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Humans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly. (For instance, we don’t know how much a six-cylinder car is worth, but we can assume it’s more expensive than the four-cylinder mode.
Most people don’t know what they want unless they see it in context.
We don’t even know what we want to do with our lives – until we find a relative or a frined who is doing just what we think we should be doing.
We are always looking at things around us in relation to others.
RELATIVITY is easy to understand. But there’s one aspect of relativity that consistently trips us up. It’s this: We not only tend to compare things with one another but also tend to focus on comparing things that are easily comparable – and avoid comparing things that cannot be compared easily.
We find it easy to spend $3000 to upgrade to leather seats when we buy a new $28000 car, but difficult to spend the same amount on a new leather sofa (even though we know we will spend more time at home on the sofa than in the car).
We can all learn: The more we have, the more we want. And the only cure is to break the cycle of relativity
THE FALLACY OF SUPPLY AND DEMAND
How did Starbucks charge more for coffee, then? If we were previously anchored to the prices at Dunkin’ Donuts, how did we move our anchor to Starbucks?
Schultz worked diligently to separate Starbucks from other coffee shops, not through price, but ambience – to feel like continental coffeehouse.
Where everyone else had small, medium, large – Starbucks had short, tall, grande, venti, as well as drinks with high-pedigree names like Caffé Americano, Caffé Misto, and Frappuchino. Starbucks did everything in its power to make the experience feel different. So different that we would not use the prices at Dunkin’ Donuts as an anchor, but instead would be open to the new anchor that Starbucks was preparing for us.
Teacher said he was going to be reading Walt Whitman poetry that Friday evening, and due to limited space had to run an auction to determine who could attend. Before the auction, though, he privately asked half the students to write down whether, hypothetically, they would be willing to pay him $10 for a 10-minute poetry reading – and the other half to write down whether, hypothetically, they would be willing to listen to him recite poetry for 10 minutes if he paid them $10.
This, of course, served as the anchor. Then he asked for the students to bid on the poetry reading.
Those who answered the hypothetical question about paying him were willing to pay. They offered, on average, $1, $2, $3 for short, medium, long reading.
Those who answered the hypothetical question about being paid demanded payment. On average, they wanted $1.30, $2.70, $4.80 for short, medium, long reading.
Like Tom Sawyer’s fence, he was able to take an ambiguous experience and make it into a pleasurable or painful experience.
Mark Twain quote:
Work consists of whatever a body is obliged to do.
Play consists of whatever a body is not obliged to do.
There are wealthy men who drive 4-horse passenger coaches 20-30 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 they would resign.
We decide whether or not to eat burgers, smoke, run red lights, marry, have children, vote Republican, etc. Theory says we base these decisions on our fundamental values – our likes and dislikes. But could it be that the lives we have so carefully crafted are largely just a product of arbitrary coherence? Could it be that we made arbitrary decisions at some point in the past and have built our lives on them ever since, assuming the original decisions were wise? Is that how we choose our careers, spouses, clothes, and hairstyle? Were these just partially random first imprints that have run wild?
We can actively improve on our irrational behaviors. Start by becoming aware of our vulnerabilities.
If you’re planning on a purchase, ask yourself:
– How did that habit begin?
– What amount of pleasure will you be getting out of it?
– Is the pleasure as much as you thought you would get?
– Could you cut back a little and better spend the remaining money on something else?
Train yourself to question your repeated behaviors.
In particular, pay attention to the first decision you make in what is going to be a long stream of decisions. (Clothing, food, etc.)
When we face such a decision, it may seem this is just one decision without large consequences, but in fact the power of the first decision has a long-lasting effect that will percolate for years to come.
The Cost of Zero Cost
It’s not a secret that getting something free feels very good. Zero is not just another price, it turns out. Zero is emotional hot button – a source of irrational excitement.
“I believe the answer is this. Most transactions have an upside and downside, but when something is FREE we forget the downside. FREE gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is. Why ? I think it’s because humans are intrinsically afraid of loss. The real allure of FREE is tied to this fear. There’s no visible possibility of loss when we choose a FREE item.
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 !!
When a person can select one and only one of two chocolates, he needs to consider not the absolute value of each chocolate but its relative value – what he gets and what he gives up.
The Cost of Social Norms
We live simultaneously in two different worlds: one where social norms prevail, and one where market norms make the rules.
Social norms include friendly requests that people make of one another. “Could you help me move this couch?”
Social norms are wrapped up in our social nature and our need for community. They are usually warm and fuzzy.
Instant paybacks are not required. Like moving a couch or opening a door, you are not expected to immediately reciprocate.
Market norms have nothing warm and fuzzy. The exchanges are sharp-edged: wages, prices, rents, interest, costs-and-benefits.
Market relationships are not necessarily mean or evil – they also include self-reliance, inventiveness, and individualism – but they do imply comparable benefits and prompt payments.
When you are in the domain of market norms, you get what you pay for – that’s just the way it is.
“When money was mentioned, the lawyers used market norms and found the offer lacking, relative to their market salary. When no money was mentioned they used social norms and were willing to volunteer their time.”
Even small gifts keep us in the social exchange world and away from market norms.
