## Monday, August 27, 2012

### PREDICTABLY IRRATIONAL

So I am sitting in a small room listening to this behavioural economics and psychology professor and author Dan Ariely speak. He starts telling me about the propensity to cheat. He says he did an experiment where he placed 6 cans of Coca-Cola in a communal refrigerator in a university dormitory. As expected, the cans of Coke were gone very quickly. He then replaced the cans of coke with six plates, each with a dollar bill on the plate. To his surprise, no one took the dollar bills. He did another similar experiment in which he gave people a piece of paper with 20, simple math problems to solve. After 5 minutes, he stopped them and paid them \$1 for each problem they solved. On average, people solved 4 problems. He did the same thing and allowed another group to rip up the paper and simply tell him how many problems they solved. This group, on average, said they solved 7 problems and were paid \$7 accordingly. He tried it in many different ways—people tearing up the entire paper, people tearing up half of the paper, so that half of the paper was visible, people being paid with tokens and then later exchanging the tokens for money on the way out, people completely ripping the paper and then paying themselves from a bowl of a \$100 on the way out. In all these experiments the results were the same, the amount of money you could gain did not increase cheating. Instead, people tended to cheat by a little as if there are two forces at play—one force that wants to look at yourself in the mirror and feel good and another force that wants to get the extra benefit or pleasure of cheating. So this gentleman speaking, Dan, suggested that there is some limit of cheating which still allows you feel good about yourself as long as you cheat less than this limit. So most people tend to cheat a little. People also tend to cheat more the further away the “crime” is from actual money. People are much more comfortable stealing office supplies from work than stealing actual cash (equivalent to the cost of the office supplies) from a petty cash fund at work.

Then Dan starts talking about another type of irrationality by looking at visual illusions. He shows a few, but the one that catches my attention most is a picture of two sides of a Rubik’s Cube. In the picture an arrow is pointing to one square on the top surface and another arrow points to a square on the bottom surface. The side surface of the Rubik’s Cube is darkened and the arrows appear to be pointing to two different-colour squares. We all agree. Then Dan plays an animation that removes all the squares on the top surface and side surface except for the two to which the arrows point. When only the two squares are left against a white background, we see that they are in fact the same colour. But the lighter background of the top surface coloured squares and the darker background of the squares on the side surface make our mind perceive them as different. Even when we know this and plays the animation showing all the squares on the top surface and side surface, we still can’t see that they are the same colour anymore. Strange. Then Dan shows examples of cognitive allusion.

The first he shares with us is a famous analysis (Johnson and Goldstein) of organ donation in various countries. Denmark, UK, Germany, and Netherlands have low percentages of people who are organ donors in their countries while Sweden, France, Austria, Belgium, Poland, and others have very high percentages, some with 100%. Dan then tells us that the Netherlands, with 28% of people who are organ donors in the year of the study, spent a lot of money conducting an organ donor campaign. The government wrote a letter to every citizen in the country, begging her to be an organ donor. Belgium, on the other hand, reached 98% organ donor participation and spent no money. He tells us that he asked students about it and they always theorise that it has to do with the culture in Austria, which might be more giving. They said similar things about the other countries. However, Austria and Germany can be considered culturally similar, just as Sweden and Denmark are similar or Belgium and the Netherlands (some might consider UK and France to be similar as well; definitely Paris and London are similar). The Dan shows us the forms. The countries with a low percentage have forms that look something like this:

Check the box below if you want to participate in the organ donor programme.
Most people do not check the box and do not join.

The countries with a high percentage have forms that look something like this:

Check the box below if you don’t want to participate in the organ donor programme.
Most people do not check the box and, now, they do join.

The first form option is called opt-in in which you must choose to participate. The second type is called opt-out in which you must choose to be excluded. So this professor from Duke, Dan, says that we often think we are in complete control of our lives and make strong decisions every day. However, the environment in which you make the decision, or in this case the form, has a huge impact on the decision you make, more than we realise. In general, most people don’t know what to do in certain cases. When that happens, people go with the default that was chosen for them.

So Dan says it has been tried with experts, as well. He took a group of doctors and presented a case study of a 67-year-old farmer who has been suffering from right hip pain. The doctors were told that no medication seemed to be working and that each doctor had referred the patient to hip-replacement surgery. Then he told each doctor that yesterday, each doctor was reviewing the patient’s files and discovered that he forgot to try one medication—Ibuprofen. The researchers posed the question “What do you do? Do avoid intervening and let the patient go to hip-replacement surgery, or do you prevent the surgery from happening and try Ibuprofen first?” Thankfully, most doctors said they would try Ibuprofen.

