Quotes
In theory, there is no difference between theory and practice, but in practice there is a great deal of difference. —Al Roth
It was not the commandments themselves that encouraged honesty, but the mere contemplation of a moral benchmark of some kind. —Dan Ariely, Chapter 11
My hope is that one of the banks will decide to step up to the challenge and lead the way for others by announcing a different pay structure, different incentives for its bankers, transparency, and strict rules against conflicts of interest.
Chapter 1: Relativity
People irrationally compare things relatively without regard for inherent value or personal value. When provided an item, an identical but slightly worse item, and a third item that’s different altogether, they’ll choose the first item simply because they compare it relatively better than the second item. They don’t really consider the third that much because they have nothing to weight it against.
Cognitive relativity can be abused to force people’s decisions in the aggregate by providing similar but worse options.
Chapter 2: Supply and Demand (Anchors)
People irrationally determine value of things based on initial anchors: prices they first saw, what they’re used to, what they remember, etc. this kind of ties into the relativity idea of chapter 1. Even if the anchor is uncorrelated to the decision—i.e, write your social security number then bid on wine—people are psychologically influenced.
Also, people often don’t realize when to pay or be paid. When author asked half a room how much they’d pay to hear him talk and the other half how much they’d have to receive to hear him talk, either group provided a number (average) on the side they were asked despite knowing they could switch. Both groups were blind.
Tom Sawyer talked about how he loved whitewashing his fence and eventually his friends would pay him to do it.
There are wealthy gentlemen in England who drive four-horse passenger coaches twenty or thirty 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 then they would resign.
Supply and demand are correlated in a different way because people need to interpret prices somehow, and their memories etc. affect that. If prices rose but they didn’t remember earlier prices they wouldn’t be impacted that much.
Free markets work fabulously for rational actors but we’re not always rational so we need some good regulation to keep things stable and safe.
Chapter 3: Cost of Zero Cost
People overestimate the benefits of something being free. “Free” is literally just $0. 0 is 1 less than 1, just as 1 is 1 less than 2. 0 is a value that can apply to economic models that use rationality to make decisions. But people are so irrationally attracted to something’s freeness; buy one get one free, buy this for 10 cents or pick this up for free; that they are blinded. Rationality leaves them. It’s a weird and tough to grasp concept because we tend to think of free as having no implications. There’s no cost or risk to free, because you’re not paying anything so there’s no chance of making the wrong decision. But that’s a fallacy. There’s always relative costs, opportunity costs, etc. that render that free ($0 purchase) irrational.
Zero is not just another discount. Zero is a different place. The difference between two cents and one cent is small. But the difference between one cent and zero is huge!
Want to draw a crowd? Make something free. Want to sell more products? Make part of the purchase free. Similarly, we can use free to drive social policy. Want people to drive electric cars? Don’t just lower the registration and inspection fees––eliminate them, so that you have created free. In the same way, if health is your concern, focus on early detection as a way to eliminate the progression of severe illnesses. Want people to do the right thing––in terms of getting regular colonoscopies, mammograms, cholesterol checks, diabetes checks, and such? Don’t just decrease the cost (by decreasing the co-pay). Make these critical procedures free! I don’t think most policy strategists realize that freeis an ace in their hand, let alone how to play it. It’s certainly counterintuitive, in these times of budget cutbacks, to make something free. But when we stop to think about it free can have a great deal of power, and it makes a lot of sense.
Chapter 4: Social Norms and Market Norms
Social norms vs. market norms. Extremely interesting concept. When money and reward isn’t involved we operate in a social norms landscape. This is often much more powerful than when compensation is offered. Firstly it can be insulting. But really, people switch mindsets. It’s a market norms thing now. They have to weigh that cost against the labor and determine if its worth it. They act more selfishly etc. as if it’s a competitive free market landscape, as compared to a social one.
Social norms are cheaper than market norms. Using social norms: favors, incentives, freeness (ch3), working for a cause, volunteering, and social contracts like family, neighbors, community, etc. is cheaper and more impactful than trying to pay somebody.
Small gifts are a great way to show appreciation without drawing someone into the market norms landscape. Even the mention of money can make the norms switch. Don’t mention any prices or costs of items at a dinner date because it will put her in market norms. Don’t mix social and market—sex, daycare pickups—because once social norms are replaced it’s very hard to get them back. Careful balance.
The most expensive sex is free sex
The quote is true because the cost of social norms are higher in free sex than paid sex when it’s market norms.
Chapter 5: The Influence of Arousal
People think they're highly rational beings, forecasting their futures and figuring out how they're going to behave in the future in response to different triggers. But they fail to recognize that these decisions are made in a 'cold' state: they're not aroused sexually, physically, painfully, or in any other way. When people are aroused, their rationally tends to head out the door. For example, Ariely did a study at Berkeley where students drove themselves to the brink of arousal then answered some questions, and their responses to those questions about how they'd act if things happened where entirely different than before they were aroused.
Anger, shock, sexuality, etc. can be powerful motivators and causes of irrationality. They lead people to deviate from their original standpoints, beliefs, values, etc. Therefore, they can be used to get people to do or behave in a way that is not necessarily in accordance with their original or traditional values structure.
Chapter 6: Procrastination and Self Control
Procrastination: pro cras, for tomorrow.
Procrastination, when we put things off for later, is irrational and yet our brains are wired to seek immediate gratification and put things off for later. It's a real problem. Ariely found with his students that enforced deadlines proved the highest grades compared to self-deadlines and even worse was no deadlines. Setting guidelines and goals is really important to avoid procrastination. You can't just have a list of things to do and say "okay now do them." You have to schedule it, give deadlines, have a reason to get them done, and follow through.
