PredictablyIrrational

revisedandexpandededition

TheHiddenForcesThatShapeOurDecisions

DanAriely

Tomymentors,colleagues,andstudents—whomakeresearchexciting

Contents

Cover

TitlePage

Introduction

Chapter1-TheTruthaboutRelativity

Chapter2-TheFallacyofSupplyandDemand

Chapter3-TheCostofZeroCost

Chapter4-TheCostofSocialNorms

Chapter5-ThePowerofaFreeCookie

Chapter6-TheInfluenceofArousal

Chapter7-TheProblemofProcrastinationandSelf-Control

Chapter8-TheHighPriceofOwnership

Chapter9-KeepingDoorsOpen

Chapter10-TheEffectofExpectations

Chapter11-ThePowerofPrice

Chapter12-TheCycleofDistrust

Chapter13-TheContextofOurCharacter,PartI

Chapter14-TheContextofOurCharacter,PartII

Chapter15-BeerandFreeLunches

Thanks

ListofCollaborators

Notes

BibliographyandAdditionalReadings

AbouttheAuthor

PraiseforPredictablyIrrational

Copyright

AboutthePublisher

Introduction

HowanInjuryLedMetoIrrationalityandtotheResearchDescribedHere

IhavebeentoldbymanypeoplethatIhaveanunusualwayof lookingat theworld.Overthelast20yearsorsoofmyresearchcareer,it’senabledmetohavea lot of fun figuring outwhat really influences our decisions in daily life (asopposedtowhatwethink,oftenwithgreatconfidence,influencesthem).Do you knowwhywe so often promise ourselves to diet, only to have the

thoughtvanishwhenthedessertcartrollsby?Doyouknowwhywesometimes findourselvesexcitedlybuying thingswe

don’treallyneed?Doyouknowwhywestillhaveaheadacheaftertakingaone-centaspirin,but

whythatsameheadachevanisheswhentheaspirincosts50cents?Do you know why people who have been asked to recall the Ten

Commandments tend to bemore honest (at least immediately afterward) thanthosewho haven’t?Orwhy honor codes actually do reduce dishonesty in theworkplace?By the end of this book, you’ll know the answers to these andmany other

questionsthathaveimplicationsforyourpersonallife,foryourbusinesslife,andfor theway you look at theworld. Understanding the answer to the questionaboutaspirin, forexample,has implicationsnotonly foryourchoiceofdrugs,butforoneofthebiggestissuesfacingoursociety:thecostandeffectivenessofhealth insurance. Understanding the impact of the Ten Commandments incurbing dishonesty might help prevent the next Enron-like fraud. Andunderstandingthedynamicsofimpulsiveeatinghasimplicationsforeveryotherimpulsivedecisioninourlives—includingwhyit’ssohardtosavemoneyforarainyday.

Mygoal,bytheendofthisbook,istohelpyoufundamentallyrethinkwhatmakes you and the people around you tick. I hope to lead you there bypresentingawide rangeof scientific experiments, findings, andanecdotes thatareinmanycasesquiteamusing.Onceyouseehowsystematiccertainmistakesare—howwerepeatthemagainandagain—Ithinkyouwillbegintolearnhowtoavoidsomeofthem.But before I tell you aboutmy curious, practical, entertaining (and in some

casesevendelicious)researchoneating,shopping,love,money,procrastination,beer,honesty,andotherareasoflife,IfeelitisimportantthatItellyouabouttheorigins of my somewhat unorthodox worldview—and therefore of this book.Tragically,myintroductiontothisarenastartedwithanaccidentmanyyearsagothatwasanythingbutamusing.

ONWHATWOULDotherwisehavebeenanormalFridayafternooninthelifeofaneighteen-year-old Israeli, everything changed irreversibly in amatter of a fewseconds.Anexplosionofa largemagnesiumflare, thekindused to illuminatebattlefieldsatnight,left70percentofmybodycoveredwiththird-degreeburns.The next three years foundmewrapped in bandages in a hospital and then

emergingintopubliconlyoccasionally,dressedinatightsyntheticsuitandmaskthatmademelooklikeacrookedversionofSpider-Man.Withouttheabilitytoparticipate in thesamedailyactivitiesasmyfriendsandfamily, I feltpartiallyseparated from society and as a consequence started to observe the veryactivities thatwereoncemydaily routineas if Iwereanoutsider.As if Ihadcome from a different culture (or planet), I started reflecting on the goals ofdifferentbehaviors,mineandthoseofothers.Forexample,IstartedwonderingwhyIlovedonegirlbutnotanother,whymydailyroutinewasdesignedtobecomfortableforthephysiciansbutnotforme,whyIlovedgoingrockclimbingbutnotstudyinghistory,whyIcaredsomuchaboutwhatotherpeoplethoughtofme, andmostlywhat it is about life thatmotivatespeople andcausesus tobehaveaswedo.During the years in the hospital following my accident, I had extensive

experience with different types of pain and a great deal of time betweentreatmentsandoperations to reflecton it. Initially,mydailyagonywas largelyplayed out in the “bath,” a procedure in which I was soaked in disinfectantsolution, the bandages were removed, and the dead particles of skin werescrapedoff.Whentheskinisintact,disinfectantscreatealow-levelsting,andingeneralthebandagescomeoffeasily.Butwhenthereislittleornoskin—asinmycasebecauseofmyextensiveburns—thedisinfectantstingsunbearably,thebandages stick to the flesh, and removing them (often tearing them)hurts like

nothingelseIcandescribe.Early on in the burn department I started talking to the nurses who

administered my daily bath, in order to understand their approach to mytreatment.Thenurseswould routinelygrabholdofabandageand rip itoffasfastaspossible,creatingarelativelyshortburstofpain;theywouldrepeatthisprocess for an hour or so until they had removed every one of the bandages.OncethisprocesswasoverIwascoveredwithointmentandwithnewbandages,inordertorepeattheprocessagainthenextday.The nurses, I quickly learned, had theorized that a vigorous tug at the

bandages,whichcausedasharpspikeofpain,waspreferable(tothepatient)toaslowpullingof thewrappings,whichmightnot lead tosuchaseverespikeofpainbutwouldextendthetreatment,andthereforebemorepainfuloverall.Thenurses had also concluded that there was no difference between two possiblemethods:startingatthemostpainfulpartofthebodyandworkingtheirwaytothe least painful part; or starting at the least painful part and advancing to themostexcruciatingareas.As someonewhohadactually experienced thepainof thebandage removal

process,Ididnotsharetheirbeliefs(whichhadneverbeenscientificallytested).Moreover, their theories gave no consideration to the amount of fear that thepatient felt anticipating the treatment; to the difficulties of dealing withfluctuationsofpainovertime;totheunpredictabilityofnotknowingwhenthepain will start and ease off; or to the benefits of being comforted with thepossibility that the pain would be reduced over time. But, given my helplessposition,IhadlittleinfluenceoverthewayIwastreated.As soonas Iwasable to leave thehospital for aprolongedperiod (Iwould

still return for occasional operations and treatments for another five years), IbeganstudyingatTelAvivUniversity.Duringmyfirstsemester,I tookaclassthat profoundly changed my outlook on research and largely determined myfuture. This was a class on the physiology of the brain, taught by professorHananFrenk. Inaddition to the fascinatingmaterialProfessorFrenkpresentedabout theworkingsof thebrain,what struckmemostabout thisclasswashisattitudetoquestionsandalternativetheories.Manytimes,whenIraisedmyhandin class or stopped by his office to suggest a different interpretation of someresults he had presented, he replied that my theory was indeed a possibility(somewhat unlikely, but a possibility nevertheless)—andwould then challengemetoproposeanempiricaltesttodistinguishitfromtheconventionaltheory.Coming up with such tests was not easy, but the idea that science is an

empirical endeavor inwhich all the participants, including a new student likemyself,couldcomeupwithalternativetheories,aslongastheyfoundempirical

waystotestthesetheories,openedupanewworldtome.OnoneofmyvisitstoProfessorFrenk’soffice, Iproposeda theoryexplaininghowacertainstageofepilepsydeveloped,andincludedanideaforhowonemighttestitinrats.ProfessorFrenk liked the idea, and for the next threemonths I operated on

about50rats,implantingcathetersintheirspinalcordsandgivingthemdifferentsubstances to create and reduce their epileptic seizures. One of the practicalproblemswith this approachwas that themovements ofmy handswere verylimited,becauseofmyinjury,andasaconsequenceitwasverydifficultformetooperateon the rats.Luckily forme,mybest friend,RonWeisberg (an avidvegetarian and animal lover), agreed to come with me to the lab for severalweekends and help me with the procedures—a true test of friendship if evertherewasone.Intheend,itturnedoutthatmytheorywaswrong,butthisdidnotdiminish

my enthusiasm. Iwas able to learn something aboutmy theory, after all, andeventhoughthetheorywaswrong,itwasgoodtoknowthiswithhighcertainty.I always hadmanyquestions about how thingswork andhowpeople behave,andmynewunderstanding—thatscienceprovidesthetoolsandopportunitiestoexamine anything I found interesting—luredme into the study of howpeoplebehave.With thesenew tools, I focusedmuchofmy initialeffortsonunderstanding

howweexperiencepain.ForobviousreasonsIwasmostconcernedwithsuchsituationsasthebathtreatment,inwhichpainmustbedeliveredtoapatientoveralongperiodoftime.Wasitpossibletoreducetheoverallagonyofsuchpain?OverthenextfewyearsIwasabletocarryoutasetoflaboratoryexperimentson myself, my friends, and volunteers—using physical pain induced by heat,cold water, pressure, loud sounds, and even the psychological pain of losingmoneyinthestockmarket—toprobefortheanswers.BythetimeIhadfinished,Irealizedthatthenursesintheburnunitwerekind

andgenerousindividuals(well,therewasoneexception)withalotofexperiencein soaking and removing bandages, but they still didn’t have the right theoryaboutwhatwouldminimizetheirpatients’pain.Howcouldtheybesowrong,Iwondered, considering their vast experience? Since I knew these nursespersonally,Iknewthattheirbehaviorwasnotduetomaliciousness,stupidity,orneglect. Rather, they were most likely the victims of inherent biases in theirperceptionsoftheirpatients’pain—biasesthatapparentlywerenotalteredevenbytheirvastexperience.For these reasons, I was particularly excited when I returned to the burn

departmentonemorningandpresentedmyresults,inthehopeofinfluencingthebandageremovalproceduresforotherpatients.Itturnsout,Itoldthenursesand

physicians,thatpeoplefeellesspainiftreatments(suchasremovingbandagesinabath)arecarriedoutwithlowerintensityandlongerdurationthanifthesamegoalisachievedthroughhighintensityandashorterduration.Inotherwords,Iwouldhavesufferedlessiftheyhadpulledthebandagesoffslowlyratherthanwiththeirquick-pullmethod.The nurseswere genuinely surprised bymy conclusions, but I was equally

surprised bywhat Etty,my favorite nurse, had to say. She admitted that theirunderstandinghadbeenlackingandthattheyshouldchangetheirmethods.Butshealsopointedoutthatadiscussionofthepaininflictedinthebathtreatmentshouldalsotakeintoaccountthepsychologicalpainthatthenursesexperiencedwhen their patients screamed in agony.Pulling thebandagesquicklymight bemore understandable, she explained, if it were indeed the nurses’ way ofshortening their own torment (and their faces often did reveal that they weresuffering). In the end, though, we all agreed that the procedures should bechanged,andindeed,someofthenursesfollowedmyrecommendations.My recommendations never changed the bandage removal process on a

greaterscale(asfarasIknow),buttheepisodeleftaspecialimpressiononme.If the nurses,with all their experience,misunderstoodwhat constituted realityfor the patients they cared so much about, perhaps other people similarlymisunderstand the consequences of their behaviors and, for that reason,repeatedlymakethewrongdecisions.Idecidedtoexpandmyscopeofresearch,from pain to the examination of cases in which individuals make repeatedmistakes—withoutbeingabletolearnmuchfromtheirexperiences.

THIS JOURNEY INTO themanyways inwhichweareall irrational, then, iswhatthisbookisabout.Thedisciplinethatallowsmetoplaywiththissubjectmatteriscalledbehavioraleconomics,orjudgmentanddecisionmaking(JDM).Behavioraleconomics isarelativelynewfield,one thatdrawsonaspectsof

both psychology and economics. It has led me to study everything from ourreluctance to save for retirement toour inability to thinkclearlyduring sexualarousal.It’snotjustthebehaviorthatIhavetriedtounderstand,though,butalsothe decision-making processes behind such behavior—yours, mine, andeverybodyelse’s.BeforeIgoon,letmetrytoexplain,briefly,whatbehavioraleconomicsisallaboutandhowitisdifferentfromstandardeconomics.LetmestartoutwithabitofShakespeare:

Whatapieceofworkisaman!hownobleinreason!howinfiniteinfaculty!informandmovinghowexpressandadmirable!inactionhowlikeanangel!inapprehensionhowlikeagod!Thebeautyoftheworld,the

paragonofanimals.—fromActII,scene2,ofHamlet

Thepredominantviewofhumannature,largelysharedbyeconomists,policymakers, nonprofessionals, and everyday Joes, is the one reflected in thisquotation. Of course, this view is largely correct. Our minds and bodies arecapable of amazing acts.We can see a ball thrown from a distance, instantlycalculateitstrajectoryandimpact,andthenmoveourbodyandhandsinordertocatchit.Wecanlearnnewlanguageswithease,particularlyasyoungchildren.We canmaster chess.We can recognize thousands of faceswithout confusingthem.Wecanproducemusic, literature, technology,andart—and the listgoesonandon.Shakespeareisnotaloneinhisappreciationforthehumanmind.Infact,we

allthinkofourselvesalongthelinesofShakespeare’sdepiction(althoughwedorealize that our neighbors, spouses, and bosses do not always live up to thisstandard).Withinthedomainofscience,theseassumptionsaboutourabilityforperfectreasoninghavefoundtheirwayintoeconomics.Ineconomics,thisverybasic idea, called rationality, provides the foundation for economic theories,predictions,andrecommendations.From this perspective, and to the extent that we all believe in human

rationality,we are all economists. I don’tmean that eachof us can intuitivelydevelopcomplexgame-theoreticalmodelsorunderstandthegeneralizedaxiomof revealed preference (GARP); rather, I mean that we hold the basic beliefsabouthumannatureonwhicheconomicsisbuilt.Inthisbook,whenImentionthe rational economic model, I refer to the basic assumption that mosteconomists and many of us hold about human nature—the simple andcompellingideathatwearecapableofmakingtherightdecisionsforourselves.Althoughafeelingofaweatthecapabilityofhumansisclearlyjustified,there

isalargedifferencebetweenadeepsenseofadmirationandtheassumptionthatourreasoningabilitiesareperfect.Infact,thisbookisabouthumanirrationality—aboutourdistancefromperfection.Ibelievethatrecognizingwherewedepartfromtheidealisanimportantpartofthequesttotrulyunderstandourselves,andone that promises many practical benefits. Understanding irrationality isimportantforoureverydayactionsanddecisions,andforunderstandinghowwedesignourenvironmentandthechoicesitpresentstous.My further observation is that we are not only irrational, but predictably

irrational—that our irrationality happens the same way, again and again.Whether we are acting as consumers, businesspeople, or policy makers,understanding how we are predictably irrational provides a starting point forimprovingourdecisionmakingandchangingthewayweliveforthebetter.

