A Taste of Irrationality

Sample chapters from Predictably Irrational and Upside of Irrationality

Dr. Dan Ariely

• Publisher: HarperCollins e-books
• Year: 2010
• ISBN:
  9780062060402
• Topic: Business
• Subtopic: Consumer Behaviour
• Index: Business

Sample chapters from Predictably Irrational and Upside of Irrationality.

Predictably Irrational

Why do our headaches persist after we take a one-cent aspirin but disappear when we take a fifty-cent aspirin?

Why do we splurge on a lavish meal but cut coupons to save twenty-five cents on a can of soup?

When it comes to making decisions in our lives, we think we're making smart, rational choices. But are we?

In this newly revised and expanded edition of the groundbreaking New York Times bestseller, Dan Ariely refutes the common assumption that we behave in fundamentally rational ways. From drinking coffee to losing weight, from buying a car to choosing a romantic partner, we consistently overpay, underestimate, and procrastinate. Yet these misguided behaviors are neither random nor senseless. They're systematic and predictable—making us predictably irrational.

Upside of Irrationality

The provocative follow-up to the New York Times bestseller Predictably Irrational

• Why can large bonuses make CEOs less productive?
• How can confusing directions actually help us?
• Why is revenge so important to us?
• Why is there such a big difference between what we think will make us happy and what really makes us happy?

In his groundbreaking book Predictably Irrational, social scientist Dan Ariely revealed the multiple biases that lead us into making unwise decisions. Now, in The Upside of Irrationality, he exposes the surprising negative and positive effects irrationality can have on our lives. Focusing on our behaviors at work and in relationships, he offers new insights and eye-opening truths about what really motivates us on the job, how one unwise action can become a long-term habit, how we learn to love the ones we're with, and more.

Drawing on the same experimental methods that made Predictably Irrational one of the most talked-about bestsellers of the past few years, Ariely uses data from his own original and entertaining experiments to draw arresting conclusions about how—and why—we behave the way we do. From our office attitudes, to our romantic relationships, to our search for purpose in life, Ariely explains how to break through our negative patterns of thought and behavior to make better decisions. The Upside of Irrationality will change the way we see ourselves at work and at home—and cast our irrational behaviors in a more nuanced light.

Predictably
Irrational

revised and expanded edition

The Hidden Forces
That Shape Our Decisions

Dan Ariely

Chapter 5
The Power of a Free Cookie

How free Can Make Us Less Selfish

Some time ago, I decided to go watch firsthand one of the most infamous acts of raw, unabashed, supply-and-demand capitalism in action. I am talking, of course, about Filene’s Basement’s “Running of the Brides”—an event that has been held annually since 1947 and is the department store’s answer to the famous “Running of the Bulls” in Pamplona, Spain. Instead of watching thousand-pound bulls trampling and goring foolhardy humans, I observed about a thousand blushing brides-to-be (and their minions) trampling one another in a mass grab for discount-priced designer wedding dresses. According to the store’s Web site,⁵ gowns originally priced at thousands of dollars are on this day offered for a pittance, from $249 to $699.

Early on the morning of the sale, the brides, each with a small army of moms and friends, line up outside the store (some even camp out the night before). The minute the doors open, they turn into a frantic, screaming, pushing mob, running to the racks to tear off as many dresses as they can carry. (One piece of particularly useful advice for brides: put all your friends in brightly colored uniforms or silly headgear so you can identify them in the melee as they grab armfuls of dresses.) It takes just a minute or so for the racks to be stripped to bare metal. As soon as they have their piles of dresses, the women strip off their clothes and begin trying them on. Dresses that don’t fit are tossed aside, and the poor, bedraggled store assistants try to pick them off the floor and re-rack them.

Although I’d heard horror stories of injuries and scuffles, I personally didn’t see a lot of violence. But I did witness rampant selfishness, to say nothing of the air turning blue from the terrible language. (I suspect that if their fiancés were to witness this event, it might have led to a serious rethinking of marriage proposals.)

NOW, TRADITIONAL ECONOMICS takes a very simple and straightforward view of the scene at Filene’s Basement when prices on wedding gowns are so dramatically reduced. When a Vera Wang gown is reduced from $10,000 to $249, the excitement (“demand,” in economic-speak) over the gown dramatically increases. More precisely, demand increases for two reasons. According to the first law of demand, it increases because more women are now in the market for designer gowns (they can now afford them). And according to the second law of demand, it increases because at these prices women might buy multiple units. This second law is less relevant for wedding gowns, where women presumably need just one, but central in cases where we need multiple units (cookies, sweaters, etc.). Still, even in the case of wedding dresses, multiple women have been sighted leaving Filene’s Basement with more than one gown. These two laws are the nuts and bolts of the standard economic rule of demand. (Admittedly, the Filene’s event isn’t just any occurrence of “increased demand.” It’s more like an all-out bridal battlefield.)

THESE TWO ECONOMIC laws of demand seem perfectly reasonable, but as we learned in Chapter 4, “The Cost of Social Norms,” market rules are just some of the forces that operate on us. As social animals, we also have social forces to contend with—and when economic and social forces mix, the outcome is sometimes different from what we would expect. When we explored the interactions between social and market norms, we basically found that when we add money to a situation that operates on social norms, motivation can decrease rather than increase. For example, if I asked you to help me change my tire, you’ll probably think to yourself: “Okay, Dan’s a nice enough guy most of the time, so I will be happy to help him out.” But if I asked you: “Would you help me change the tire of my car—how about [checking my wallet] $3 for your help?” Now you’ll think: “Man, no way, what a jerk! Does he really think my time is worth that little?” What this means is that when I ask you for a favor and add $3 to the mix, you don’t think to yourself: “How wonderful! I get to help Dan and I get to earn $3.” Instead, you change your perspective on the situation, look at it as work, and conclude that it is not worth your time (of course, if I offered you $175, you would most likely take on this job).