Social implications: we can't create a government that enforces deadlines on people and says "you have to get your colonoscopy done tomorrow" etc. Authoritarianism is bad. But we can reinvent the incentives. We can say: "in order to book this appointment you must pay a $100 deposit. you get the deposit back if you show up in time." This may not always work due to conflicts or emergencies but the idea is there. Shift the incentives so it works more favorably towards people and away from irrational procrastination.
Ariely had an idea for credit cards. When we want to spend less on chocolate, clothes, etc. it's very difficult to exercise self control. We could shift incentives with credit cards similarly by creating a credit card in which you set your own limits, but there's a consequence (your own) for breaching it. It's not like the credit card company wins. It would be: email a relative an automated message; tax themselves; money goes to a humanitarian cause; money goes to a long term savings or investment account.
At the time of writing (and to my knowledge as of 10/5/2021) this doesn't exist, though the feature really should.
Chapter 7: Ownership Valuation
People irrationally value what they have higher than what it is actually worth. Ariely went to Duke where watching basketball games is difficult and prestigious and found that people who went through the struggle and won the opportunity to buy tickets would only sell them for a floor of $2400 while those who went through the struggle but didn't win a ticket would only spend $175 for the ticket.
People who want to sell their cars expect them to be worth more than they actually are, and right after listing them they're bombarded with memories of how much they love the car, the experiences they had, etc. This is irrational because in an exchange, people tend to think more about what they're losing versus what they're about to gain.
Money back guarantee abuses this because once we have the item we feel ownership towards it and view returning it as a loss.
Chapter 8: Options
People are irrationally drawn to having multiple options open at all times. They want many doors to be available to them even if they won't serve them in the end. Even if they know they'll get a predictable, desired outcome out of a certain option, which will save them decisive time and other costs, they will fight to keep the other doors open. This is irrational. A study done at MIT proved that students will pay costs to keep their doors open in search of profit even when they know their best chance is in a certain particular door.
We pay a cost when we are indecisive. The cost is of time, and an opportunity cost of not doing other things instead. We should just recognize when we have what we want, or when two options are identical to just pick one and not stall and keep both options open. This will benefit us in the long term and prevent us from being predictably irrational.
This can be abused. Provide people with many options and get them focused on trying to keep them all open. They'll be worse off than if you handed them their best ticket and they had no choice but to run with it. A quote from this chapter was that "most of our troubles in the modern world do not come from a lack of opportunity, but an abundance."
Chapter 9: Effect of Expectations
People tend to get what they expect. Preconceptions and expectations can have an effect on how people actually experience an event. When Ariely told college students a beer had some vinegar in it, before they drank it, they liked it way less than normal beer. But when he told them afterwards, he found they liked it basically the same if not more. When he told them afterwards, then told them the recipe (including vinegar) and told them to make their own beer, the vast majority ended up copying the recipe and willingly adding vinegar to their beer.
Stereotypes work both ways. We expect people to act a certain way based on stereotypes, and often we see what we expect. But, people also tend to act based on stereotypes about them. Asians are expected to be good at math, women are not. When asian women were given a math test but first given statements making them think about being asian, they did better than a separate group of women given the same test but first given statements making them think about their womanhood.
Brand loyalty: given a blind taste test, people can determine which of two options taste better. But when they’re told the brand name, a different part of their brain comes to life. Affiliation, stereotypes, preconceptions, etc. come into play. This is what happened with the blind Coke vs. Pepsi tests.
When fancy ingredients are named in a dish we subconsciously expect the dish to taste better and be more exquisite. Buffalo instead of beef, etc.
People act this way based on ideology, too. And race, and heritage. They may see the same facts but still justify their ideologies and act based on their preconceptions. That’s why “bringing both parties to the table” is a nice lofty goal but often doesn’t work out as well as we expect it to. A neutral third party is one of the best ways to bridge this gap.
Chapter 10: The Power of Price
Price plays a huge role in how we experience items, medicine, painkillers, etc. The placebo effect is very real and works not just psychologically but also physically. When we expect a painkiller, our brain reduces the amount of pain we experience before we even take the painkiller. And when we expect a more valuable painkiller, this process happens in higher magnitude. This ties to chapter 9, the concept of expectations becoming a mental framework and then becoming a subjective or objective reality. Or both.
Chapters 11 and 12: The Context of Our Character
People lie and are dishonest. But honesty is also one of our highest aspirations and according to Adam Smith a foundation of our character. People cheat and deceive more when the action is dissociated from money. People are less likely to steal $5 in cash than a $5 pen.
People are less likely to be dishonest when they’ve just recollected a moral code, oath, obligation, religious text, etc. They steal little to none after doing that in the aggregate (this is not talking about psychopaths or career criminals etc.)
People do this on business expense reports, tax reports, insurance claims (this is interesting. If you lie on this and ask for more reimbursement your rate goes up. So this is an interesting dilemma about the actual efficacy of insurance and how those who need it least will not use it etc.).
Ariely’s Anecdotes
- By pairing things that are good for us but not fun with things that are fun, we can train our brains to have a better time doing what’s right.
- A large aspect of the 2008 crisis was irrationality on the part of consumers. Not that it’s their fault, but they weren’t able to calculate their own optimal mortgage amounts. And banks had no incentive to correct this. They tend to opt for the highest mortgage amount. That’s why interest only mortgages didn’t make things better—instead, people raised the mortgage amount to maintain the same monthly payment value.
2008 Crisis
- the planning fallacy causes many people to not account for certain things going wrong because different things go wrong at different times. They often plan for the best-case scenario, so when something inevitably goes wrong they’re behind.