Thisleadsmetothereal“rub”(asShakespearemighthavecalledit)betweenconventionaleconomicsandbehavioraleconomics.Inconventionaleconomics,theassumptionthatweareallrationalimpliesthat,ineverydaylife,wecomputethe value of all the optionswe face and then follow the best possible path ofaction. What if we make a mistake and do something irrational? Here, too,traditionaleconomicshasananswer:“marketforces”willsweepdownonusandswiftlysetusbackonthepathofrighteousnessandrationality.Onthebasisofthese assumptions, in fact, generations of economists sinceAdam Smith havebeen able to develop far-reaching conclusions about everything from taxationandhealth-carepoliciestothepricingofgoodsandservices.But,asyouwillseeinthisbook,wearereallyfarlessrationalthanstandard

economic theory assumes. Moreover, these irrational behaviors of ours areneither random nor senseless. They are systematic, and since we repeat themagain and again, predictable. So, wouldn’t it make sense to modify standardeconomics,tomoveitawayfromnaivepsychology(whichoftenfailsthetestsof reason, introspection, and—most important—empirical scrutiny)? This isexactly what the emerging field of behavioral economics, and this book as asmallpartofthatenterprise,istryingtoaccomplish.

ASYOUWILLseeinthepagesahead,eachofthechaptersinthisbookisbasedonafewexperimentsIcarriedoutovertheyearswithsometerrificcolleagues(atthe end of the book, I have included short biographies of my amazingcollaborators). Why experiments? Life is complex, with multiple forcessimultaneously exerting their influences on us, and this complexity makes itdifficulttofigureoutexactlyhoweachoftheseforcesshapesourbehavior.Forsocialscientists,experimentsarelikemicroscopesorstrobelights.Theyhelpusslowhumanbehaviortoaframe-by-framenarrationofevents,isolateindividualforces, andexamine those forces carefully and inmoredetail.They let us testdirectlyandunambiguouslywhatmakesustick.ThereisoneotherpointIwanttoemphasizeaboutexperiments.Ifthelessons

learned in any experiment were limited to the exact environment of theexperiment, their value would be limited. Instead, I would like you to thinkaboutexperimentsasanillustrationofageneralprinciple,providinginsightintohow we think and how we make decisions—not only in the context of aparticularexperimentbut,byextrapolation,inmanycontextsoflife.Ineachchapter,then,Ihavetakenastepinextrapolatingthefindingsfromthe

experiments to other contexts, attempting to describe some of their possibleimplicationsforlife,business,andpublicpolicy.TheimplicationsIhavedrawnare,ofcourse,justapartiallist.

Togetrealvaluefromthis,andfromsocialscienceingeneral,itisimportantthat you, the reader, spend some time thinking about how the principles ofhumanbehavioridentifiedintheexperimentsapplytoyourlife.Mysuggestiontoyouistopauseattheendofeachchapterandconsiderwhethertheprinciplesrevealed in the experiments might make your life better or worse, and moreimportantly what you could do differently, given your new understanding ofhumannature.Thisiswheretherealadventurelies.Andnowforthejourney.

Chapter1TheTruthaboutRelativity

WhyEverythingIsRelative—EvenWhenItShouldn’tBe

One daywhile browsing theWorldWideWeb (obviously forwork—not justwasting time), I stumbledon the followingad,on theWebsiteofamagazine,theEconomist.

Ireadtheseoffersoneatatime.Thefirstoffer—theInternetsubscriptionfor$59—seemed reasonable. The second option—the $125 print subscription—seemedabitexpensive,butstillreasonable.ButthenIreadthethirdoption:aprintand Internetsubscriptionfor$125.I

readittwicebeforemyeyeranbacktothepreviousoptions.Whowouldwanttobuy the print option alone, I wondered, when both the Internet and the printsubscriptionswereoffered for thesameprice?Now, theprint-onlyoptionmay

have been a typographical error, but I suspect that the clever people at theEconomist’s London offices (and they are clever—and quitemischievous in aBritishsortofway)wereactuallymanipulatingme.Iamprettycertainthattheywantedme toskip the Internet-onlyoption (which theyassumedwouldbemychoice,sinceIwasreadingtheadvertisementontheWeb)andjumptothemoreexpensiveoption:Internetandprint.But how could theymanipulateme? I suspect it’s because theEconomist’s

marketingwizards(andIcouldjustpicturethemintheirschooltiesandblazers)knewsomethingimportantabouthumanbehavior:humansrarelychoosethingsinabsoluteterms.Wedon’thaveaninternalvaluemeterthattellsushowmuchthingsareworth.Rather,we focuson the relativeadvantageofone thingoveranother,andestimatevalueaccordingly.(Forinstance,wedon’tknowhowmuchasix-cylindercarisworth,butwecanassumeit’smoreexpensivethanthefour-cylindermodel.)InthecaseoftheEconomist,ImaynothaveknownwhethertheInternet-only

subscription at $59was abetter deal than theprint-onlyoption at $125.But Icertainly knew that the print-and-Internet option for $125was better than theprint-only option at $125. In fact, you could reasonably deduce that in thecombinationpackage, theInternetsubscriptionisfree!“It’sabloodysteal—gofor it, governor!” I could almost hear them shout from the riverbanks of theThames. And I have to admit, if I had been inclined to subscribe I probablywouldhavetakenthepackagedealmyself.(Later,whenItestedtheofferonalarge number of participants, the vastmajority preferred the Internet-and-printdeal.)So what was going on here? Let me start with a fundamental observation:

mostpeopledon’tknowwhattheywantunlesstheyseeitincontext.Wedon’tknowwhatkindofracingbikewewant—untilweseeachampin theTourdeFranceratchetingthegearsonaparticularmodel.Wedon’tknowwhatkindofspeakersystemwelike—untilwehearasetofspeakersthatsoundsbetterthanthepreviousone.Wedon’tevenknowwhatwewanttodowithourlives—untilwe find a relative or a friendwho is doing just what we thinkwe should bedoing.Everythingisrelative,andthat’sthepoint.Likeanairplanepilotlandinginthedark,wewantrunwaylightsoneithersideofus,guidingustotheplacewherewecantouchdownourwheels.InthecaseoftheEconomist,thedecisionbetweentheInternet-onlyandprint-

onlyoptionswould take abit of thinking.Thinking is difficult and sometimesunpleasant.SotheEconomist’smarketersofferedusano-brainer:relativetotheprint-onlyoption,theprint-and-Internetoptionlooksclearlysuperior.The geniuses at the Economist aren’t the only ones who understand the

importanceof relativity.TakeSam, the televisionsalesman.Heplays thesamegeneraltypeoftrickonuswhenhedecideswhichtelevisionstoputtogetherondisplay:

36-inchPanasonicfor$69042-inchToshibafor$85050-inchPhilipsfor$1,480

Whichonewouldyouchoose?Inthiscase,Samknowsthatcustomersfinditdifficult to compute the value of different options. (Who really knows if thePanasonic at $690 is a better deal than the Philips at $1,480?) But Sam alsoknowsthatgiven threechoices,mostpeoplewill take themiddlechoice(as inlandingyourplanebetweentherunwaylights).SoguesswhichtelevisionSampricesasthemiddleoption?That’sright—theonehewantstosell!Ofcourse,Samisnotaloneinhiscleverness.TheNewYorkTimesranastory

recentlyaboutGreggRapp,a restaurantconsultant,whogetspaid toworkoutthe pricing for menus. He knows, for instance, how lamb sold this year asopposedtolastyear;whetherlambdidbetterpairedwithsquashorwithrisotto;andwhetherordersdecreasedwhenthepriceofthemaincoursewashikedfrom$39to$41.One thing Rapp has learned is that high-priced entrées on the menu boost

revenue for the restaurant—even if no one buys them. Why? Because eventhoughpeoplegenerallywon’tbuy themostexpensivedishon themenu, theywillorderthesecondmostexpensivedish.Thus,bycreatinganexpensivedish,arestaurateurcanlurecustomersintoorderingthesecondmostexpensivechoice(whichcanbecleverlyengineeredtodeliverahigherprofitmargin).1

SOLET’SRUNthroughtheEconomist’ssleightofhandinslowmotion.Asyourecall,thechoiceswere:

1.Internet-onlysubscriptionfor$59.2.Print-onlysubscriptionfor$125.3.Print-and-Internetsubscriptionfor$125.

When I gave these options to 100 students at MIT’s Sloan School ofManagement,theyoptedasfollows:

1.Internet-onlysubscriptionfor$59—16students2.Print-onlysubscriptionfor$125—zerostudents

3.Print-and-Internetsubscriptionfor$125—84students

SofartheseSloanMBAsaresmartcookies.Theyallsawtheadvantageintheprint-and-Internetofferovertheprint-onlyoffer.Butweretheyinfluencedbythemere presence of the print-only option (which Iwill henceforth, and for goodreason,call the“decoy”).Inotherwords,supposethatIremovedthedecoysothatthechoiceswouldbetheonesseeninthefigurebelow:

Wouldthestudentsrespondasbefore(16fortheInternetonlyand84forthe

combination)?Certainlytheywouldreactthesameway,wouldn’tthey?Afterall,theoptionI

tookoutwasonethatnooneselected,soitshouldmakenodifference.Right?Aucontraire!Thistime,68ofthestudentschosetheInternet-onlyoptionfor

$59, up from 16 before. And only 32 chose the combination subscription for$125,downfrom84before.*

What could have possibly changed their minds? Nothing rational, I assure

you.Itwasthemerepresenceofthedecoythatsent84ofthemtotheprint-and-Internet option (and 16 to the Internet-only option). And the absence of the

decoyhad themchoosingdifferently,with32 forprint-and-Internet and68 forInternet-only.This is not only irrational but predictably irrational aswell.Why? I’mglad

youasked.

LETMEOFFERyouthisvisualdemonstrationofrelativity.

As you can see, the middle circle can’t seem to stay the same size.When

placedamongthelargercircles,itgetssmaller.Whenplacedamongthesmallercircles,itgrowsbigger.Themiddlecircleisthesamesizeinbothpositions,ofcourse,butitappearstochangedependingonwhatweplacenexttoit.Thismightbeamerecuriosity,butforthefactthatitmirrorsthewaythemind

iswired:wearealwayslookingatthethingsaroundusinrelationtoothers.Wecan’t help it. This holds true not only for physical things—toasters, bicycles,puppies,restaurantentrées,andspouses—butforexperiencessuchasvacationsandeducationaloptions, and for ephemeral thingsaswell: emotions, attitudes,andpointsofview.We always compare jobs with jobs, vacations with vacations, lovers with

lovers,andwineswithwines.All this relativity remindsmeofa line fromthefilmCrocodileDundee,whenastreethoodlumpullsaswitchbladeagainstourhero, Paul Hogan. “You call that a knife?” says Hogan incredulously,withdrawingabowiebladefromthebackofhisboot.“Nowthis,”hesayswithaslygrin,“isaknife.”

