Dan Ariely's Blog, page 60

We just created a new facebook game called "Friend Measure"

The basic idea is that once a week we will post a question.  The question this week is:

Would you date your friend's ex a month after they broke up?

After you answer the weekly question, we ask you to pick some of your friends and predict how they will answer the same question.  Next, they will be asked to answer the question (and also predict your answer).

At the end of all of this, you will get one score of how well you know your friends in general and other scores of how well you know each of your friends (and how well they know you).

Looking forward to your feedback, and if you want to suggest questions that we should ask in the weeks to come just send the suggestions to irrationallyyours@gmail,com

 

"Friend Measure"

Dan

I recently had an interesting meeting with a locksmith:

As I mention in the video, what's really interesting is that this locksmith was penalized for getting better at his profession. He was tipped better when he was an apprentice and it took him longer to pick a lock, even though he would oftentimes break the lock! Now that it takes him only a moment, his customers complain that he is overcharging and they don't tip him. What this tells is that consumers don't value goods and services solely by their utility, benefit from the service, but also a sense of fairness relating to how much effort was exerted.

Now imagine how much more people would pay if they knew the effort that goes into all kinds of products and services?

.

How do we decide how much we are willing to pay for things?

Let's take black pearls as an example:

The interesting thing about black pearls is that when they were first introduced to the market there was essentially no way to gauge how much they were worth: were they worth more or less than white pearls? Most people instinctually believed that white pearls were still more desirable. Then these discoverers had the insight: take these familiar black pearls to a famous jeweler and have them displayed next to the more precious gems: rubies, sapphires, etc.. The result still lives with us today: black pearls are now worth more.

 

Dear Readers,

 

You may have noticed that the Weekly Survey hasn't changed in several weeks.  We needed a lot of responses for the wealth distribution survey we were conducting, so we left it up for a long time.  Good news, though- thanks to the more than 2,000 of you who "clicked to participate," this survey is now complete!  Results will be posted soon.

There's a new survey up now about natural vs. synthetic medications, so check it out and let me know what you think.  You can either click on the "click to participate" button or on this link to take the survey.

And as always, many thanks for all your help.

 

Dan

Here is a letter I got last week:

Dear Professor Ariely,

I have something of a story that intrigued me along the lines of your 'dishonesty' experiments. My wife's cousin (I'll call Mary) is generally a nice, honest person. She and her fiancé found an iPhone on vacation. They decided to keep the phone, a nice item of value. Soon after, the owner started calling repeatedly (his name comes up on the screen). Mary chose to not answer the phone. After many calls were unanswered, the calls stopped. Mary kept the phone.

Mary's situation is special because this is an instance where the lost object can 'communicate' with the finder and 'ask' to be returned. To what extent and to how long would the average person wait before answering? Would they directly refuse to return the item, or demand compensation?

What if you could rig a phone to deliver a series of text messages that become increasingly personal? Would the finder then feel more connected to the owner and feel more sorry for them?

As a side note, the owner of the iPhone was able to remotely shutdown the phone so nobody could benefit. The unfortunate outcome is a lost phone. The upside is the empowerment given to the owner, who as a last resort just stops the functionality.

What do you think?

Jack

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Dear Jack,

I think that there are two very interesting points here:

The first is that Mary probably realized that if she answered the phone she would feel obligated to return the iPhone to its owner. And since she did not want to give it up – she did not answer the phone.  This act is in essence a very sad type of self-control.  Generally we try to exert self-control when we want to assure that we will behave well (save money, take medications, not procrastinate), but here of course Mary was trying to avoid the temptation that would have made her behave in a kind way.

The second interesting thing is the idea that people are more likely to return items that are more personal.  Text messages are one extreme example of this principle, but maybe it would also work for wallets with pictures, books with names, cloths with initials etc.

Not sure if this helps, but maybe we could learn something from Mary's behavior.  And for sure don't leave any valuables unattended during thanksgiving.