People are willing to work free, and they are willing to work for a reasonable wage, but offer them just a small payment and they will walk away.
So we live in two worlds: one characterized by social exchanges and the other characterized by market exchanges. And we apply different norms to these two kinds of relationships.
“Think of it this way: who do you suppose is likely to wrk harder, show more loyalty, and truly love his work more – someone who is getting $1000 in cash or someone who is getting a personal gift ?”
Money, as it turns out, is very often the most expensive way to motivate people. Social norms are not only cheaper, but often more effective as well.
When we keep social norms and market norms on their separate paths, life hums along pretty well.
Sex, for instance: free in social context, where it’s warm and emotionally nourishing. But market sex, on demand, costs money. Woody Allen: “The most expensive sex is free sex.”
Once market norms enter our considerations, the social norms depart.
Using gifts is not seen as market norms (giving someone chocolates as a present for helping) – but putting a cost on the gift (“50-cent Snickers bar”, “5-dollar Godiva chocolates”) does make it market norms.
Great example: Day care center had a problem with parents picking up the kids late, so they added a fine. But now that parents were paying for their tardiness, they could decide for themselves whether to be late or not, and they more-often chose to be late.
A few weeks later the day care removed the fine, there was another slight increase in tardiness, now that social norms and market norms had both been removed.
LESSON: When a social norm collides with a market norm, the social norm goes away for a long time. Social norms are not easy to re-establish.
The Power of a Free Cookie
“If I asked you to help me change my tire, you’ll probably think to yourself: Okay, Dan is 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 $3 for your help ? Now you’ll think: Man, no way, what a jerk !! Does he really think my time is worth $3!! What this means is that when I aks you for favor and add $3 to the mix, you don’t think to yourself: How wondeful ! 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.
When price is not a part of the excahnge, we become less selfish maximizers and start caring more about the welfare of others.
The Influence of Arousal
When you are in one state, and try to predict your behavior in another state, you’ll get it wrong.
We need to explore the two sides of ourselves; we need to understand the cold state and the hot state; we need to see how the gap between the hot and cold states benefits our lives, and where it leads us astray.
The Problem Of Procrastination and Self-Control
The self-control credit card: cutomers decide in advance how much money they wanted to spend in each category, per store, per time-frame. For example: $20 on coffee per week, or $600 on clothes every 6 months, or no candy between 2pm and 6pm. If they surpass their limit, cardholders select their penalties. The card could be rejected, or they could tax themselves and send the tax to Habitat for Humanity, a friend, or long-term savings. Or it could email your spouse.
Giving up long-term goals for immediate gratification is procrastination.
The avarage American family now has six credit cards
( students has to commit to a deadline date for papers. Once you set your deadlines, they can’t be changed. Late papers added would be penalized at the rate of one percent off the grade for each day late.)
The students for whom I set the deadlines-for whom I provided the “parental” voice- did best. Of course, barking orders, while very effective, may not always be feasible or desirable.
It seems that the best course might be to give people an opportunity to commit up front to their preferred path of action. This approach might not be as effective as the dictatorial treatment, but it can help push us in the right direction.
The High Price of Ownership
“Endowment effet” – we predicted than when we own something-whether it’s a car or a violin, a cat or a basketball ticket – we begin to value it more than other people.
We fall in love with what we already have.
We focus on what we may lose, rather than what we may gain.
We assume other people will see the transaction from the same perspective as we do.
It is just diffucult for us to imagine that the person on the other side of the transaction, buyer or seller, is not seeing the world as we see it.
Ownership is not limited to material things. It can also apply to points of view.
Maybe we can realize that we have such biases and listen more carefully to the advice and feedback we get from others.
Bunch of people wait in line for football tickets. They’re handed out on a lottery system. Some get them, others don’t, but they all waited the same time. Ask people who don’t have a ticket how much they’ll be willing to pay to buy one, and they’ll say $175. Ask ticket-holders how much they’d be willing to sell theirs for, they say $2400.
The more work you put into something, the more ownership you feel for it. The Ikea effect.
Keeping Doors Open
Normally, we cannot stand the idea of closing the doors on our alternatives.
We keep our children in every activity we can imagine – just in case one sparks their interest in gymnastics, piano, French, organic gardening, or taekwondo.
What is it about options that is so difficult for us ? Why do we feel compelled to keep as many doors open as possible, even at great expense ? Why can’t we simply commit ourselves ?
Is this an efficient way to live our lives – especially when another door or two is added every week ?
The truth is that they could have made more money by picking a room – any room – and merely staying there for the whole experiment! ( Think about that in terms of your life or carrer ).
How many times have we bought something on sale not because we really needed it but because by the end of the sale all of those items would be gone, and we could never have it at that price again ?
The other side of this tragedy develops when we fail to realize that some things really are disappering doors, and need our immediate attention.
Sometimes these doors close too slowly for us to see them vanishing.
What we need is to consciously start closing some of our doors.
What’s the consequences of not deciding ?
The Effect of Expectations
Students who got beer with 3 drops of vinegar liked it. But if they were told in advance it had vinegar, they didn’t. If you tell people up-front that something might be distasteful, the odds are they will end up agreeing with you.