RELATIVITYIS(RELATIVELY)easytounderstand.Butthere’soneaspectofrelativitythatconsistently tripsusup. It’s this:wenotonly tend tocompare thingswithone another but also tend to focus on comparing things that are easilycomparable—andavoidcomparingthingsthatcannotbecomparedeasily.Thatmay be a confusing thought, so letme give you an example. Suppose

you’reshoppingforahouseinanewtown.Yourrealestateagentguidesyoutothreehouses,allofwhichinterestyou.Oneofthemisacontemporary,andtwo

arecolonials.All threecostabout thesame; theyareallequallydesirable;andtheonlydifference is thatoneof thecolonials (the“decoy”)needsanewroofand the owner has knocked a few thousand dollars off the price to cover theadditionalexpense.Sowhichonewillyouchoose?Thechancesaregoodthatyouwillnotchoosethecontemporaryandyouwill

not choose thecolonial thatneeds thenewroof,butyouwillchoose theothercolonial.Why?Here’stherationale(whichisactuallyquiteirrational).Weliketomake decisions based on comparisons. In the case of the three houses, wedon’t know much about the contemporary (we don’t have another house tocompareitwith),sothathousegoesonthesidelines.Butwedoknowthatoneofthecolonialsisbetterthantheotherone.Thatis,thecolonialwiththegoodroofisbetterthantheonewiththebadroof.Therefore,wewillreasonthatitisbetteroverall andgo for the colonialwith thegood roof, spurning the contemporaryandthecolonialthatneedsanewroof.Tobetterunderstandhowrelativityworks,considerthefollowingillustration:

Intheleftsideofthisillustrationweseetwooptions,eachofwhichisbetter

on a different attribute. Option (A) is better on attribute 1—let’s say quality.Option (B) is better on attribute 2—let’s say beauty.Obviously these are twoverydifferentoptionsandthechoicebetweenthemisnotsimple.Nowconsiderwhat happens if we add another option, called (-A) (see the right side of theillustration). This option is clearly worse than option (A), but it is also verysimilartoit,makingthecomparisonbetweenthemeasy,andsuggestingthat(A)isnotonlybetterthan(-A)butalsobetterthan(B).Inessence, introducing(-A), thedecoy,createsasimplerelativecomparison

with(A),andhencemakes(A)lookbetter,notjustrelativeto(-A),butoverallaswell. As a consequence, the inclusion of (-A) in the set, even if no one everselectsit,makespeoplemorelikelytomake(A)theirfinalchoice.Doesthisselectionprocesssoundfamiliar?Rememberthepitchputtogether

by theEconomist?Themarketers thereknew thatwedidn’tknowwhetherwewantedanInternetsubscriptionoraprintsubscription.Buttheyfiguredthat,of

the three options, the print-and-Internet combination would be the offer wewouldtake.Here’s another example of the decoy effect. Suppose you are planning a

honeymoon in Europe. You’ve already decided to go to one of the majorromantic cities and have narrowed your choices toRome and Paris, your twofavorites.Thetravelagentpresentsyouwiththevacationpackagesforeachcity,which includes airfare, hotel accommodations, sightseeing tours, and a freebreakfasteverymorning.Whichwouldyouselect?Formostpeople,thedecisionbetweenaweekinRomeandaweekinParisis

noteffortless.RomehastheColiseum;Paris,theLouvre.Bothhavearomanticambience, fabulous food, and fashionable shopping. It’s not an easy call. Butsupposeyouwereofferedathirdoption:Romewithoutthefreebreakfast,called-Romeorthedecoy.Ifyouweretoconsiderthesethreeoptions(Paris,Rome,-Rome),youwould

immediately recognize that whereas Romewith the free breakfast is about asappealing as Pariswith the free breakfast, the inferior option,which is Romewithoutthefreebreakfast, isastepdown.Thecomparisonbetweentheclearlyinferioroption(-Rome)makesRomewiththefreebreakfastseemevenbetter.Infact,-RomemakesRomewiththefreebreakfastlooksogoodthatyoujudgeitto be even better than the difficult-to-compare option, Paris with the freebreakfast.

ONCEYOUSEEthedecoyeffectinaction,yourealizethatitisthesecretagentinmoredecisionsthanwecouldimagine.Itevenhelpsusdecidewhomtodate—and, ultimately,whom tomarry. Letme describe an experiment that exploredjustthissubject.As students hurried aroundMIT one cold weekday, I asked some of them

whethertheywouldallowmetotaketheirpicturesforastudy.Insomecases,Igot disapproving looks.A few studentswalked away. Butmost of themwerehappy toparticipate,andbefore long, thecard inmydigitalcamerawas filledwithimagesofsmilingstudents.Ireturnedtomyofficeandprinted60ofthem—30ofwomenand30ofmen.ThefollowingweekImadeanunusualrequestof25ofmyundergraduates.I

askedthemtopairthe30photographsofmenandthe30ofwomenbyphysicalattractiveness (matching the men with other men, and the women with otherwomen).Thatis,IhadthempairtheBradPittsandtheGeorgeClooneysofMIT,aswellastheWoodyAllensandtheDannyDeVitos(sorry,WoodyandDanny).Outofthese30pairs,Iselectedthesixpairs—threefemalepairsandthreemalepairs—thatmystudentsseemedtoagreeweremostalike.

Now,likeDr.Frankensteinhimself,Isetaboutgivingthesefacesmyspecialtreatment.UsingPhotoshop,Imutatedthepicturesjustabit,creatingaslightlybut noticeably less attractive version of each of them. I found that just theslightestmovement of the nose threw off the symmetry.Using another tool, Ienlargedoneeye,eliminatedsomeofthehair,andaddedtracesofacne.Noflashesoflightningilluminatedmylaboratory;norwasthereabayingof

thehoundsonthemoor.Butthiswasstillagooddayforscience.BythetimeIwasthrough,IhadtheMITequivalentofGeorgeClooneyinhisprime(A)andtheMIT equivalent ofBrad Pitt in his prime (B), and also aGeorgeClooneywith a slightly drooping eye and thicker nose (-A, the decoy) and a lesssymmetrical version of Brad Pitt (-B, another decoy). I followed the sameprocedureforthelessattractivepairs.IhadtheMITequivalentofWoodyAllenwith his usual lopsided grin (A) and Woody Allen with an unnervinglymisplaced eye (-A), as well as Danny DeVito (B) and a slightly disfiguredversionofDannyDeVito(-B).Foreachofthe12photographs,infact,Inowhadaregularversionaswellas

an inferior (-) decoy version. (See the illustration for an example of the twoconditionsusedinthestudy.)Itwas now time for themain part of the experiment. I took all the sets of

picturesandmademywayovertothestudentunion.Approachingonestudentafter another, I asked each to participate.When the students agreed, I handedthemasheetwiththreepictures(asintheillustrationhere).Someofthemhadthe regular picture (A), the decoy of that picture (-A), and the other regularpicture(B).Othershadtheregularpicture(B),thedecoyofthatpicture(-B),andtheotherregularpicture(A).Forexample,asetmight includearegularClooney(A),adecoyClooney(-

A),andaregularPitt(B);oraregularPitt(B),adecoyPitt(-B),andaregularClooney (A). After selecting a sheet with either male or female pictures,according to their preferences, I asked the students to circle the people theywouldpicktogoonadatewith,iftheyhadachoice.Allthistookquiteawhile,andwhenIwasdone,Ihaddistributed600sheets.Whatwasmymotiveinall this?Simplytodetermineif theexistenceof the

distortedpicture(-Aor-B)wouldpushmyparticipantstochoosethesimilarbutundistorted picture. In other words, would a slightly less attractive GeorgeClooney (-A)push theparticipants tochoose theperfectGeorgeClooneyovertheperfectBradPitt?TherewerenopicturesofBradPittorGeorgeClooneyinmyexperiment,of

course. Pictures (A) and (B) showed ordinary students.But do you rememberhowtheexistenceofacolonial-stylehouseneedinganewroofmightpushyou

to choose a perfect colonial over a contemporary house—simply because thedecoycolonialwouldgiveyousomethingagainstwhichtocomparetheregularcolonial?AndintheEconomist’sad,didn’ttheprint-onlyoptionfor$125pushpeople to take the print-and-Internet option for $125? Similarly, would theexistenceofa lessperfectperson(-Aor -B)pushpeople tochoose theperfectone(AorB),simplybecausethedecoyoptionservedasapointofcomparison?

Note:Forthisillustration,Iusedcomputerizedfaces,notthoseoftheMITstudents.Andofcourse,thelettersdidnotappearontheoriginalsheets.

Itdid.Whenever Ihandedouta sheet thathada regularpicture, its inferiorversion, and another regular picture, theparticipants said theywouldprefer todatethe“regular”person—theonewhowassimilar,butclearlysuperior,tothedistortedversion—overtheother,undistortedpersononthesheet.Thiswasnotjustaclosecall—ithappened75percentofthetime.To explain the decoy effect further, letme tell you something about bread-

making machines. When Williams-Sonoma first introduced a home “breadbakery”machine (for $275),most consumerswerenot interested.Whatwas ahomebread-makingmachine,anyway?Wasitgoodorbad?Didonereallyneedhome-baked bread? Why not just buy a fancy coffeemaker sitting nearbyinstead?Flusteredbypoorsales,themanufacturerofthebreadmachinebroughtin a marketing research firm, which suggested a fix: introduce an additional

model of the bread maker, one that was not only larger but priced about 50percenthigherthantheinitialmachine.Nowsalesbegantorise(alongwithmanyloavesofbread),thoughitwasnot

the large bread maker that was being sold.Why? Simply because consumersnow had twomodels of breadmakers to choose from. Since onewas clearlylargerandmuchmoreexpensivethantheother,peopledidn’thavetomaketheirdecision inavacuum.Theycould say: “Well, Idon’tknowmuchaboutbreadmakers,butIdoknowthatifIweretobuyone,I’dratherhavethesmalleroneforlessmoney.”Andthat’swhenbreadmakersbegantoflyofftheshelves.2OKforbreadmakers.Butlet’stakealookatthedecoyeffectinacompletely

different situation. What if you are single, and hope to appeal to as manyattractivepotentialdatingpartnersaspossibleatanupcomingsinglesevent?Myadvicewould be to bring a friendwho has your basic physical characteristics(similarcoloring,bodytype,facialfeatures),butisslightlylessattractive(-you).Why?Becausethefolksyouwanttoattractwillhaveahardtimeevaluating

youwithnocomparablesaround.However,ifyouarecomparedwitha“-you,”thedecoy friendwill do a lot tomakeyou lookbetter, not just in comparisonwiththedecoybutalsoingeneral,andincomparisonwithalltheotherpeoplearound.Itmaysoundirrational(andIcan’tguaranteethis),butthechancesaregoodthatyouwillgetsomeextraattention.Ofcourse,don’tjuststopatlooks.Ifgreatconversationwillwintheday,besuretopickafriendforthesingleseventwho can’tmatch your smooth delivery and rapier wit. By comparison, you’llsoundgreat.Nowthatyouknowthissecret,becareful:whenasimilarbutbetter-looking

friendof the samesexasksyou toaccompanyhimorher foranightout,youmightwonderwhetheryouhavebeeninvitedalongforyourcompanyormerelyasadecoy.

RELATIVITYHELPSUSmakedecisions in life.But itcanalsomakeusdownrightmiserable.Why?Because jealousyandenvyspring fromcomparingour lot inlifewiththatofothers.Itwas for good reason, after all, that the TenCommandments admonished,

“Neither shall you desire your neighbor’s house nor field, or male or femaleslave,ordonkeyoranythingthatbelongstoyourneighbor.”Thismightjustbethetoughestcommandmenttofollow,consideringthatbyourverynaturewearewiredtocompare.Modernlifemakesthisweaknessevenmorepronounced.Afewyearsago,for

instance, I met with one of the top executives of one of the big investmentcompanies.Over the course of our conversation hementioned that one of his

employeeshadrecentlycometohimtocomplainabouthissalary.“Howlonghaveyoubeenwiththefirm?”theexecutiveaskedtheyoungman.“Threeyears.Icamestraightfromcollege,”wastheanswer.“Andwhenyou joinedus, howmuchdidyouexpect tobemaking in three

years?”“Iwashopingtobemakingaboutahundredthousand.”Theexecutiveeyedhimcuriously.“Andnowyou aremaking almost three hundred thousand, so howcanyou

possiblycomplain?”heasked.“Well,” theyoungmanstammered,“it’s just thatacoupleof theguysat the

desksnext tome, they’renot anybetter than I am, and theyaremaking threehundredten.”Theexecutiveshookhishead.An ironic aspect of this story is that in 1993, federal securities regulators

forcedcompanies,forthefirsttime,torevealdetailsaboutthepayandperksoftheirtopexecutives.Theideawasthatoncepaywasintheopen,boardswouldbe reluctant to give executives outrageous salaries and benefits. This, it washoped,wouldstoptheriseinexecutivecompensation,whichneitherregulation,legislation,norshareholderpressurehadbeenabletostop.Andindeed,itneededto stop: in 1976 the averageCEOwas paid 36 times asmuch as the averageworker.By1993,theaverageCEOwaspaid131timesasmuch.Butguesswhathappened.Oncesalariesbecamepublicinformation,themedia

regularlyranspecialstoriesrankingCEOsbypay.Rather thansuppressing theexecutiveperks, thepublicityhadCEOs inAmerica comparing their paywiththat of everyone else. In response, executives’ salaries skyrocketed. The trendwas further “helped” by compensation consulting firms (scathingly dubbed“Ratchet,Ratchet,andBingo”bytheinvestorWarrenBuffett)thatadvisedtheirCEO clients to demand outrageous raises. The result? Now the average CEOmakesabout369 timesasmuchas theaverageworker—about three times thesalarybeforeexecutivecompensationwentpublic.Keepingthatinmind,IhadafewquestionsfortheexecutiveImetwith.“Whatwouldhappen,”Iventured,“iftheinformationinyoursalarydatabase

becameknownthroughoutthecompany?”The executive looked atmewith alarm. “We could get over a lot of things

here—insider trading, financial scandals, and the like—but if everyone kneweveryone else’s salary, itwouldbe a true catastrophe.All but thehighest-paidindividualwould feelunderpaid—andIwouldn’tbesurprised if theywentoutandlookedforanotherjob.”Isn’tthisodd?Ithasbeenshownrepeatedlythatthelinkbetweenamountof

salaryandhappinessisnotasstrongasonewouldexpectit tobe(infact, it isratherweak).Studiesevenfindthatcountrieswiththe“happiest”peoplearenotamong thosewith thehighestpersonal income.Yetwekeeppushing towardahighersalary.Muchofthatcanbeblamedonsheerenvy.AsH.L.Mencken,thetwentieth-centuryjournalist,satirist,socialcritic,cynic,andfreethinkernoted,aman’ssatisfactionwithhissalarydependson(areyoureadyforthis?)whetherhemakesmorethanhiswife’ssister’shusband.Whythewife’ssister’shusband?Because (andIhavea feeling thatMencken’swifekepthimfully informedofher sister’s husband’s salary) this is a comparison that is salient and readilyavailable.*All this extravagance in CEOs’ pay has had a damaging effect on society.