Irrationally yours

Dan

I have recently been asking people around me what they think makes a good gift.  And I don't mean specific items like sunglasses or one of my books (which are all excellent gifts); I was looking to find some of the basic principles and characteristics of good gifts.  One of the best answers I've gotten so far is this: "A good gift is something that someone really wants, but feels guilty buying it for themselves."  What is interesting about this answer is that the ideal gift from this perspective is not about getting the person something that they can't afford, or something that they have no idea that they want – it is all about alleviating guilt connected with the purchase of a highly desirable (yet guilt invoking) item.  So, lets consider two ways in which good gifts can eliminate guilt:

Case 1*: Imagine that you are walking by a storefront and you notice a beautiful coat that is just the right cut and color.  You walk in to check it out, and up close it is even more beautiful.  But then, you look at the price tag and you discover that it is about twice as expensive as you originally guessed, and after 30 seconds of painful deliberation you decide that you can't possibly justify paying so much for a coat – and you go on your way.  When you get home, you find out that your significant other has purchased that same exact coat for you … from your joint checking account.  Now, ask yourself how you would feel about this. Would you say a) "Honey, this is very nice of you, but I have weighted the costs and benefits earlier and decided that this coat is not worth the money — so please take it back immediately" or b) "Thank you so much, I love it, and I love you."  I suspect that the answer is b.  Why?  Because by getting you the expensive coat, your significant other got you what you wanted without making you contemplate the guilt associated with the purchase.

Case 2**: Imagine that you have just finished a fantastic meal and have the option to pay with cash or with a credit card.  Which one will "hurt" a bit more?  You probably think that paying with cash will be a more miserable way of spending your money – but why?  Because, as Drazen Prelec and George Loewenstein showed, when we couple payment with consumption, the result is reduced happiness.  When we pay with a credit card the timing of the consumption of the food and the agony of the payment occur at different points in time and this separation allows us to experience a higher level of enjoyment (at least until we get the bill).

To think some more about this example, imagine that I own a restaurant and I realize that on average people eat 50 bites and pay $50.  One day you come to my restaurant and I tell you that because I like you so much I will give you a great price and charge you half price – only 50¢ per bite. In addition, I will also charge you only for the bites you eat, and you will not have to pay for the bits that you don't eat.  What I will do is serve you your food and stand next to you with my notebook open and mark in it each bite you take.  At the end of the meal I will charge you 50¢ for every bite you took.  I think you will agree that this would be a fantastically cheap meal relative to the regular price, but I also suspect you will agree that the process will not be much fun.  Most likely, every time you take a bite you will be thinking "is this worth it?" and in the process not enjoy the meal at all.  Woody Allen might have said it best in the Manhattan taxi ride when he turns to his date to say, "You look so beautiful, I can hardly keep my eyes on the meter."

The lesson here is that when the timing of consumption and payment are close together, the experience ends up being much less pleasurable. From this perspective you can think about gift certificates for iTunes, drinks, movies, etc. as gifts that not only get people to experience something new, but also get them to experience something guilt-free, and without the pain of paying.

In summary, I think that the best gifts circumvent guilt in two key ways: by eliminating the guilt that accompanies extravagant purchases, and by reducing the guilt that comes from coupling payment with consumption. The best advice on gift-giving, therefore, is to get something that someone really wants but would feel guilty buying otherwise.

May this be a joyful gift-giving season – and in case you want to get me something, I love gadgets, but I have lots of guilt about buying them.

Dan Ariely

A shorter version of this post has appeared at the WSJ

[* This example is based on a paper by Dick Thaler, "Mental Accounting and Consumer Choice," Marketing Science, 1985]

[** This example is based on a paper by Drazen Prelec and George Loewenstein, "The Red and the Black: Mental Accounting of Savings and Debt," Marketing Science, 17(1), 4-28, 1998]

Here is a letter I got from Mary Kate Dilworth ….

Dear Dan,

Hello.  My name is Mary Kate Dilworth, and I am a junior at Thomas Jefferson High School for Science and Technology in Alexandria, Virginia.  Last summer, I read a copy of Predictably Irrational, and now it sits on my bedside table because I reference it so often in my life.  I find the chapter on social v. market norms particularly applicable to my life (I am in several volunteer organizations that regularly do fundraising projects).

Today, for example, my school's Russian Honors Society had an Election Day bake sale.  In years past, various goods have had set prices, but this year we chose to make it donation-based.  What a difference it made!  When one woman bought a cupcake, she reached for a one dollar bill and asked about the price.  When I told her there was no set price but donations-only, she put the one back in her wallet and pulled out a ten.  Your suggestion to switch to social instead of market norms was a great one-thank you so much!

Sincerely,

Mary Kate Dilworth

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Dear Mary Kate,

This is great, and I am delighted that you are taking lessons from the book and implementing them.

Next time think about trying both versions and measuring more directly the difference.  It would be interesting to know if the effect is driven by a few people who give much more, by many people who give a bit more, or perhaps by more people becoming interested in the bake sale 9or maybe all of these).