Students who were told about the vinegar after tasting the beer liked it much better – as much as the ones who didn’t know it had vinegar at all.
Stereotypes: Asians good at math, women worse at math. Asian women were asked to take a math exam. Half were asked questions about being a woman first, and they did worse on the test. Half were asked questions about being Asian first, and they did better on the test.
When we believe beforehand that something will be good, therefore, it generally will be good – and when we think it will be bad, it will be bad.
When you invite people to a movie, you can increase their enjoyment by mentioning that it got great reviews. This is also essential for building the reputation of brand or product. That’s what marketing is all about – providing information that will heighten someone’s anticipated and real plesure. But do expectations created by marketing really change our enjoyment ?
Expectation is an important part of the way we experience !
We don’t really understand the role expectations play in the way we exprierence and evalute art, music, literature, drama, architecture, food, wine – anything.
In the absence of expertise or perfect information, we look for social cues to help us figure out how much we are, or should be, impressed, and our expectations take care of the rest.
“Blessed is he who expects nothing, for he shall never be disappointed.” – Alexander Pope
As it turns out, positive expectations allow us to enjoy things more and improve our perception of the world around us. The danger of expecting nothing is that, in the end, it might be all we’ll get.
The Power of Price
When given a placebo pill, told it was a pain pill, almost all people felt the pain-relieving effects when told it was very expensive ($2.50 per pill). But when told it was only 10 cents, only half felt the effects.
When researchers tested the effect of the six leading antidepressants, they noted that 75% of the offect was duplicated in placebo controls.
The truth is that placebos run on the power of suggestions. They are effective because people believe in them. You see your doctor and you feel better.
Price can change our experience.
If we see a discounted item, we will instinctively assume that its quality is less than that of a full-price item.
The Cycle of Distrust
If we start to think about trust as a public good ( like clean air and water), we see that we can all benefit from higher levels of trust in terms of communicating with others, making financial transitions smoother, simplyfing contracts, and many other businesses and social activities. Without constant suspicion, we can get more out of our exchanges with others while spending less time making that others will fulfill their promises to us.
“The Boy Who Cried Wolf”
“I believe that companies that want to be successful should realize that honestly, transparency, conscientiousness, and fair dealing should be bedrock corporate principles.”
The Context of Our Character
When given the opportunity, many honest people will cheat.
Even when we have no chance of getting caught, we still don’t become wildly dishonest.
So we learned that people cheat when they have a chance to do so, but they don’t cheat as much as they could. Moreover, once they begin thinking about honesty they stop cheating completely. In other words, when we are removed from any benchmarks of ethical thought, we tend to stray into dishonesty. But if we are reminded of morality at the moment we are tempted, then we are much more likely to be honest.
Cheating is A LOT easier when it’s a step removed from money.
It is estimated that when consumers report losses on their homes and cars, they creatively stretch their claims by about 10%.
“It is difficult to get a man to understand something when his salary depends upon his not undestanding it.”
It is even more difficult to get a man to undestand something when he is dealing with nonmonetary currencies.
When we deal with money, we are primed to think about our actions as if we had just signed an honor code.
People cheat when they have a chance to do so, but don’t cheat as much as they could. Once they begin thinking about honesty (Ten Commandments, etc) – they stop cheating completely. When we are removed from any benchmarks of ethical thought, we tend to stray into dishonesty. If we are reminded of morality at the moment we are tempted, then we are much more likely to be honest.
Cheating is often one step removed from cash. (Accounting practices, backdated stock options, lobbyists sending politicians on vacations.)
Taking a red pencil from work is easy. Taking 10 cents from the petty cash drawer in order to buy a pencil is not so easy.
At a college dorm, he put 10 cans of coke in shared fridges, and they all disappeared. He put 10 $1 bills on a plate in the fridge and they all stayed.
Test given with 10 hard questions, paid $1 for each correct answer.
Group #1: Had no way to cheat. Got 3.5 questions correct.
Group #2: Told to tear up their sheet afterwards and just tell someone how many they got correct: 6.2 correct.
Group #3: Same as #2, but told someone how many they got correct just to get tokens, which then someone elsewhere turned to dollars: 9.4 correct.
Given a chance, people cheat.
Beer and Free Lunches
When people order out loud in a restaurant, they choose differently than when they order privately. People often feel they have to order something different than companions. (In Hong Kong, people felt they had to order the same thing as their companions.) People who ordered out loud were also not has happy with their selections afterwards.
Knowing this, it’s best to plan your order before the waiter arrives, and stick with it. Alternative is to get people to order anonymously.
Standard economics believes all human decisions are rational and informed, motivated by an accurate concept of the worth of all goods and services, and the amount of happiness all decisions are likely to produce. Under this assumption, everyone in the marketplace is trying to maximize profit and striving to optimize his experiences. Economic theory says there are no free lunches. If there were any, someone would have already found them and extracted all their value.
We usually think of ourselves as sitting in the drived’s seat, with ultimate control over the decisions we make and the direction our life takes; but, alas, this perception has more to do with our desires – with how we want to view ourselves – than with reality.