Insteadofcausingshame,everynewoutrageincompensationencouragesotherCEOstodemandevenmore.“IntheWebWorld,”accordingtoaheadlineintheNewYorkTimes,the“RichNowEnvytheSuperrich.”In another news story, a physician explained that he had graduated from

HarvardwiththedreamofsomedayreceivingaNobelPrizeforcancerresearch.Thiswas his goal.Thiswas his dream.But a fewyears later, he realized thatseveralofhis colleaguesweremakingmoreasmedical investment advisers atWall Street firms than he was making in medicine. He had previously beenhappywithhisincome,buthearingofhisfriends’yachtsandvacationhomes,hesuddenlyfeltverypoor.Sohetookanotherroutewithhiscareer—therouteofWall Street.3 By the time he arrived at his twentieth class reunion, he wasmaking 10 times what most of his peers were making in medicine. You canalmostseehim,standinginthemiddleoftheroomatthereunion,drinkinhand—alargecircleofinfluencewithsmallercirclesgatheringaroundhim.Hehadnotwon theNobelPrize,buthehad relinquishedhisdreams foraWallStreetsalary,forachancetostopfeeling“poor.”Isitanywonderthatfamilypracticephysicians,whomakeanaverageof$160,000ayear,areinshortsupply?*

CANWEDOanythingaboutthisproblemofrelativity?The good news is that we can sometimes control the “circles” around us,

movingtowardsmallercirclesthatboostourrelativehappiness.Ifweareatourclassreunion,andthere’sa“bigcircle”inthemiddleoftheroomwithadrinkinhishand,boastingofhisbigsalary,wecanconsciouslytakeseveralstepsawayandtalkwithsomeoneelse.Ifwearethinkingofbuyinganewhouse,wecanbeselectiveabouttheopenhouseswegoto,skippingthehousesthatareaboveourmeans.Ifwearethinkingaboutbuyinganewcar,wecanfocusonthemodelsthatwecanafford,andsoon.Wecanalsochangeourfocusfromnarrowtobroad.Letmeexplainwithan

examplefromastudyconductedbytwobrilliantresearchers,AmosTverskyandDanielKahneman.Suppose youhave two errands to run today.The first is tobuy a newpen, and the second is to buy a suit forwork.At an office supplystore,youfindanicepenfor$25.Youaresettobuyit,whenyourememberthatthesamepenisonsalefor$18atanotherstore15minutesaway.Whatwouldyoudo?Doyoudecidetotakethe15-minutetriptosavethe$7?Mostpeoplefacedwiththisdilemmasaythattheywouldtakethetriptosavethe$7.Nowyouareonyoursecondtask:you’reshoppingforyoursuit.Youfinda

luxurious gray pinstripe suit for $455 and decide to buy it, but then anothercustomerwhispersinyourearthattheexactsamesuitisonsaleforonly$448atanotherstore,just15minutesaway.Doyoumakethissecond15-minutetrip?Inthiscase,mostpeoplesaythattheywouldnot.Butwhatisgoingonhere?Is15minutesofyourtimeworth$7,orisn’tit?In

reality,ofcourse,$7is$7—nomatterhowyoucountit.Theonlyquestionyoushould ask yourself in these cases iswhether the trip across town, and the 15extraminutesitwouldtake,isworththeextra$7youwouldsave.Whethertheamountfromwhichthis$7willbesavedis$10or$10,000shouldbeirrelevant.This is theproblemofrelativity—welookatourdecisions inarelativeway

andcompare themlocally to theavailablealternative.Wecompare therelativeadvantageof thecheappenwith theexpensiveone, and this contrastmakes itobvious tous thatweshouldspend theextra time tosave the$7.At thesametime, the relativeadvantageof thecheaper suit isvery small, sowe spend theextra$7.Thisisalsowhyitissoeasyforapersontoadd$200toa$5,000cateringbill

forasoupentrée,whenthesamepersonwillclipcouponstosave25centsonaone-dollarcanofcondensedsoup.Similarly,wefinditeasytospend$3,000toupgradetoleatherseatswhenwebuyanew$25,000car,butdifficulttospendthe same amount on a new leather sofa (even thoughweknowwewill spendmoretimeathomeonthesofathaninthecar).Yetifwejustthoughtaboutthisin a broader perspective, we could better assess what we could do with the$3,000thatweareconsideringspendingonupgradingthecarseats.Wouldweperhaps be better off spending it on books, clothes, or a vacation? Thinkingbroadly like this is not easy, becausemaking relative judgments is the naturalwaywethink.Canyougetahandleonit?Iknowsomeonewhocan.He is James Hong, cofounder of the Hotornot.com rating and dating site.

(James,hisbusinesspartnerJimYoung,LeonardLee,GeorgeLoewenstein,andI recently worked on a research project examining how one’s own“attractiveness”affectsone’sviewofthe“attractiveness”ofothers.)Forsure, Jameshasmadea lotofmoney,andheseesevenmoremoneyall

aroundhim.Oneofhisgoodfriends,infact,isafounderofPayPalandisworthtensofmillions.ButHongknowshowtomakethecirclesofcomparisoninhislifesmaller,notlarger.Inhiscase,hestartedbysellinghisPorscheBoxsterandbuyingaToyotaPriusinitsplace.4“I don’t want to live the life of a Boxster,” he told the New York Times,

“becausewhenyougetaBoxsteryouwishyouhada911,andyouknowwhatpeoplewhohave911swishtheyhad?TheywishtheyhadaFerrari.”That’salessonwecanalllearn:themorewehave,themorewewant.Andthe

onlycureistobreakthecycleofrelativity.

ReflectionsonDatingandRelativityInChapter1,onrelativity,Iofferedsomedatingadvice.Iproposedthatifyouwant togobar-hopping,youshouldconsider takingalongsomeonewho lookssimilar to you butwho is slightly less attractive than you are.Because of therelativenatureofevaluations,otherswouldperceiveyounotonlyascuterthanyourdecoy,butalsoasbetter-lookingthanotherpeopleinthebar.Bythesamelogic,Ialsopointedoutthattheflipsideofthiscoinisthatifsomeoneinvitesyoutobehisorherwingman(orwingwoman),youcaneasilyfigureoutwhatyourfriendreallythinksofyou.Asitturnsout,IforgottoincludeoneimportantwarningthatcamecourtesyofthedaughterofacolleagueofminefromMIT.“Susan”was an undergraduate atCornellwhowrote tome, saying shewas

delightedwithmy trick and that it hadworkedwonderfully for her.Once shefoundtheidealdecoy,hersociallifeimproved.Butafewweekslatershewroteagain, tellingme that she’dbeenatapartywhere she’dhada fewdrinks.Forsome odd reason, she decided to tell her friend why she invited her toaccompanyhereverywhere.Thefriendwasunderstandablyupset,andthestorydidnotendwell.Themoralofthisstory?Never,evertellyourfriendwhyyou’reaskinghimor

her to comewith you.Your friendmight have suspicions, but for the love ofGod,don’teliminatealldoubt.

ReflectionsonTravelingandRelativityWhenPredictably Irrational came out, I went on a book tour that lasted sixstraight weeks. I traveled from airport to airport, city to city, radio station toradiostation,talkingtoreportersandreadersforwhatseemedlikedaysonend,without engaging in any type of personal discussion. Every conversation was

short,“allbusiness,”andfocusedonmyresearch.TherewasnotimetoenjoyacupofcoffeeorabeerwithanyofthewonderfulpeopleIencountered.TowardtheendofthetourIfoundmyselfinBarcelona.ThereImetJon,an

Americantouristwho,likeme,didnotspeakanySpanish.Wefeltanimmediatecamaraderie. I imagine thiskindofbondinghappensoftenwith travelers fromthe same country who are far from home and find themselves sharingobservationsabouthowtheydifferfromthelocalsaroundthem.JonandIendedup having a wonderful dinner and a deeply personal discussion. He told methingsthatheseemednottohavesharedbefore,andIdidthesame.Therewasanunusualclosenessbetweenus,asifwewerelong-lostbrothers.Afterstayingupvery late talking,webothneeded to sleep.Wewouldnothaveachance tomeetagainbeforepartingwaysthefollowingmorning,soweexchangede-mailaddresses.Thiswasamistake.Aboutsixmonthslater,JonandImetagainforlunchinNewYork.Thistime,

itwashardformetofigureoutwhyI’dfeltsuchaconnectionwithhim,andnodoubthefeltthesame.Wehadaperfectlyamicableandinterestinglunch,butitlackedtheintensityofourfirstmeeting,andIwasleftwonderingwhy.Inretrospect,IthinkitwasbecauseI’dfallenvictimtotheeffectsofrelativity.

When Jon and I first met, everyone around us was Spanish, and as culturaloutsiderswewereeachother’sbestalternativeforcompanionship.Butoncewereturned home to our beloved American families and friends, the basis forcomparisonswitchedbackto“normal”mode.Giventhissituation,itwashardtounderstandwhy Jonor Iwouldwant to spendanother evening ineachother’scompanyratherthanwiththosewelove.My advice? Understand that relativity is everywhere, and that we view

everything through its lens—rose-colored or otherwise. When you meetsomeone in a different country or city and it seems that you have a magicalconnection, realize that the enchantment might be limited to the surroundingcircumstances. This realization might prevent you from subsequentdisenchantment.

Chapter2TheFallacyofSupplyandDemand

WhythePriceofPearls—andEverythingElse—IsUpintheAir

At the onset ofWorldWar II, an Italian diamond dealer, James Assael, fledEuropeforCuba.There,hefoundanewlivelihood:theAmericanarmyneededwaterproofwatches,andAssael,throughhiscontactsinSwitzerland,wasabletofillthedemand.Whenthewarended,Assael’sdealwiththeU.S.governmentdriedup,andhe

was left with thousands of Swiss watches. The Japanese needed watches, ofcourse.But theydidn’thaveanymoney.Theydidhavepearls, though—manythousandsofthem.Beforelong,AssaelhadtaughthissonhowtobarterSwisswatchesforJapanesepearls.Thebusinessblossomed,andshortlythereafter,theson,SalvadorAssael,becameknownasthe“pearlking.”ThepearlkinghadmooredhisyachtatSaint-Tropezonedayin1973,whena

dashingyoungFrenchman,Jean-ClaudeBrouillet,cameaboardfromanadjacentyacht.Brouillethadjustsoldhisair-freightbusinessandwiththeproceedshadpurchased an atoll in French Polynesia—a blue-lagooned paradise for himselfand his young Tahitian wife. Brouillet explained that its turquoise watersaboundedwithblack-lippedoysters,Pinctadamargaritifera.Andfromtheblacklipsofthoseoysterscamesomethingofnote:blackpearls.AtthetimetherewasnomarketforTahitianblackpearls,andlittledemand.

But Brouillet persuaded Assael to go into business with him. Together theywould harvest black pearls and sell them to the world. At first, Assael’smarketingeffortsfailed.Thepearlsweregunmetalgray,aboutthesizeofmusketballs, and he returned to Polynesiawithout havingmade a single sale.Assael

couldhavedroppedtheblackpearlsaltogetherorsoldthematalowpricetoadiscountstore.Hecouldhavetriedtopushthemtoconsumersbybundlingthemtogether with a few white pearls. But instead Assael waited a year, until theoperationhadproducedsomebetterspecimens,andthenbroughtthemtoanoldfriend, HarryWinston, the legendary gemstone dealer.Winston agreed to putthem in the window of his store on Fifth Avenue, with an outrageously highpricetagattached.Assael,meanwhile,commissionedafull-pageadvertisementthat ran in the glossiest ofmagazines.There, a string ofTahitian black pearlsglowed,setamongasprayofdiamonds,rubies,andemeralds.Thepearls,whichhadshortlybeforebeentheprivatebusinessofaclusterof

black-lipped oysters, hanging on a rope in the Polynesian sea, were soonparading throughManhattanon thearchednecksof thecity’smostprosperousdivas.Assaelhadtakensomethingofdubiousworthandmadeitfabulouslyfine.Or,asMarkTwainoncenotedaboutTomSawyer,“Tomhaddiscoveredagreatlawofhumanaction,namely,thatinordertomakeamancovetathing,itisonlynecessarytomakethethingdifficulttoattain.”

HOW DID THE pearl king do it? How did he persuade the cream of society tobecomepassionateaboutTahitianblackpearls—andpayhimroyallyforthem?Inordertoanswerthisquestion,Ineedtoexplainsomethingaboutbabygeese.A few decades ago, the naturalist Konrad Lorenz discovered that goslings,

uponbreakingoutoftheireggs,becomeattachedtothefirstmovingobjecttheyencounter (which is generally theirmother). Lorenz knew this because in oneexperimenthe became the first thing they saw, and they followed him loyallyfromthenonthroughadolescence.Withthat,Lorenzdemonstratednotonlythatgoslingsmake initialdecisionsbasedonwhat’savailable in theirenvironment,but that they stick with a decision once it has beenmade. Lorenz called thisnaturalphenomenonimprinting.Isthehumanbrain,then,wiredlikethatofagosling?Doourfirstimpressions

anddecisionsbecomeimprinted?Andifso,howdoesthisimprintingplayoutinourlives?Whenweencounteranewproduct,forinstance,doweacceptthefirstpricethatcomesbeforeoureyes?Andmoreimportantly,doesthatprice(whichinacademiclingowecallananchor)havealong-termeffectonourwillingnesstopayfortheproductfromthenon?Itseemsthatwhat’sgoodforthegooseisgoodforhumansaswell.Andthis

includes anchoring. From the beginning, for instance, Assael “anchored” hispearls to the finest gems in theworld—and the prices followed forever after.Similarly,oncewebuyanewproductataparticularprice,webecomeanchoredtothatprice.Buthowexactlydoesthiswork?Whydoweacceptanchors?

Consider this: if I asked you for the last two digits of your social securitynumber (mine are79), then askedyouwhether youwouldpay this number indollars (for me this would be $79) for a particular bottle of Côtes du Rhône1998,wouldthemeresuggestionofthatnumberinfluencehowmuchyouwouldbewilling to spendonwine?Soundspreposterous,doesn’t it?Well,waituntilyouseewhathappenedtoagroupofMBAstudentsatMITafewyearsago.