And good luck in your next implementation.

Dan

Thanks to all the people who participated in the probabilistic promotion for "The Upside."

The average response to "would you but this book without this promotion was 72% (on a 100% scale), and the average response to "would you wait longer was 62% (on a 100% scale).  This means that this promotion worked mainly for people who were going to buy the book anyway at some point.  But, there seems to be a substantial group that would have not purchased the book without this promotion.

There were people from all over the US, and some from outside the US — and the winner that was selected at random is from Washington DC.

 

I hope this was fun for everyone, and if you have any other suggestions for creative promotions, let me know and I am happy to try more things.

 

Irrationally yours

 

Dan Ariely

 

If you practice kicking a soccer ball with your eyes closed, it takes only a few tries to become quite good at predicting where the ball will end up. But when "random noise" is added to the situation—a dog chases the ball, a stiff breeze blows through, a neighbor passes by and kicks the ball—the results become quite unpredictable.

If you had to evaluate the kicker's performance, would you punish him for not predicting that Fluffy would run off with the ball? Would you switch kickers in an attempt to find someone better able to predict Fluffy's involvement?

That would be absurd. And yet it's exactly how we reward and punish managers. Managers attempt to make sense of the environment and predict what will result from their decisions.

The problem is that there's plenty of random noise in competitive strategic decisions. Predicting where the ball will go is equivalent to deciding whether to open a chain of seafood restaurants on the Gulf Coast. The dog running off with the ball is the BP oil spill. When the board reviews the manager's performance, they'll focus on the failed restaurants. The stock is down. The chain lost money. Since the manager's compensation is tied to results, he'll incur financial penalties. To save face and appear to be taking action, the board may even fire him—thus giving up on someone who may be a good manager but had bad luck.

The oil spill example is an extreme case. In the real world, the random noise is often more subtle and various—a hundred little things rather than one big thing. But the effect is the same. Rewarding and penalizing leaders based on outcomes overestimates how much variance people actually control. (This works both ways: Just as good managers can suffer from bad outcomes not of their own making, bad managers can be rewarded for good outcomes that occur in spite of their ineptitude.) In fact, the more unpredictable an environment becomes, the more an outcomes-based approach ends up rewarding or penalizing noise.

In the last year I've asked many board members how much of a company's stock value they think should be attributed to the CEO's strength, and the answer is surprising. They estimate that you'll get about 10% more stock value, on average, from a good CEO than from a mediocre one. Implicit in that estimate is the understanding that many outcomes are outside a leader's control.

We can't entirely avoid outcome-based decisions. Still, we can reduce our reliance on stochastic outcomes. Here are four ways companies can create more-sound reward systems.

1. Change the mind-set. Publicly recognize that rewarding outcomes is a bad idea, particularly for companies that deal in complex and unpredictable environments.

2. Document crucial assumptions. Analyze a manager's assumptions at the time when the decision takes place. If they are valid but circumstances change, don't punish her, but don't reward her, either.

3. Create a standard for good decision making. Making sound assumptions and being explicit about them should be the basic condition for getting a reward. Good decisions are forward-looking, take available information into account, consider all available options, and do not create conflicts of interests.

4. Reward good decisions at the time they're made.Reinforce smart habits by breaking the link between rewards and outcomes.

Our focus on outcomes is understandable. When a company loses money, people demand that heads roll, even if the changes are more about assuaging shareholders than sound management. Moreover, measuring outcomes is relatively easy to do; decision-making–based reward systems will be more complex. But as I've I said before, "It's hard" is a terrible reason not to do something. Especially when that something can help reward and retain the people best able to help you grow your business.

This post is based on my column at HBR

Recently Nina Mazar and I have been playing with the idea of probabilistic discounts.  The basic question is whether people would prefer a fixed discount of X% (lets say 10%) over a fixed probability X of paying nothing for the product (lets say 10% chance of paying nothing).  So far it seems that probabilistic discounts are a huge hit.

 

So – I decided to try a type of probabilistic promotion for my second book ("The Upside of Irrationality").  Here is the deal:

 

If you buy "The Upside of Irrationality" in any version (physical, e-book, enhanced e-book, or audio) between now and Nov 20th, keep your receipt, follow this link, and fill in your information.

If you are selected (at random) I will invite you to have dinner with me (now, is this a positive or negative experience?).

 

Interested?