Dan Ariely's Blog, page 58

A few centuries ago little luxuries like iPhones and cars did not exist for the working class to consider buying, so the motivation to work did not extend beyond the desire to feed oneself and one's family. Now, however, we can imagine that with cars and iPhones within reach, even lower wages in the face of higher taxes are offset by the motivation to acquire these items. The market for such consumer luxuries, in turn, has inspired an incredible wave of motivation and innovation, so let's be thankful for them.

I just posted a fun new study (should take about 2 min).

If you'd like to take it, press on the "click to participate" button on the right

I will post the results next week

Thanks in advance

Dan

I just posted a new fun study (should take about 2 min).

If you are willing to take it, press on the "click to participate" button on the right

I will post the results next week

Thanks in advance

Dan

Imagine that you and I meet at a party, and I tell you about my research on behavioral economics. You see opportunities to use the principles to improve your business and think we could work together. You have two options: You can ask me to collaborate, with a handshake promise that if things work out, you'll make it worth my while. Or you can prepare a contract that details my obligations and compensation, specifies who will own the resulting intellectual property, and so on.

For most of you, the decision is obvious. The second approach, the complete contract, is the way to go. But should it be?

The idea of making a deal with a handshake—what we generally call an incomplete contract—makes most of us uncomfortable. A handshake is fine between friends, but when it comes to vendors, partners, advisers, employees, or customers, we believe that incomplete contracts are a reckless way to do business.

Indeed, firms try to make contracts as airtight as possible—specifying outcomes and contingencies in advance, thus lowering the chances for misunderstanding and uncertainty. But complete contracts have their own flaws, and business's increasing dependence on (I would say, fetish for) absurdly detailed contracts in every situation comes with its own downside.

All contracts deal with the direct aspects of the expected exchange and with unexpected consequences. Incomplete contracts lay out the general parameters of the exchange (the part that we shake hands over), while the unexpected consequences are covered by social norms governing what is appropriate and what is not. The social norms are what can motivate me to work with you, and what would establish goodwill in resolving problems that might arise.

As for complete contracts, they too specify the parameters of an exchange, but they don't imply the same adherence to social norms. If something is left out, or if circumstances change, there's no default to goodwill—it's happy hunting season for all. When we use complete contracts as a basis for working together, we take away flexibility, reasonableness, and understanding and replace them with a narrow definition of expectations. That can be costly.

A CEO of a large internet company recently told me about one of the worst decisions of his career. He instituted a very specific performance-evaluation matrix that would determine 10% of his employees' compensation. Before this, the firm, like most, had a general agreement with its employees—they had to work hard, behave well, and were measured on certain goals. In return they were rewarded with salary increases, bonuses, and benefits. This CEO believed he could eliminate the uncertainty of the incomplete contract and better define ideal performance.

The complete-contract approach backfired. Employees became obsessively focused on meeting the specific terms of their contracts, even when it came at the expense of colleagues and the company. Morale sank, as did overall performance.

Even lawyers see the risks of complete contracts. As part of my research, I asked the dean of Duke's law school, David Levi, if I could take a look at the school's honor code. Expecting a detailed contract written by lawyers for lawyers, I was shocked to find that the code went something like this: If a student does anything the faculty doesn't approve of, the student won't be allowed to take the bar exam. It was, in essence, a handshake agreement!

"Imagine that a student decides to deal drugs and raise chickens in his apartment," Levi said. "Now suppose that our code of conduct bans many activities but doesn't address pot or chickens. The student has honored the code. But does Duke really want that student to become a lawyer?"

Complete contracts are inevitably imperfect. So what's better: a complete contract that mutates goodwill into legal trickery, or an incomplete contract that rests on the understanding we share of appropriate and inappropriate behavior?

This post first appeared on HBR

Tip #1: Go for the chocolate and flowers.

While a rational economist would tell you and your special Valentine to skip the formalities of jewelry, chocolate, and flowers (after all, don't we all really have better things to spend our money on?), we know that in reality, human relationships are based on more than money.

Tip #2: Be careful. Kids are expensive.

Toys, Nintendo, iPad, clothes, shots, birthday parties: kids are expensive. Be careful.

Tip #3: Don't let your expectations run away.