“NOW HERE WE have a nice Côtes du Rhône Jaboulet Parallel,” said DrazenPrelec,aprofessoratMIT’sSloanSchoolofManagement,asheliftedabottleadmiringly.“It’sa1998.”At the time, sitting before him were the 55 students from his marketing

research class. On this day, Drazen, George Loewenstein (a professor atCarnegieMellonUniversity),andIwouldhaveanunusualrequestforthisgroupoffuturemarketingpros.Wewouldaskthemtojotdownthelasttwodigitsoftheirsocialsecuritynumbersandtelluswhethertheywouldpaythisamountforanumberofproducts,includingthebottleofwine.Then,wewouldaskthemtoactuallybidontheseitemsinanauction.What were we trying to prove? The existence of what we called arbitrary

coherence.Thebasic ideaofarbitrarycoherence is this:although initialprices(such as the price of Assael’s pearls) are “arbitrary,” once those prices areestablishedinourmindstheywillshapenotonlypresentpricesbutalsofutureprices (this makes them “coherent”). So, would thinking about one’s socialsecuritynumberbeenough tocreateananchor?Andwould that initial anchorhavealong-terminfluence?That’swhatwewantedtosee.“For those of you who don’t knowmuch about wines,” Drazen continued,

“thisbottle receivedeighty-sixpoints fromWineSpectator. Ithas theflavorofredberry,mocha,andblackchocolate;it’samedium-bodied,medium-intensity,nicelybalancedred,anditmakesfordelightfuldrinking.”Drazenheld up another bottle.Thiswas aHermitage JabouletLaChapelle,

1996,witha92-pointratingfromtheWineAdvocatemagazine.“ThefinestLaChapelle since1990,”Drazen intoned,while the students lookedupcuriously.“Only8,100casesmade...”In turn, Drazen held up four other items: a cordless trackball (TrackMan

MarbleFXbyLogitech);acordlesskeyboardandmouse(iTouchbyLogitech);a design book (The Perfect Package: How to Add Value through GraphicDesign);andaone-poundboxofBelgianchocolatesbyNeuhaus.Drazenpassedoutformsthatlistedalltheitems.“NowIwantyoutowritethe

last two digits of your social security number at the top of the page,” heinstructed.“Andthenwritethemagainnexttoeachoftheitemsintheformofa

price.Inotherwords, if thelast twodigitsare twenty-three,write twenty-threedollars.”“Nowwhenyou’refinishedwiththat,”headded,“Iwantyoutoindicateon

yoursheets—withasimpleyesorno—whetheryouwouldpaythatamountforeachoftheproducts.”When the students had finished answering yes or no to each item, Drazen

asked them towrite down themaximum amount theywerewilling to pay foreach of the products (their bids). Once they had written down their bids, thestudentspassedthesheetsuptomeandIenteredtheirresponsesintomylaptopandannouncedthewinners.Onebyonethestudentwhohadmadethehighestbidforeachoftheproductswouldstepuptothefrontoftheclass,payfortheproduct,*andtakeitwiththem.The students enjoyed this class exercise, butwhen I asked them if they felt

that writing down the last two digits of their social security numbers hadinfluencedtheirfinalbids,theyquicklydismissedmysuggestion.Noway!When I got back tomy office, I analyzed the data.Did the digits from the

social security numbers serve as anchors? Remarkably, they did: the studentswiththehighest-endingsocialsecuritydigits(from80to99)bidhighest,whilethosewiththelowest-endingnumbers(1to20)bidlowest.Thetop20percent,for instance, bid an average of $56 for the cordless keyboard; the bottom 20percentbidanaverageof$16.Intheend,wecouldseethatstudentswithsocialsecurity numbers ending in the upper 20 percent placed bids thatwere 216 to346 percent higher than those of the students with social security numbersendinginthelowest20percent(seetableonthefacingpage).NowifthelasttwodigitsofyoursocialsecuritynumberareahighnumberI

knowwhatyoumustbethinking:“I’vebeenpayingtoomuchforeverythingmyentire life!” This is not the case, however. Social security numbers were theanchorinthisexperimentonlybecausewerequestedthem.Wecouldhavejustaswellaskedforthecurrenttemperatureorthemanufacturer’ssuggestedretailprice(MSRP).Anyquestion, infact,wouldhavecreatedtheanchor.Doesthatseemrational?Ofcoursenot.Butthat’sthewayweare—goslings,afterall.*

Thedatahadonemoreinterestingaspect.Althoughthewillingnesstopayfor

these itemswasarbitrary, therewasalsoa logical,coherentaspect to it.Whenwelookedat thebidsforthetwopairsofrelateditems(thetwowinesandthetwo computer components), their relative prices seemed incredibly logical.Everyonewaswillingtopaymoreforthekeyboardthanforthetrackball—andalsopaymore for the1996Hermitage thanfor the1998CôtesduRhône.Thesignificance of this is that once the participants werewilling to pay a certainprice for one product, their willingness to pay for other items in the sameproductcategorywasjudgedrelativetothatfirstprice(theanchor).This, then, is what we call arbitrary coherence. Initial prices are largely

“arbitrary” and can be influenced by responses to randomquestions; but oncethose prices are established in our minds, they shape not only what we arewillingtopayforanitem,butalsohowmuchwearewillingtopayforrelatedproducts(thismakesthemcoherent).NowIneedtoaddoneimportantclarificationtothestoryI’vejusttold.Inlife

we are bombardedbyprices.We see themanufacturer’s suggested retail price(MSRP)forcars,lawnmowers,andcoffeemakers.Wegettherealestateagent’sspielon localhousingprices.Butprice tagsby themselvesarenotnecessarilyanchors. They become anchors when we contemplate buying a product orserviceatthatparticularprice.That’swhentheimprintisset.Fromthenon,wearewillingtoacceptarangeofprices—butaswiththepullofabungeecord,wealways refer back to the original anchor. Thus the first anchor influences notonlytheimmediatebuyingdecisionbutmanyothersthatfollow.Wemightseea57-inchLCDhigh-definitiontelevisiononsalefor$3,000,for

instance.Thepricetagisnottheanchor.Butifwedecidetobuyit(orseriouslycontemplate buying it) at that price, then the decision becomes our anchor

henceforth in terms ofLCD television sets.That’s our peg in the ground, andfromthenon—whetherweshopforanothersetormerelyhaveaconversationatabackyardcookout—allotherhigh-definition televisionsare judgedrelative tothatprice.Anchoring influencesallkindsofpurchases.UriSimon-sohn(aprofessorat

the University of Pennsylvania) andGeorge Loewenstein, for example, foundthatpeoplewhomovetoanewcitygenerallyremainanchoredtothepricestheypaidforhousingintheirformercity.Intheirstudytheyfoundthatpeoplewhomove from inexpensive markets (say, Lubbock, Texas) to moderately pricedcities (say, Pittsburgh) don’t increase their spending to fit the new market.*Rather, thesepeoplespendanamountsimilar towhat theywereused to in theprevious market, even if this means having to squeeze themselves and theirfamiliesintosmallerorlesscomfortablehomes.Likewise,transplantsfrommoreexpensive cities sink the samedollars into their newhousing situation as theydid in the past. People who move from Los Angeles to Pittsburgh, in otherwords, don’t generally downsize their spending much once they hitPennsylvania: theyspendanamountsimilar towhat theyusedtospendinLosAngeles.It seems that we get used to the particularities of our housingmarkets and

don’treadilychange.Theonlywayoutofthisbox,infact,istorentahomeinthenewlocationforayearorso.Thatway,weadjusttothenewenvironment—and, after a while, we are able tomake a purchase that aligns with the localmarket.

SOWEANCHORourselvestoinitialprices.Butdowehopfromoneanchorpriceto another (flip-flopping, if youwill), continually changing ourwillingness topay?Ordoesthefirstanchorweencounterbecomeouranchorforalongtimeandformanydecisions?Toanswerthisquestion,wedecidedtoconductanotherexperiment—one in which we attempted to lure our participants from oldanchorstonewones.Forthisexperimentweenlistedsomeundergraduatestudents,somegraduate

students,andsomeinvestmentbankerswhohadcometo thecampus torecruitnew employees for their firms.Once the experiment startedwe presented ourparticipantswiththreedifferentsounds,andfollowingeach,askedthemiftheywouldbewillingtogetpaidaparticularamountofmoney(whichservedasthepriceanchor)forhearingthosesoundsagain.Onesoundwasa30-secondhigh-pitched3,000-hertzsound,somewhatlikesomeonescreaminginahigh-pitchedvoice.Anotherwas a 30-second full-spectrum noise (also calledwhite noise),whichissimilartothenoiseatelevisionsetmakeswhenthereisnoreception.

The third was a 30-second oscillation between high-pitched and low-pitchedsounds.(Iamnotsureifthebankersunderstoodexactlywhattheywereabouttoexperience, but maybe even our annoying sounds were less annoying thantalkingaboutinvestmentbanking.)Weusedsoundsbecausethereisnoexistingmarketforannoyingsounds(so

theparticipantscouldn’tuseamarketpriceasawaytothinkaboutthevalueofthesesounds).Wealsousedannoyingsounds,specifically,becausenoonelikessuch sounds (ifwe had used classicalmusic, somewould have liked it betterthan others). As for the sounds themselves, I selected them after creatinghundreds of sounds, choosing these three because they were, in my opinion,equallyannoying.Weplaced our participants in front of computer screens at the lab, and had

themclampheadphonesovertheirears.Astheroomquieteddown,thefirstgroupsawthismessageappearinfrontof

them:“Inafewmomentswearegoingtoplayanewunpleasanttoneoveryourheadset.Weare interested inhowannoyingyou find it. Immediatelyafteryouhearthetone,wewillaskyouwhether,hypothetically,youwouldbewillingtorepeatthesameexperienceinexchangeforapaymentof10cents.”Thesecondgroupgotthesamemessage,onlywithanofferof90centsratherthan10cents.Would the anchor pricesmake a difference? To find out, we turned on the

sound—in this case the irritating 30-second, 3,000-hertz squeal. Some of ourparticipantsgrimaced.Othersrolledtheireyes.Whenthescreechingended,eachparticipantwaspresentedwiththeanchoring

question, phrased as a hypothetical choice: Would the participant be willing,hypothetically,torepeattheexperienceforacashpayment(whichwas10centsfor the first group and 90 cents for the second group)? After answering thisanchoring question, the participants were asked to indicate on the computerscreen the lowest price theywould demand to listen to the sound again. Thisdecisionwasreal,bytheway,asitwoulddeterminewhethertheywouldhearthesoundagain—andgetpaidfordoingso.*Soon after the participants entered their prices, they learned the outcome.

Participants whose price was sufficiently low “won” the sound, had the(unpleasant) opportunity to hear it again, and got paid for doing so. Theparticipantswhosepricewas toohighdidnot listen to thesoundandwerenotpaidforthispartoftheexperiment.Whatwasthepointofallthis?Wewantedtofindoutwhetherthefirstprices

thatwesuggested(10centsand90cents)hadservedasananchor.Andindeedtheyhad.Thosewhofirstfacedthehypotheticaldecisionaboutwhethertolistentothesoundfor10centsneededmuchlessmoneytobewillingtolistentothis

sound again (33 cents on average) relative to those who first faced thehypothetical decision about whether to listen to the sound for 90 cents—thissecond group demanded more than twice the compensation (73 cents onaverage) for thesameannoyingexperience.Doyousee thedifference that thesuggestedpricehad?

BUT THISWAS only the start of our exploration.We alsowanted to know howinfluential the anchor would be in future decisions. Suppose we gave theparticipantsanopportunitytodropthisanchorandrunforanother?Wouldtheydoit?Toputitintermsofgoslings,wouldtheyswimacrossthepondaftertheiroriginal imprint and then, midway, swing their allegiance to a new mothergoose? In terms of goslings, I think you know that theywould stickwith theoriginalmom.Butwhatabouthumans?Thenexttwophasesoftheexperimentwouldenableustoanswerthesequestions.Inthesecondphaseoftheexperiment,wetookparticipantsfromtheprevious

10-cents and 90-cents groups and treated them to 30 seconds of a white,wooshing noise. “Hypothetically, would you listen to this sound again for 50cents?”we asked them at the end. The respondents pressed a button on theircomputerstoindicateyesorno.“OK, how much would you need to be paid for this?” we asked. Our

participants typed in their lowest price; the computer did its thing; and,dependingon theirbids, someparticipants listened to the soundagainandgotpaidandsomedidnot.Whenwecomparedtheprices,the10-centsgroupofferedmuchlowerbidsthanthe90-centsgroup.Thismeansthatalthoughbothgroupshad been equally exposed to the suggested 50 cents, as their focal anchoringresponse (to “Hypothetically, would you listen to this sound again for 50cents?”), the firstanchor in thisannoyingsoundcategory (whichwas10centsforsomeand90centsforothers)predominated.Why?Perhaps theparticipants in the10-centsgroupsaidsomething like the

followingtothemselves:“Well,Ilistenedpreviouslytothatannoyingsoundforalowamount.Thissoundisnotmuchdifferent.SoifIsaidalowamountforthepreviousone, Iguess Icouldbear thissoundforabout thesameprice.”Thosewhowere in the90-centsgroupused thesame typeof logic,butbecause theirstarting point was different, so was their ending point. These individuals toldthemselves, “Well, I listened previously to that annoying sound for a highamount.Thissoundisnotmuchdifferent.SosinceIsaidahighamountforthepreviousone,IguessIcouldbearthissoundforaboutthesameprice.”Indeed,the effect of the first anchor held—indicating that anchors have an enduringeffectforpresentpricesaswellasforfutureprices.

Therewasonemoresteptothisexperiment.Thistimewehadourparticipantslistentotheoscillatingsoundthatroseandfellinpitchfor30seconds.Weaskedour10-centsgroup,“Hypothetically,wouldyoulistentothissoundagainfor90cents?” Then we asked our 90-cents group, “Would you listen to this soundagainfor10cents?”Havingflippedouranchors,wewouldnowseewhichone,thelocalanchororthefirstanchor,exertedthegreatestinfluence.Onceagain,theparticipantstypedinyesorno.Thenweaskedthemforreal

bids: “Howmuchwould it take for you to listen to this again?”At this point,they had a history with three anchors: the first one they encountered in theexperiment(either10centsor90cents),thesecondone(50cents),andthemostrecent one (either 90 cents or 10 cents).Which one of these would have thelargestinfluenceonthepricetheydemandedtolistentothesound?Again,itwasasifourparticipants’mindstoldthem,“IfIlistenedtothefirst

soundforxcents,andlistenedtothesecondsoundforxcentsaswell,thenIcansurelydo thisone forx cents, too!”And that’swhat theydid.Thosewhohadfirstencounteredthe10-centanchoracceptedlowprices,evenafter90centswassuggestedastheanchor.Ontheotherhand,thosewhohadfirstencounteredthe90-centanchorkeptondemandingmuchhigherprices,regardlessoftheanchorsthatfollowed.Whatdidweshow?Thatourfirstdecisionsresonateoveralongsequenceof

decisions. First impressions are important, whether they involve rememberingthat our first DVD player cost muchmore than such players cost today (andrealizingthat,incomparison,thecurrentpricesareasteal)orrememberingthatgas was once a dollar a gallon, which makes every trip to the gas station apainful experience. In all these cases the random, andnot so random, anchorsthatwe encountered along theway andwere swayed by remainwith us longaftertheinitialdecisionitself.

