex, for instance: free in social context, where it's warm and emotionally nourishing. But market sex, on demand, costs money. Woody Allen: "The most expensive sex is free sex."
AARP asked lawyers if they would offer less expensive services to needy retirees, at something like $30/hr. Overhwelmingly said no.
They asked the lawyers if they would offer free services to needy retirees. Overwhelmingly said yes.
Similar when asking people to help move a couch: ask them to do it for free, and they'll say yes. Offer to pay them a dollar, and they say no.
LESSON : Once market norms enter our considerations, the social norms depart.
Using gifts is not seen as market norms (giving someone chocolates as a present for helping) - but putting a cost on the gift ("50-cent Snickers bar", "5-dollar Godiva chocolates") does make it market norms.
Great example: Day care center had a problem with parents picking up the kids late, so they added a fine. But now that parents were paying for their tardiness, they could decide for themselves whether to be late or not, and they more-often chose to be late.
A few weeks later the day care removed the fine, there was another slight increase in tardiness, now that social norms and market norms had both been removed.
LESSON: When a social norm collides with a market norm, the social norm goes away for a long time. Social norms are not easy to re-establish.
As a company, remember that you can't have it both ways. You can't treat your customers like family one moment then treat them impersonally - as a nuisance or competitor - a moment later when this becomes more convenient or profitable. If you want a social relationship, go for it, but remember that you have to maintain it under all circumstances.
==== THE INFLUENCE OF AROUSAL
When you are in one state, and try to predict your behavior in another state, you'll get it wrong.
==== THE PROBLEM OF PROCRASTINATION AND SELF-CONTROL
Like the influence of arousal, we can be sensible in a cool state, and say we're going to save money or eat wisely. But in the heat of the moment, when we see something we crave, we are in a hot emotional moment, and do not act as we predict.
Giving up long-term goals for immediate gratification is procrastination.
Students did their assignments best when forced to obey a schedule, instead of letting them choose for themselves (since procrastination takes over).
If this lesson is applied to society, government could force required health exams the way we get tickets for jaywalking or having seat belts undone.
What if colonosopy gave you a $200 refund if you went, nonrefundable if you didn't show up?
The self-control credit card: cutomers decide in advance how much money they wanted to spend in each category, per store, per time-frame. For example: $20 on coffee per week, or $600 on clothes every 6 months, or no candy between 2pm and 6pm. If they surpass their limit, cardholders select their penalties. The card could be rejected, or they could tax themselves and send the tax to Habitat for Humanity, a friend, or long-term savings. Or it could email your spouse.
==== THE HIGH PRICE OF OWNERSHIP
The "endowment effect": when we own something, we begin to value it more than other people do.
Bunch of people wait in line for football tickets. They're handed out on a lottery system. Some get them, others don't, but they all waited the same time. Ask people who don't have a ticket how much they'll be willing to pay to buy one, and they'll say $175. Ask ticket-holders how much they'd be willing to sell theirs for, they say $2400.
We assume other people will see the transaction as we do. We expect the buyer of our car to share our feelings, emotions, and memories. They see the smoke or mold. It's as hard for the buyer to imagine the seller's point of view as it is for the seller to imagine the buyer's.
The more work you put into something, the more ownership you feel for it. The Ikea effect.
We can start to feel ownership before we own something. (Danger of bidding on Ebay.)
Ownership changes perspective. Moving backwards to our pre-ownership state is a loss we cannot abide. While moving up in life, we indulge ourselves with the fantasy that we can always ratchet ourselves back if need be, but in reality, we can't. Downgrading to a smaller home is experienced as a loss.
==== THE EFFECT OF EXPECTATIONS
Students who got beer with 3 drops of vinegar liked it. But if they were told in advance it had vinegar, they didn't. If you tell people up-front that something might be distasteful, the odds are they will end up agreeing with you.
Students who were told about the vinegar after tasting the beer liked it much better - as much as the ones who didn't know it had vinegar at all.
With sample coffee : when presented with test-taste coffee in styrofoam cups, people said it tasted cheap. When the same coffee was presented in nice cups, saucers and spoons, they said it tasted expensive. (And they'd be willing to pay more for it.)
Stereotypes: Asians good at math, women worse at math. Asian women were asked to take a math exam. Half were asked questions about being a woman first, and they did worse on the test. Half were asked questions about being Asian first, and they did better on the test.
==== THE POWER OF PRICE
When given a placebo pill, told it was a pain pill, almost all people felt the pain-relieving effects when told it was very expensive ($2.50 per pill). But when told it was only 10 cents, only half felt the effects.
For people with recent pain-medicine experience, it was even more extreme. They had recently learned first-hand that you get what you pay for.
==== CONTEXT OF OUR CHARACTER
The students who could only remember one or two of the ten commandments were just as affected by them as the students who remembered all ten. It was not the commandments themselves that encouraged honesty, but the mere contemplation of a moral benchmark of some kind.
People cheat when they have a chance to do so, but don't cheat as much as they could. Once they begin thinking about honesty (Ten Commandments, etc) - they stop cheating completely. When we are removed from any benchmarks of ethical thought, we tend to stray into dishonesty. If we are reminded of morality at the moment we are tempted, then we are much more likely to be honest.
Cheating is often one step removed from cash. (Accounting practices, backdated stock options, lobbyists sending politicians on vacations.)
Taking a red pencil from work is easy. Taking 10 cents from the petty cash drawer in order to buy a pencil is not so easy.
At a college dorm, he put 10 cans of coke in shared fridges, and they all disappeared. He put 10 $1 bills on a plate in the fridge and they all stayed.
Test given with 10 hard questions, paid $1 for each correct answer.
Group #1: Had no way to cheat. Got 3.5 questions correct.
Group #2: Told to tear up their sheet afterwards and just tell someone how many they got correct: 6.2 correct.
Group #3: Same as #2, but told someone how many they got correct just to get tokens, which then someone elsewhere turned to dollars: 9.4 correct.
Given a chance, people cheat.
==== BEER AND FREE LUNCHES
When people order out loud in a restaurant, they choose differently than when they order privately. People often feel they have to order something different than companions. (In Hong Kong, people felt they had to order the same thing as their companions.) People who ordered out loud were also not has happy with their selections afterwards.
Knowing this, it's best to plan your order before the waiter arrives, and stick with it. Alternative is to get people to order anonymously.
Standard economics believes 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 all decisions are likely to produce. Under this assumption, everyone in the marketplace is trying to maximize profit and striving to optimize his experiences. Economic theory says there are no free lunches. If there were any, someone would have already found them and extracted all their value.
Behavioral economics believes that people are susceptible to irrelevant influences from their immediate environment (context effects), irrelevant emotions, shortsightedness, and other forms of irrationality as shown in this book. 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 stratgies, tools, and methods to help us make better decisions and improve our overall well-being? That's exactly the meaning of free lunches from the perspective of behavioral economics.
Although irrationality is commonplace, it does not necessarily mean that we are helpless. Once we understand when and where we make erroneous decisions, we can try to be more vigilant, force ourselves to think differently about these decisions, or use technology to overcome our inherent shortcomings. This is also where businesses and policy makers could revise their thinking and consider how to design their policies and products so as to provide free lunches.