Our data show that our expectations about people we meet online tend to be overinflated. If we see that somebody is into sports, for example, we tend to mistakenly assume that they like the same sports we do. This bias, as you can imagine, can lead to emotional distress after the date. Keep your expectations modest.

Recently I decided to come up with a rough measure of generosity across different communities. Which communities have a culture of giving away unused items as opposed to trying to sell them? And why?

One of the ideas was to use Craigslist as a rough measure. Looking at the 23 major cities on Craigslist, we took the number of free items being given away in one week and divided it by the number of items being sold in the furniture category, as a quick index of generosity. In a nutshell: for every 100 items of furniture being sold, how many items are being given away for free?

As you can see, Portland, SF Bay, Boston, and Seattle come up on top in terms of this measurement, with Miami, Phoenix, and Houston on the bottom.

Is this a good metric for measuring generosity across communities?

A lesson about (de)motivating employees

A few months ago an ex-student of mine, who was at the time working for a big software company, contacted me and asked me to meet with her and her team later in the summer. My student, together with a large team, had worked very hard for the previous two years on an innovation which they believed was the best new idea in the "computer world," and the best new direction for their company.  They worked very hard on this project and were full of hope and expectations. But, between the time that she originally contacted me and the time that I arrived at their offices for my presentation, the CEO of the company looked at the project and decided to cancel it.

So there I was sitting with a group of highly creative people who were completely deflated. I've never seen people in the high-tech industry with a lower level of motivation. So I asked them, "How many of you show up to work later than you did before the project was shut down?" Everybody raised their hand. I next asked them, "And how many of you go home early?" All hands went up. Lastly, I asked them, "How many of you feel that you are now more likely to fudge a bit your expense reports?" In this case, no one answered the question—instead, they smiled in a way that made me think that they had first-hand experience with expense fudge.

Now, it is possible that the project was really not that good, or that it did not fit with the future direction of the company, which would mean that canceling it was the appropriate decision.  But even if this were the case, how the CEO could have behaved differently if he was also trying to keep the team members excited and interested in their work?  So I posed this question to the team and they came up with a few interesting answers:

1. The CEO could have asked them to present the project to the entire company.  The presentation would have included the process that the team followed and the final product specifications. This would allow everyone at the company to understand and (hopefully) appreciate the hard work they had done.

2. The CEO could have asked the team to write about the steps they took in the process of development, and then to use this as a template to help other teams as they developed new products. In this way, their work would not have felt wasted.

3. The CEO could have gone a step further and allowed the team to build a few working prototypes in order to let them experiment with the technology in more depth (which would have also provided a more accurate idea of the usefulness of the technology).

4. The CEO could have asked the team to redirect their efforts toward finding ways to introduce some of their new technology into other products the company was working on.

These were just a few of the team's ideas, and of course there are many possible approaches that senior management could have taken to boost their morale. Of course, most of these morale-boosters would have required some investment of time and money. The CEO may have thought of these people as rats working in a maze, and therefore seen no reason to motivate or help them make the most out of their canceled project. But if he had understood the importance of meaning in the workplace he might have taken some of these steps, spent some money in the process, and ended up with more motivated employees.  Sadly, this was not the case. I recently heard that the main people in that particular group left the company, and that the whole group was dissolved.  Maybe this is the kind of expensive lesson that this CEO needed.  However, most likely, he will be able to tell himself a story about why he was correct and they were all petty and wrong.

While recently in Istanbul I took the opportunity to study the city's market system, trying my hand at some negotiating. What techniques have sellers developed to gain the upper hand against savvy buyers?

Negotiation@Grand Bazaar from serendipity on Vimeo.

Is there symbolism of the choice of art at the world economic forum?

Maybe.

On the surface the world economic forum and the attendees are trying to maintain the feeling that we are over the recession and that the economic life is more or less back to what it used to be. But maybe the unconscious thoughts of the people at the world economic forum feel somewhat different — and maybe this is the reason for this particular piece of art?

Although I've very clearly come down on one side of the debate about rationality in economics, there is another war that I've just found out I'm in the middle of. If you look very closely in the picture below from a recent iPhone commercial, Upside of Irrationality is one of the preferred books of the AT&T iPhone user!

While it's nice that Apple put me in the middle of this war between AT&T and Verizon, In line with their slogan that "two is better than one"; what would have been really nice is to have both of my books featured–one on each shelf.