NOWTHATWE knowwebehave likegoslings, it is important tounderstand theprocessbywhichourfirstdecisionstranslateintolong-termhabits.Toillustratethis process, consider this example.You’rewalking past a restaurant, and yousee two people standing in line, waiting to get in. “This must be a goodrestaurant,” you think to yourself. “People are standing in line.” So you standbehindthesepeople.Anotherpersonwalksby.Heseesthreepeoplestandinginlineandthinks,“Thismustbeafantasticrestaurant,”andjoinstheline.Othersjoin.We call this type of behavior herding. It happens when we assume thatsomethingisgood(orbad)onthebasisofotherpeople’spreviousbehavior,andourownactionsfollowsuit.But there’s also anotherkindofherding,one thatwecall self-herding.This

happenswhenwebelieve something isgood (orbad)on thebasisofourownprevious behavior. Essentially, oncewe become the first person in line at therestaurant,webegin to lineupbehindourself insubsequentexperiences.Doesthatmakesense?Letmeexplain.Recall your first introduction to Starbucks, perhaps several years ago. (I

assume that nearly everyone has had this experience, since Starbucks sits onevery corner in America.) You are sleepy and in desperate need of a liquidenergyboostasyouembarkonanerrandoneafternoon.YouglancethroughthewindowsatStarbucksandwalkin.Thepricesofthecoffeeareashock—you’vebeen blissfully drinking the brew at Dunkin’Donuts for years. But since youhavewalkedinandarenowcuriousaboutwhatcoffeeatthispricemighttastelike,yousurpriseyourself:youbuyasmallcoffee,enjoyitstasteanditseffectonyou,andwalkout.The following week you walk by Starbucks again. Should you go in? The

idealdecision-makingprocessshouldtakeintoaccountthequalityofthecoffee(StarbucksversusDunkin’Donuts);thepricesatthetwoplaces;and,ofcourse,thecost(orvalue)ofwalkingafewmoreblockstogettoDunkin’Donuts.Thisis a complex computation—so instead, you resort to the simple approach: “IwenttoStarbucksbefore,andIenjoyedmyselfandthecoffee,sothismustbeagooddecisionforme.”Soyouwalkinandgetanothersmallcupofcoffee.In doing so, you just became the second person in line, standing behind

yourself. A few days later, you again walk by Starbucks and this time, youvividly remember your past decisions and act on them again—voilà! Youbecome the third person in line, standing behind yourself.As theweeks pass,youenteragainandagainandevery time,youfeelmorestrongly thatyouareactingonthebasisofyourpreferences.BuyingcoffeeatStarbuckshasbecomeahabitwithyou.

BUTTHESTORYdoesn’tendthere.Nowthatyouhavegottenusedtopayingmoreforcoffee,andhavebumpedyourselfupontoanewcurveofconsumption,otherchangesalsobecomesimpler.Perhapsyouwillnowmoveupfromthesmallcupfor$2.20 to themediumsize for$3.50or to theVenti for$4.15.Even thoughyoudon’tknowhowyougotintothispricebracketinthefirstplace,movingtoalarger coffee at a relatively greater price seems pretty logical. So is a lateralmovetootherofferingsatStarbucks:CaffèAmericano,CaffèMisto,Macchiato,andFrappuccino,forinstance.Ifyoustoppedtothinkaboutthis,itwouldnotbeclearwhetheryoushouldbe

spendingallthismoneyoncoffeeatStarbucksinsteadofgettingcheapercoffeeatDunkin’Donutsoreven freecoffeeat theoffice.Butyoudon’t thinkabout

thesetrade-offsanymore.You’vealreadymadethisdecisionmanytimesinthepast, so you now assume that this is theway youwant to spend yourmoney.You’veherdedyourself—liningupbehindyourinitialexperienceatStarbucks—andnowyou’repartofthecrowd.

HOWEVER, THERE IS something odd in this story. If anchoring is based on ourinitialdecisions,howdidStarbucksmanagetobecomeaninitialdecisioninthefirst place? In other words, if we were previously anchored to the prices atDunkin’Donuts, how didwemove our anchor to Starbucks?This iswhere itgetsreallyinteresting.WhenHowardShultzcreatedStarbucks,hewasasintuitiveabusinessmanas

SalvadorAssael.Heworkeddiligently toseparateStarbucks fromothercoffeeshops, not through price but through ambience. Accordingly, he designedStarbucksfromtheverybeginningtofeellikeacontinentalcoffeehouse.The early shops were fragrant with the smell of roasted beans (and better-

quality roasted beans than those at Dunkin’ Donuts). They sold fancy Frenchcoffee presses. The showcases presented alluring snacks—almond croissants,biscotti, raspberry custard pastries, and others. Whereas Dunkin’ Donuts hadsmall, medium, and large coffees, Starbucks offered Short, Tall, Grande, andVenti,aswellasdrinkswithhigh-pedigreenameslikeCaffèAmericano,CaffèMisto,Macchiato, and Frappuccino. Starbucks did everything in its power, inotherwords, tomake theexperiencefeeldifferent—sodifferent thatwewouldnotusethepricesatDunkin’Donutsasananchor,butinsteadwouldbeopentothenewanchorthatStarbuckswaspreparingforus.Andthat,toagreatextent,ishowStarbuckssucceeded.

GEORGE, DRAZEN, AND I were so excited with the experiments on coherentarbitrarinessthatwedecidedtopushtheideaonestepfarther.Thistime,wehadadifferenttwisttoexplore.DoyourememberthefamousepisodeinTheAdventuresofTomSawyer,the

one in which Tom turned the whitewashing of Aunt Polly’s fence into anexercise inmanipulating his friends?As I’m sure you recall, Tom applied thepaintwithgusto,pretendingtoenjoythejob.“Doyoucallthiswork?”Tomtoldhisfriends.“Doesaboygetachancetowhitewashafenceeveryday?”Armedwiththisnew“information,”hisfriendsdiscoveredthejoysofwhitewashingafence.Beforelong,Tom’sfriendswerenotonlypayinghimfortheprivilege,butderivingrealpleasurefromthetask—awin-winoutcomeifthereeverwasone.From our perspective, Tom transformed a negative experience to a positive

one—hetransformedasituationinwhichcompensationwasrequiredtoonein

whichpeople(Tom’sfriends)wouldpaytoget inonthefun.Couldwedothesame?Wethoughtwe’dgiveitatry.One day, to the surprise of my students, I opened the day’s lecture on

managerialpsychologywithapoetryselection,afewlinesof“Whoeveryouareholdingmenowinhand”fromWaltWhitman’sLeavesofGrass:

Whoeveryouareholdingmenowinhand,Withoutonethingallwillbeuseless,Igiveyoufairwarningbeforeyouattemptmefurther,Iamnotwhatyousupposed,butfardifferent.Whoishethatwouldbecomemyfollower?Whowouldsignhimselfacandidateformyaffections?Thewayissuspicious,theresultuncertain,perhapsdestructive,Youwouldhavetogiveupallelse,Ialonewouldexpecttobeyoursoleandexclusivestandard,

Yournovitiatewouldeventhenbelongandexhausting,Thewholepasttheoryofyourlifeandallconformitytothelivesaroundyouwouldhavetobeabandon’d,

Thereforereleasemenowbeforetroublingyourselfanyfurther,letgoyourhandfrommyshoulders,

Putmedownanddepartonyourway.

After closing the book, I told the students that Iwould be conducting threereadingsfromWaltWhitman’sLeavesofGrass thatFridayevening:oneshort,onemedium,andonelong.Owingtolimitedspace,Itoldthem,Ihaddecidedtoholdanauctiontodeterminewhocouldattend.Ipassedoutsheetsofpapersothat theycouldbidforaspace;butbefore theydidso, Ihadaquestion toaskthem.Iaskedhalfthestudentstowritedownwhether,hypothetically,theywouldbe

willingtopayme$10fora10-minutepoetryrecitation.Iaskedtheotherhalftowritedownwhether,hypothetically,theywouldbewillingtolistentomerecitepoetryfortenminutesifIpaidthem$10.This,of course, servedas theanchor.NowIasked the students tobid fora

spotatmypoetryreading.Doyouthinktheinitialanchorinfluencedtheensuingbids?BeforeItellyou,considertwothings.First,myskillsatreadingpoetryarenot

of the first order.So asking someone topayme for10minutesof it couldbeconsidered a stretch. Second, even though I asked half of the students if theywouldpaymefortheprivilegeofattendingtherecitation,theydidn’thavetobid

thatway.TheycouldhaveturnedthetablescompletelyanddemandedthatIpaythem.And now to the results (drumroll, please). Those who answered the

hypothetical question about payingmewere indeedwilling to payme for theprivilege.Theyoffered,onaverage,topaymeaboutadollarfortheshortpoetryreading,about twodollars for themediumpoetry reading,andabitmore thanthreedollarsforthelongpoetryreading.(MaybeIcouldmakealivingoutsideacademeafterall.)But,whataboutthosewhowereanchoredtothethoughtofbeingpaid(rather

than payingme)?As youmight expect, they demanded payment: on average,theywanted $1.30 to listen to the short poetry reading, $2.70 to listen to themediumpoetryreading,and$4.80toendurethelongpoetryreading.MuchlikeTomSawyer,then,Iwasabletotakeanambiguousexperience(and

ifyoucouldhearme recitepoetry,youwouldunderstand justhowambiguousthis experience is) and arbitrarily make it into a pleasurable or painfulexperience.Neithergroupofstudentsknewwhethermypoetryreadingwasofthe quality that isworth paying for or of the quality that isworth listening toonly if one is being financially compensated for the experience (they did notknow if it is pleasurable or painful). But once the first impression had beenformed(thattheywouldpaymeorthatIwouldpaythem),thediewascastandtheanchorset.Moreover,oncethefirstdecisionhadbeenmade,otherdecisionsfollowedinwhatseemedtobealogicalandcoherentmanner.Thestudentsdidnotknowwhether listening tome recitepoetrywasagoodorbadexperience,butwhatever their firstdecisionwas, theyused itas inputfor theirsubsequentdecisions andprovided a coherent patternof responses across the threepoetryreadings.Of course,MarkTwain came to the same conclusions: “If Tomhad been a

great and wise philosopher, like the writer of this book, he would now havecomprehendedthatworkconsistsofwhateverabodyisobligedtodo,andthatplay consists of whatever a body is not obliged to do.” Mark Twain furtherobserved: “There are wealthy gentlemen in England who drive four-horsepassenger-coachestwentyorthirtymilesonadailylineinthesummerbecausetheprivilegecoststhemconsiderablemoney;butiftheywereofferedwagesfortheservice,thatwouldturnitintowork,andthentheywouldresign.”*

WHEREDOTHESEthoughtsleadus?Forone,theyillustratethemanychoiceswemake, from the trivial to the profound, in which anchoring plays a role. Wedecide whether or not to purchase Big Macs, smoke, run red lights, takevacations in Patagonia, listen to Tchaikovsky, slave away at doctoral

dissertations,marry,havechildren,liveinthesuburbs,voteRepublican,andsoon.Accordingtoeconomictheory,webasethesedecisionsonourfundamentalvalues—ourlikesanddislikes.But what are the main lessons from these experiments about our lives in

general?Coulditbethattheliveswehavesocarefullycraftedarelargelyjustaproductofarbitrarycoherence?Coulditbethatwemadearbitrarydecisionsatsomepointinthepast(likethegoslingsthatadoptedLorenzastheirparent)andhavebuiltourlivesonthemeversince,assumingthattheoriginaldecisionswerewise?Is thathowwechoseourcareers,ourspouses, theclotheswewear,andthewaywestyleourhair?Weretheysmartdecisionsinthefirstplace?Orweretheypartiallyrandomfirstimprintsthathaverunwild?Descartessaid,Cogitoergosum—“Ithink, therefore Iam.”Butsupposewe

arenothingmorethanthesumofourfirst,naive,randombehaviors.Whatthen?Thesequestionsmaybetoughnutstocrack,butintermsofourpersonallives,

wecanactivelyimproveonourirrationalbehaviors.Wecanstartbybecomingawareofourvulnerabilities.Supposeyou’replanningtobuyacutting-edgecellphone (the onewith the three-megapixel, 8× zoom digital camera), or even adaily$4cupofgourmetcoffee.Youmightbeginbyquestioningthathabit.Howdiditbegin?Second,askyourselfwhatamountofpleasureyouwillbegettingoutofit.Isthepleasureasmuchasyouthoughtyouwouldget?Couldyoucutback a little and better spend the remaining money on something else?Witheverythingyoudo, in fact,youshould trainyourself toquestionyour repeatedbehaviors. In the case of the cell phone, could you take a step back from thecuttingedge,reduceyouroutlay,andusesomeofthemoneyforsomethingelse?Andasfor thecoffee—rather thanaskingwhichblendofcoffeeyouwillhavetoday, ask yourself whether you should even be having that habitual cup ofexpensivecoffeeatall.*Weshouldalsopayparticularattentiontothefirstdecisionwemakeinwhatis

goingtobealongstreamofdecisions(aboutclothing,food,etc.).Whenwefacesuchadecision,itmightseemtousthatthisisjustonedecision,withoutlargeconsequences;but infact thepowerof thefirstdecisioncanhavesuchalong-lastingeffect that itwill percolate intoour futuredecisions foryears to come.Given this effect, the first decision is crucial, and we should give it anappropriateamountofattention.Socratessaidthattheunexaminedlifeisnotworthliving.Perhapsit’stimeto

inventory the imprints and anchors in our own life. Even if they once werecompletely reasonable, are they still reasonable? Once the old choices arereconsidered, we can open ourselves to new decisions—and the newopportunitiesofanewday.Thatseemstomakesense.