The basic lesson, then, is that when we offer people a financial payment in a situation that is governed by social norms, the added payment could actually reduce their motivation to engage and help out.

But what if the situation was reversed and we asked people to pay us for something? Would the effect of social norms work in the same way? This was the question that Uri Gneezy (a professor at the University of California at San Diego), Ernan Haruvy (a professor at the University of Texas at Dallas), and I wanted to explore: the effect of mixing social and market norms on demand.

To think more concretely about this effect, imagine that one of your coworkers—let’s call her Susan—also happens to be a rather talented baker. One weekend, in a fit of boredom, Susan bakes a hundred chewy chocolate-chip-oatmeal cookies using her grandmother’s famous recipe, and it just so happens that there are about a hundred people in the
office. Since your desk is adjacent to hers, Susan comes
to your office first and places before you the box with all those delicious-smelling confections. How many would you take, and how would you decide this? Chances are you would quickly consider, among other things, your level of hunger, your waistline, and your love of chocolate-chip-oatmeal cookies. You might also think about how your
co-workers would feel if the cookies ran out, and if they learned that you took a lot of them. With all this in mind, including the importance of social norms, you decide to take one or two.

Now, consider a variation of this situation. This time, Susan comes by your desk asking you if you want to buy cookies for a nickel a piece. Now how many would you take, and what would dictate your decision? Most likely, you would again take into account your level of hunger, your waistline, and your love of chocolate-chip-oatmeal cookies. But unlike the previous case, this time you will have no compunction about buying a bunch to eat and take home (knowing how much your kids would love them), and you would not even think about the fact that by getting so many of Susan’s cookies you are depriving your coworkers from that same joy.

Why would your decision change so much once Susan asks for a nickel apiece? Because, very simply, by asking for money, she has introduced market norms into the equation, and these have chased away the social norms that governed the case of the free cookies. More interesting, it’s clear in both cases that if you take multiple cookies, there will be fewer for the other people in your office. But if Susan offers her cookies for free, I am willing to bet that you will think about social justice, the consequences of appearing greedy, and the welfare of your coworkers. Once money is introduced into the exchange, you stop thinking about what’s socially right and wrong, and you simply want to maximize your cookie intake.

In the same way, if you go to Filene’s Basement and discover a fantastic deal on wedding gowns, you don’t naturally think about all the other women who would also like to score a similar deal on their Vera Wangs—and therefore you grab as many dresses as you can. In economic exchanges, we are perfectly selfish and unfair. And we think that following our wallets is the right thing to do.

URI, ERNAN, AND I decided to find out what would actually happen in the two Susan cookie scenarios. To that end, we set up one of our makeshift candy stands at the MIT student center and watched for the outcome of two experimental scenarios:

Scenario 1: Pretend you’re a college student hurrying through the student center on your way to a late afternoon class. You see a booth up ahead with a sign that reads “Starburst Fruit Chews for 1¢ each.” Let’s say that, thinking quickly, you recall that you haven’t eaten lunch, that the last time you bought Starburst was in the movie theater, and, hey, they’re only one cent each. So you go over and buy ten Starbursts. Lunch is served!

Scenario 2: The setting is the same, but this time the sign reads “Starburst Fruit Chews for free.” You reminisce over the memory of popping these candies in your mouth when you went to the movies as a kid, happily recalling that it was one of the few times your parents allowed you to eat lots of sugar. Now what would you do? How many Starbursts would you take? According to the two laws of demand, with this new, irresistibly reduced price of zero, more people will go for the Starburst, and those who do will take more of the colorful square candy.

We set up our candy booth in the afternoon hours when the stream of students was more or less steady, and from time to time, we switched the conditions by alternating the free and the 1¢ signs (the penny price represented what we called the “monetary condition”). We counted the number of students who stopped by our booth and how many Starbursts they either bought or picked up. We found that during an average hour in the monetary condition, about 58 students stopped by and purchased candy, while in an average hour in the free condition, 207 students stopped by to take candy. Altogether, nearly three times the number of students stopped at the booth when Starbursts were free. Just as the theory of demand predicts, the decrease in price resulted in a greater number of people consuming the product. So far so good for the first law of demand.

Now, given the second law of demand, you’d assume that once the price drops from 1¢ to zero, each of the students who took candy would take more units. And since the number of students who stopped by was almost three times as large, you might expect that together these two forces of demand will make the total demand in our free condition much larger than the demand in the monetary condition.
So how many more Starbursts did our students pick up
when they were free? Trick question: They picked up fewer Starbursts!

When the Starbursts cost a cent apiece, the average number of candies per customer was 3.5, but when the price went down to zero, the average went down to 1.1 per customer. The students limited themselves to a large degree when the candy was free. In fact, almost all the students applied a very simple social-norm rule in this situation—they politely took one and only one Starburst. This, of course, is the opposite of the second law of demand. And how did these two forces of demand work together? In total, the increase due to the greater number of people that stopped by and the decrease due to the reduction in the number of candies that each person took resulted in students collectively taking fewer Starbursts as the price decreased from 1¢ to free.

What these results mean is that when price is not a part of the exchange, we become less selfish maximizers and start caring more about the welfare of others. We saw this demonstrated by the fact that when the price decreased to zero, customers restrained themselves and took far fewer units. So while the product (candy, in our case) was more attractive to more people, ...

Table of contents

• Cover Page
• Title Page
• Table of Contents
• Predictably Irrational
• The Upside of Irrationality
• About the Author
• Copyright
• More Irrational By Dan Ariely
• About the Publisher