Dan tells us the researchers tested another group of doctors given a similar situation. This time, they were told that they had forgotten to try two different medicines—Ibuprofen and Piroxicam. “What do you do? Do you avoid intervening and let the patient go to hip-replacement surgery? Do you pull the patient back from the hip-replacement path? If you do stop or postpone surgery which medicine do you choose—Ibuprofen or Piroxicam?” Strangely, most doctors decided to let the patient move forward with hip replacement. The question is why? Well, it turns out that even experts sometimes don’t know what to do. In the first case, compared to the default (surgery), Ibuprofen looked like a good and easy alternative. In the second case, compared to the default (surgery), the physician still had to make another decision about which medicine was best to take. And if that didn’t work, do you send the farmer to surgery or do you try the other medicine? The complexity of the alternative was increased and as a result, the default looked great.

Dan then shows an example he did with paid, weekend vacations. He offered people a paid vacation (flight, hotel, and breakfast each morning with coffee) to Rome and another to Paris. People were roughly split in half, choosing Rome or Paris. He ran the experiment again to see if people would choose Paris, Rome, or a third option—having your car stolen. We all laugh at this. He then asks us why would having your car stolen influence anything. So he says he didn’t offer a stolen car, but he offered something similar to an option no one would want; he offered paid weekend in Rome without coffee. If you want coffee with your breakfast you have to pay €2.50. He calls this option Rome-. What do you think happened? Most people chose Rome. He did the same with Paris. He offered a paid, weekend vacation in Rome, another in Paris, and a third option of a paid weekend in Paris minus the coffee; you have to buy your own coffee. In this talk, Dan calls this last option Paris-. What happened? Most people chose Paris, Dan says. Why? It’s an anchoring option. People don’t know how to value anything. It’s very difficult to compare Paris to Rome; they have different foods, different art, different architecture, different culture. But the moment you add Rome-, people now have a measuring stick. They now believe that the Rome option looks great compared to the Rome- option. And for that reason, the value of Rome goes up compared to Paris which still does not have a similar measuring stick. The same thing happens for Paris when the options are Rome, Paris, and Paris-.

Dan says he did the same thing with an Economist ad. He offered students 3 choices of Economist subscriptions: an online subscription for \$59, a print subscription for \$125, or both for \$125. Most students (84%) wanted the combo deal. Dan says, in real life, if no one is choosing an option, you would naturally remove it. So he removed the option of just a print subscription for \$125, and he tested the experiment again with only two options—a \$59 online subscription or a \$125 online and print subscription. What happened? The results flipped: most people (68%) wanted the online-only subscription. Dan says he figured that the option in the middle (\$125 for a print subscription) was only useless in that no one wanted it. But it was highly useful in giving people an anchor point in order to know how to value something. By having the option to purchase a \$125 print-only subscription, it increased the value of the \$125 print-and-online subscription. Without it, it is hard to know that the \$125 subscription is worth it. Dan then says to us, “How do you value taking your finger and flicking it across an object like this?” Dan makes the motion people make when they swipe their finger across a smart phone. “How much is it worth? \$200? \$300? How much?” We all laugh. “I mean, come on. That’s what the iPhone is, right? It’s a sophisticated toy that lets you do this?” He makes the swiping motion again.

He says when the IPhone was released it was priced at \$400. People had no idea if that was a good deal or a bad deal. How do you value something like that, especially something new? Then Apple immediately reduced the price to \$200. All of a sudden, sales went up because people had something to measure the \$200 iPhone against—the \$400 higher-priced iPhone. He says he’s not sure that they did this on purpose but it was a smart move.

Dan tells us of a number of other interesting research insights, but my favourite is in the realm of dating. He did an experiment where he showed a number of female university students pictures of two male students—Tom and Jerry. He asked them who would they like to go out with? Roughly half chose Tom, and half chose Jerry. He then repeated the experiment and added a person who looked similar to Tom but was slightly more ugly. Who would you like to go out with? Tom, Jerry, or Ugly Tom? A majority of people chose Tom. He did it again with a slightly more ugly version of Jerry. Who would you like to go out with? Tom, Jerry, or Ugly Jerry. Most women chose Jerry. Dan says people think they are even in completely control of their preferences regarding physical attractiveness but the environment can influence that. Of course this has natural application to real life, in general. First, if you go out bar hopping or on a pub-crawl, you know who to take—someone similar to you but slightly more ugly. Secondly, I now know why my friend Neeki (who many is very similar to me) would always take me out with him, even to the bookstore or grocery store, and walk away with 3 phone numbers. . . .I was his anchoring point.

Dan has three books, now. Predictably Irrational: The Hidden Forces That Shape Our Decisions (2008), The Upside of Irrationality:  The Unexpected Benefits of Defying Logic at Work and at Home (2010), and The (Honest) Truth About Dishonesty: How We Lie to Everyone—Especially Ourselves (2012).