ALLTHISTALKaboutanchorsandgoslingshaslargerimplicationsthanconsumerpreferences,however.Traditionaleconomicsassumesthatpricesofproductsinthemarketaredeterminedbyabalancebetweentwoforces:productionateachprice (supply) and the desires of those with purchasing power at each price(demand).Thepriceatwhichthesetwoforcesmeetdeterminesthepricesinthemarketplace.Thisisanelegantidea,butitdependscentrallyontheassumptionthatthetwo

forces are independent and that together they produce the market price. Theresults of all the experiments presented in this chapter (and the basic idea ofarbitrarycoherence itself )challenge theseassumptions.First,according to thestandardeconomicframework,consumers’willingnesstopayisoneofthetwoinputsthatdeterminemarketprices(thisisthedemand).Butasourexperimentsdemonstrate,whatconsumersarewillingtopaycaneasilybemanipulated,andthis means that consumers don’t in fact have a good handle on their ownpreferences and the prices they are willing to pay for different goods andexperiences.Second,whereasthestandardeconomicframeworkassumesthattheforcesof

supply and demand are independent, the type of anchoring manipulations wehave shown here suggest that they are, in fact, dependent. In the real world,anchoring comes from manufacturer’s suggested retail prices (MSRPs),advertised prices, promotions, product introductions, etc.—all of which aresupply-sidevariables.Itseemsthenthatinsteadofconsumers’willingnesstopayinfluencingmarket prices, the causality is somewhat reversed and it ismarketpricesthemselvesthatinfluenceconsumers’willingnesstopay.Whatthismeansisthatdemandisnot,infact,acompletelyseparateforcefromsupply.

ANDTHISISnottheendofthestory.Intheframeworkofarbitrarycoherence,therelationships we see in the marketplace between demand and supply (forexample, buying more yogurt when it is discounted) are based not onpreferences but onmemory.Here is an illustration of this idea.Consider yourcurrentconsumptionofmilkandwine.Nowimaginethattwonewtaxeswillbeintroducedtomorrow.Onewillcutthepriceofwineby50percent,andtheotherwillincreasethepriceofmilkby100percent.Whatdoyouthinkwillhappen?Thesepricechangeswillsurelyaffectconsumption,andmanypeoplewillwalkaroundslightlyhappierandwithlesscalcium.Butnowimaginethis.Whatifthenewtaxesareaccompaniedbyinducedamnesiaforthepreviouspricesofwineandmilk?Whatifthepriceschangeinthesameway,butyoudonotrememberwhatyoupaidforthesetwoproductsinthepast?I suspect that the price changes would make a huge impact on demand if

peoplerememberedthepreviouspricesandnoticedthepriceincreases;butIalsosuspectthatwithoutamemoryforpastprices,thesepricechangeswouldhaveatrivial effect, if any, on demand. If people had nomemory of past prices, theconsumption of milk and wine would remain essentially the same, as if thepriceshadnotchanged.Inotherwords,thesensitivityweshowtopricechangesmightinfactbelargelyaresultofourmemoryforthepriceswehavepaidinthepastandourdesireforcoherencewithourpastdecisions—notatallareflectionofourtruepreferencesorourlevelofdemand.Thesamebasicprinciplewouldalsoapplyifthegovernmentonedaydecided

toimposeataxthatdoubledthepriceofgasoline.Underconventionaleconomictheory, thisshouldcutdemand.Butwould it?Certainly,peoplewould initiallycompare the newpriceswith their anchor,would be flabbergasted by the newprices, and somightpullbackon theirgasolineconsumptionandmaybeevenget a hybrid car.But over the long run, andonce consumers readjusted to thenewpriceandthenewanchors(justasweadjusttothepriceofNikesneakers,bottledwater,andeverythingelse),ourgasolineconsumption,atthenewprice,mightinfactgetclosetothepretaxlevel.Moreover,muchasintheexampleofStarbucks,thisprocessofreadjustmentcouldbeacceleratedifthepricechangeweretoalsobeaccompaniedbyotherchanges,suchasanewgradeofgas,oranewtypeoffuel(suchascorn-basedethanolfuel).Iamnotsuggestingthatdoublingthepriceofgasolinewouldhavenoeffect

onconsumers’demand.ButIdobelievethat inthelongterm,itwouldhaveamuchsmallerinfluenceondemandthanwouldbeassumedfromjustobservingtheshort-termmarketreactionstopriceincreases.

ANOTHERIMPLICATIONOFarbitrarycoherencehastodowiththeclaimedbenefitsof the freemarketand free trade.Thebasic ideaof the freemarket is that if Ihave something that you valuemore than I do—let’s say a sofa—trading thisitemwillbenefitbothofus.Thismeansthatthemutualbenefitoftradingrestsontheassumptionthatalltheplayersinthemarketknowthevalueofwhattheyhaveandthevalueofthethingstheyareconsideringgettingfromthetrade.Butifourchoicesareoftenaffectedbyrandominitialanchors,asweobserved

inourexperiments,thechoicesandtradeswemakearenotnecessarilygoingtobe an accurate reflection of the real pleasure or utility we derive from thoseproducts. Inotherwords, inmanycaseswemakedecisions in themarketplacethatmaynotreflecthowmuchpleasurewecangetfromdifferentitems.Now,ifwe can’t accurately compute these pleasure values, but frequently followarbitrary anchors instead, then it is not clear that the opportunity to trade isnecessarily going to make us better off. For example, because of some

unfortunateinitialanchorswemightmistakenlytradesomethingthattrulygivesusalotofpleasure(butregrettablyhadalowinitialanchor)forsomethingthatgives us less pleasure (but owing to some random circumstances had a highinitialanchor).Ifanchorsandmemoriesoftheseanchors—butnotpreferences—determineourbehavior,whywouldtradingbehailedasthekeytomaximizingpersonalhappiness(utility)?

SO,WHEREDOESthisleaveus?Ifwecan’trelyonthemarketforcesofsupplyanddemand to set optimal market prices, and we can’t count on free-marketmechanisms to help us maximize our utility, then we may need to lookelsewhere. This is especially the casewith society’s essentials, such as healthcare,medicine,water,electricity,education,andothercritical resources. Ifyouacceptthepremisethatmarketforcesandfreemarketswillnotalwaysregulatethemarket for the best, then youmay find yourself among thosewhobelievethat the government (we hope a reasonable and thoughtful government) mustplay a larger role in regulating somemarket activities, even if this limits freeenterprise.Yes,afreemarketbasedonsupply,demand,andnofrictionwouldbethe ideal ifwewere truly rational.Yetwhenwearenot rationalbut irrational,policiesshouldtakethisimportantfactorintoaccount.

ReflectionsontheExistenceofWell-DefinedPreferencesOneofthelessonsfromChapter2wasthatwegenerallybelievewehavepreciseandwell-articulatedpreferences,butinreality,weonlythinkthatweknowwhatwewant.Here’sanexampleofanexperiencewhereIwentintoasituationwithone set of ideas about what I wanted and emerged with a very differentunderstanding.WhenIturned30,Idecideditwastimetotradeinmymotorcycleforacar,

butIcouldnotdecidewhichcarwasrightforme.TheWebwasjusttakingoff,and tomydelight, I foundasite thatprovidedadviceonpurchasingcars.TheWeb site,which is now defunct, asked a series of questions ranging frommypreferredsafetyratingtomydesiredbrakingdistance,myideal turningradius,thenumberofpassengersI’dliketobeabletobringalong,and,ofcourse,mypricerange.Ispentfifteenminutesansweringthesequestions.At the topofeachpage,I

watchedtheprogressbarinchclosertomyresult.Itwasexciting—Iwasreallyinterestedinseeingwhatkindofrecommendationthesitewouldcomeupwith.

The final screen displayed all the answers I had provided in the last fifteenminutes; all I had to do was click on “Submit” to receive my tailoredrecommendation.ThesecondIdid,Ilearnedthatmyperfectcarwas(drumroll,please)aFordTaurus.What?Now, Imight not knowmuch about cars (in truth, I know very little about

them), but I knew that I did not want a Ford Taurus (and I don’t mean anydisrespect towhat Iamsure isgenerallya fineautomobile).Theproblemwasthat,havingjustsurrenderedmymotorcycle,Icouldn’tseemyselfdrivingsuchasedate sedan. I was now facing a dilemma: I had tried a deliberative andthoughtfulprocessformycarselection,andIdidn’tliketheanswerIgot.So,Ididwhat I think anyone inmypositionwoulddo. I hit thebackbutton a fewtimes,backtrackedtoearlierstagesoftheinterviewprocess,andchangedmanyof my original answers to what I convinced myself were more accurate andappropriate responses. I lowered my interest in safety and the number ofpassengers Iwanted to takewithme, and changedmanyofmy answers to fitwhatIdeemedamoreappropriatemotorcyclereplacement.Fromtimetotime,Ichecked to see how the different responses translated into differentrecommendations.Ikept thisupuntil thecar-advisingWebsitesuggestedaMazdaMiata.The

momenttheprogramwaskindenoughtorecommendasmallconvertible,Ifeltgratefulforthefantasticsoftwareanddecidedtofollowitsadvice.Afewweekslater,IbecametheproudownerofaMiata,whichservedmeloyallyformanyyears.WHAT HAPPENED HERE? On one hand, I knew that buying a car was no trivialmatter,andIwantedtoapproachsuchalargedecisionbycarefullyweighingthecost and benefits in a cold, calculated, and sensibleway.At the same time, Iknew I was making an important and symbolic move into adulthood, and Iunderstoodthatkidsandtheinevitableminivan(whichIdrivethesedays)wereawaitingme.Nevertheless,mybrainandmyheartwereengagedinapracticaltug-of-war. Deep down, what I really wanted was a car that felt closer to amotorcycle—somethingthatwasfuntodrive.Takingthesystematicandcalculatedapproachtosolvingthisproblemdidnot

yieldthe“correct”answer,soIwentbackandfudgedaroundwithmyresponses,lettingthecomputerizedmethodrationalizemychoiceforme.Thisway,Iendedupwithadecisionthatmademehappy,andatthesametime,itwasadecisionthatIcouldeasilyexplaintomyself.Withaneatandprogrammedcomputerizedprocess, it was now obviouswhy the small convertiblewas, in fact, the rightchoiceforme.

This elaborate computerized justification process might seem artificial andextreme,butIsuspectthatthesamebasicelementsendupplayingoutinmanyofour importantdecisions.Thisexperiencetaughtmethatsometimeswewantour decisions to have a rational veneer when, in fact, they stem from a gutfeeling—whatwecravedeepdown.Isuspectthatinourattemptstomakesurethat we end up with decisions that seem well-reasoned and thoughtful, wecommonly undergo a lot of unnecessarymental gymnastics and justifications,particularly when the choices are large and significant. Sometimes theserationalizations are complex and time-consuming, and sometimeswe have thebenefit of a software program to help us with more efficient rationalization.PerhapsthiswastherealfunctionoftheWebsiteIused—itwasnotnecessarilydesignedtohelpmemakeabetterdecision,buttohelpmejustifymychoiceandfeelconfidentaboutit.Intheend,followingourgutfeelingsandrationalizingthemafterthefactis

notalwaysbad.Itcansometimesleadustopickasatisfactoryoutcomeor,attheveryleast,preventusfromendingupwithacarwereallydon’twant.

Chapter3TheCostofZeroCost

WhyWeOftenPayTooMuchWhenWePayNothing

HaveyouevergrabbedforacouponofferingaFREE!packageofcoffeebeans—eventhoughyoudon’tdrinkcoffeeanddon’tevenhaveamachinewithwhichtobrewit?Whataboutall thoseFREE!extrahelpingsyoupiledonyourplateatabuffet,eventhoughyourstomachhadalreadystartedtoachefromall thefoodyou had consumed? And what about the worthless FREE! stuff you’veaccumulated—thepromotionalT-shirtfromtheradiostation,theteddybearthatcamewiththeboxofValentinechocolates,themagneticcalendaryourinsuranceagentsendsyoueachyear?It’s no secret that getting something free feels very good. Zero is not just

anotherprice,itturnsout.Zeroisanemotionalhotbutton—asourceofirrationalexcitement.Wouldyoubuysomethingifitwerediscountedfrom50centsto20cents?Maybe.Would you buy it if it were discounted from 50 cents to twocents?Maybe.Wouldyougrab it if itwerediscounted from50cents tozero?Youbet!Whatisitaboutzerocostthatwefindsoirresistible?WhydoesFREE!makeus

sohappy?Afterall,FREE!canleadusintotrouble: thingsthatwewouldneverconsiderpurchasingbecomeincrediblyappealingassoonastheyareFREE!Forinstance,haveyouevergatheredupfreepencils,keychains,andnotepadsataconference,eventhoughyou’dhavetocarrythemhomeandwouldonlythrowmostofthemaway?Haveyoueverstoodinlineforaverylongtime(toolong),justtogetafreeconeofBenandJerry’sicecream?Orhaveyouboughttwoofaproductthatyouwouldn’thavechoseninthefirstplace,justtogetthethirdoneforfree?

ZEROHASHADalonghistory.TheBabyloniansinventedtheconceptofzero;theancientGreeksdebateditinloftyterms(howcouldsomethingbenothing?);theancient Indian scholar Pingala paired zero with the numeral 1 to get doubledigits; and both theMayans and theRomansmade zero part of their numeralsystems. But zero really found its place about AD 498, when the Indianastronomer Aryabhata sat up in bed one morning and exclaimed, “Sthanamsthanamdasagunam”—whichtranslates,roughly,as“Placetoplacein10timesinvalue.”With that, the ideaof decimal-basedplace-valuenotationwasborn.Nowzerowasonaroll:ItspreadtotheArabworld,whereitflourished;crossedthe Iberian Peninsula to Europe (thanks to the Spanish Moors); got sometweakingfromtheItalians;andeventuallysailedtheAtlantictotheNewWorld,wherezeroultimatelyfoundplentyofemployment(togetherwiththedigit1)inaplacecalledSiliconValley.Somuchforabriefrecountingofthehistoryofzero.Buttheconceptofzero

applied tomoneyis lessclearlyunderstood. Infact, Idon’t think itevenhasahistory.Nonetheless,FREE!hashugeimplications,extendingnotonlytodiscountprices and promotions, but also to how FREE! can be used to help us makedecisionsthatwouldbenefitourselvesandsociety.If FREE! were a virus or a subatomic particle, I might use an electron

microscopetoprobetheobjectunderthelens,stainitwithdifferentcompoundstorevealitsnature,orsomehowsliceitaparttorevealitsinnercomposition.Inbehavioraleconomicsweuseadifferentinstrument,however,onethatallowsustoslowdownhumanbehaviorandexamineitframebyframe,asitunfolds.Asyouhaveundoubtedlyguessedbynow,thisprocedureiscalledanexperiment.

INONEEXPERIMENT,KristinaShampanier(aPhDstudentatMIT),NinaMazar(aprofessorat theUniversityofToronto),andIwentintothechocolatebusiness.Well,sortof.Wesetupatableatalargepublicbuildingandofferedtwokindsofchocolates—LindttrufflesandHershey’sKisses.Therewasalargesignaboveourtablethatread,“Onechocolatepercustomer.”Oncethepotentialcustomerssteppedcloser,theycouldseethetwotypesofchocolateandtheirprices.*Forthoseofyouwhoarenotchocolateconnoisseurs,Lindtisproducedbya

Swiss firm thathasbeenblending finecocoas for160years.Lindt’schocolatetruffles are particularly prized—exquisitely creamy and just about irresistible.Theycostabout30centseachwhenwebuytheminbulk.Hershey’sKisses,onthe other hand, are good little chocolates, but let’s face it, they are ratherordinary:Hersheycranksout80millionKissesaday.InHershey,Pennsylvania,eventhestreetlampsaremadeintheshapeoftheubiquitousHershey’sKiss.Sowhathappenedwhenthe“customers”flockedtoour table?Whenweset

the price of a Lindt truffle at 15 cents and a Kiss at one cent, we were notsurprised to find thatourcustomersactedwithagooddealof rationality: theycompared the price and quality of the Kiss with the price and quality of thetruffle,and thenmade theirchoice.About73percentof themchose the truffleand27percentchoseaKiss.NowwedecidedtoseehowFREE!mightchangethesituation.Soweoffered

theLindt trufflefor14centsandtheKissesfree.Wouldtherebeadifference?Should there be?After all,we hadmerely lowered the price of both kinds ofchocolatebyonecent.ButwhatadifferenceFREE!made.ThehumbleHershey’sKissbecameabig

favorite.Some69percentofourcustomers (up from27percentbefore)chosetheFREE!Kiss,givinguptheopportunitytogettheLindttruffleforaverygoodprice. Meanwhile, the Lindt truffle took a tumble; customers choosing itdecreasedfrom73to31percent.Whatwas going on here?First of all, letme say that there aremany times

when getting FREE! items can make perfect sense. If you find a bin of freeathletic socks at a department store, for instance, there’s no downside tograbbingall thesocksyoucan.Thecritical issueariseswhenFREE!becomesastrugglebetweenafreeitemandanotheritem—astruggleinwhichthepresenceofFREE!leadsustomakeabaddecision.Forinstance,imaginegoingtoasportsstoretobuyapairofwhitesocks,thekindwithanicelypaddedheelandagoldtoe.Fifteenminuteslateryou’releavingthestore,notwiththesocksyoucameinfor,butwithacheaperpair thatyoudon’t likeatall(withoutapaddedheelandgoldtoe)butthatcameinapackagewithaFREE!secondpair.Thisisacaseinwhichyougaveupabetterdealandsettledforsomethingthatwasnotwhatyouwanted,justbecauseyouwereluredbytheFREE!To replicate this experience in our chocolate experiment, we told our

customersthattheycouldchooseonlyasinglesweet—theKissorthetruffle.Itwasaneither-ordecision, likechoosingonekindofathleticsockoveranother.That’swhatmade the customers’ reaction to the FREE!Kiss sodramatic:Bothchocolateswere discounted by the same amount ofmoney. The relative pricedifferencebetween the twowasunchanged—andsowas theexpectedpleasurefromboth.According to standard economic theory (simple cost-benefit analysis), then,

the price reduction should not lead to any change in the behavior of ourcustomers. Before, about 27 percent chose theKiss and 73 percent chose thetruffle. And since nothing had changed in relative terms, the response to theprice reduction should have been exactly the same. A passing economist,twirling his cane and espousing conventional economic theory, in fact, would

have said that since everything in the situation was the same, our customersshouldhavechosenthetrufflesbythesamemarginofpreference.*And yet here we were, with people pressing up to the table to grab our

Hershey’sKisses, not because they hadmade a reasoned cost-benefit analysisbefore elbowing theirway in, but simply because theKisseswere FREE!Howstrange(butpredictable)wehumansare!

THISCONCLUSION,INCIDENTALLY,remainedthesameinotherexperimentsaswell.InonecasewepricedtheHershey’sKissattwocents,onecent,andzerocents,whilepricingthetrufflecorrespondinglyat27cents,26cents,and25cents.WedidthistoseeifdiscountingtheKissfromtwocentstoonecentandthetrufflefrom27cents to26centswouldmakeadifferencein theproportionofbuyersfor each. It didn’t.But, once again,whenwe lowered thepriceof theKiss tofree, the reaction was dramatic. The shoppers overwhelmingly demanded theKisses.Wedecidedthatperhapstheexperimenthadbeentainted,sinceshoppersmay

notfeellikesearchingforchangeinapurseorbackpack,ortheymaynothaveanymoneyonthem.Suchaneffectwouldartificiallymakethefreeofferseemmoreattractive.Toaddress thispossibility,weranotherexperimentsatoneofMIT’scafeterias.Inthissetup,thechocolatesweredisplayednexttothecashierasoneofthecafeteria’sregularpromotionsandthestudentswhowereinterestedin the chocolates simply added them to the lunchpurchase, andpaid for themwhilegoingthroughthecashier’sline.Whathappened?ThestudentsstillwentoverwhelminglyfortheFREE!option.

WHATISITaboutFREE!that’ssoenticing?WhydowehaveanirrationalurgetojumpforaFREE!item,evenwhenit’snotwhatwereallywant?Ibelievetheansweristhis.Mosttransactionshaveanupsideandadownside,

butwhen something is FREE!we forget the downside. FREE! gives us such anemotional charge that we perceive what is being offered as immensely morevaluable than it really is. Why? I think it’s because humans are intrinsicallyafraid of loss. The real allure of FREE! is tied to this fear. There’s no visiblepossibility of loss when we choose a FREE! item (it’s free). But suppose wechoosetheitemthat’snotfree.Uh-oh,nowthere’sariskofhavingmadeapoordecision—thepossibilityofaloss.Andso,giventhechoice,wegoforwhatisfree.Forthisreason,inthelandofpricing,zeroisnotjustanotherprice.Sure,10

centscanmakeahugedifferenceindemand(supposeyouweresellingmillionsofbarrelsofoil),butnothingbeats theemotionalsurgeofFREE!This,thezero

priceeffect,isinacategoryallitsown.Tobesure,“buyingsomethingfornothing”isabitofanoxymoron.But let

megiveyouanexampleofhowweoftenfallintothetrapofbuyingsomethingwemaynotwant,simplybecauseofthatstickysubstance,FREE!In2007, I sawanewspaperad fromamajorelectronicsmaker,offeringme

seven FREE! DVD titles if I purchased the maker’s new high-definition DVDplayer.Firstofall,didIneedahigh-definitionplayeratthattime?Probablynot.But even if I had,wouldn’t it have beenwiser towait for prices to descend?They always do—and today’s $600 high-definition DVD player will veryquickly be tomorrow’s $200 machine. Second, the DVD maker had a clearagenda behind its offer. This company’s high-definition DVD system was incutthroat competition with Blu-Ray, a system backed by many othermanufacturers. At the time, Blu-Ray was ahead and has since gone on todominatethemarket.SohowmuchisFREE!whenthemachinebeingofferedwillfind its way into obsolescence (like Betamax VCRs)? Those are two rationalthoughts thatmight prevent us from falling under the spell of FREE! But, gee,thoseFREE!DVDscertainlylookgood!

GETTING SOMETHING FREE! is certainly a drawwhen we talk about prices. Butwhatwouldhappeniftheofferwasnotafreeprice,butafreeexchange?Areweassusceptibletofreeproductsaswearetogettingproductsforfree?Afewyearsago,withHalloweendrawingnear,Ihadanideaforanexperimenttoprobethatquestion.ThistimeIwouldn’tevenhavetoleavemyhometogetmyanswers.Early in the evening, Joey, a nine-year-old kid dressed as Spider-Man and

carrying a large yellowbag, climbed the stairs of our front porch.Hismotheraccompaniedhim,toensurethatnoonegaveherkidanapplewitharazorbladeinside.(Bytheway,thereneverwasacaseofrazorbladesbeingdistributedinapples on Halloween; it is just an urban myth.) She stayed on the sidewalk,however,togiveJoeythefeelingthathewastrick-or-treatingbyhimself.Afterthetraditionalquery,“Trickortreat?”IaskedJoeytoholdopenhisright

hand. Iplaced threeHershey’sKisses inhispalmandaskedhim tohold themthereforamoment.“Youcanalsogetoneof these twoSnickersbars,” Isaid,showinghimasmalloneandalargeone.“Infact,ifyougivemeoneofthoseHershey’sKissesIwillgiveyouthissmallerSnickersbar.AndifyougivemetwoofyourHershey’sKisses,IwillgiveyouthislargerSnickersbar.”Nowakidmaydressuplikeagiantspider,butthatdoesn’tmeanhe’sstupid.

ThesmallSnickersbarweighedoneounce,andthelargeSnickersbarweighedtwo ounces. All Joey had to do was give me one additional Hershey’s Kiss(about0.16ounce)andhewouldgetanextraounceofSnickers.Thisdealmight

havestumpedarocketscientist,butforanine-year-oldboy,thecomputationwaseasy:he’dgetmorethansixtimesthereturnoninvestment(inthenetweightofchocolate)ifhewentforthelargerSnickersbar.InaflashJoeyputtwoofhisKisses intomyhand, took the two-ounceSnickersbar, anddropped it intohisbag.Joeywasn’t alone inmaking this snap decision. All but one of the kids to

whomIpresentedthisoffertradedintwoKissesforthebiggercandybars.Zoewasthenextkidtowalkdownthestreet.Shewasdressedasaprincess,

inalongwhitedress,withamagicwandinonehandandanorangeHalloweenpumpkinbucketintheother.Heryoungersisterwasrestingcomfortablyintheirfather’sarms,lookingcuteandcuddlyinherbunnyoutfit.Astheyapproached,Zoecalledout,inahigh,cutevoice,“Trickortreat!”InthepastIadmitthatIhave sometimes devilishly replied, “Trick!” Most kids stand there, baffled,havingneverthoughtthroughtheirquestiontoseethatitallowedanalternativeanswer.In this case I gaveZoe her treat—threeHershey’sKisses.But I did have a

trickupmysleeve.IofferedlittleZoeadeal:achoicebetweengettingalargeSnickersbar inexchange foroneofherHershey’sKisses,orgetting thesmallSnickersbarforFREE!withoutgivingupanyHershey’sKisses.Now, a bit of rational calculation (which in Joey’s case was amply

demonstrated)wouldshowthatthebestdealistoforgothefreesmallSnickersbar,paythecostofoneadditionalHershey’sKiss,andgoforthelargeSnickersbar. On an ounce-for-ounce comparison, it was far better to give up oneadditionalHershey’sKissandgetthelargerSnickersbar(twoounces)insteadofasmallerSnickersbar(oneounce).ThislogicwasperfectlycleartoJoeandthekidswhoencounteredtheconditioninwhichbothSnickersbarshadacost.ButwhatwouldZoedo?Wouldhercleverkid’smindmakethatrationalchoice—orwouldthefact that thesmallSnickersbarwasFREE!blindher to therationallycorrectanswer?Asyoumighthaveguessedbynow,Zoe,andtheotherkidstowhomIoffered

thesamedeal,wascompletelyblindedbyFREE!About70percentofthemgaveupthebetterdeal,andtooktheworsedealjustbecauseitwasFREE!JustincaseyouthinkKristina,Nina,andImakeahabitofpickingonkids,

I’llmentionthatwerepeatedtheexperimentwithbiggerkids,infactstudentsattheMITstudentcenter.TheresultsreplicatedthepatternwesawonHalloween.Indeed, thedrawofzerocost isnot limited tomonetary transactions.Whetherit’sproductsormoney,wejustcan’tresistthegravitationalpullofFREE!

SODOYOUthinkyouhaveahandleonFREE!?

OK. Here’s a quiz. Suppose I offered you a choice between a free $10Amazon gift certificate and a $20 gift certificate for seven dollars. Thinkquickly.Whichwouldyoutake?IfyoujumpedfortheFREE!certificate,youwouldhavebeenlikemostofthe

people we tested at one of the malls in Boston. But look again: a $20 giftcertificate for seven dollars delivers a $13 profit. That’s clearly better thangettinga$10certificatefree(earning$10).Canyouseetheirrationalbehaviorinaction?*

LET ME TELL you a story that describes the real influence of FREE! on ourbehavior.Afewyearsago,Amazon.comstartedofferingfreeshippingofordersoveracertainamount.Someonewhopurchasedasinglebookfor$16.95mightpay an additional $3.95 for shipping, for instance.But if the customer boughtanotherbook,foratotalof$31.90,theywouldgettheirshippingFREE!Some of the purchasers probably didn’t want the second book (and I am

talkinghere frompersonalexperience)but theFREE! shippingwas so temptingthattogetit,theywerewillingtopaythecostoftheextrabook.ThepeopleatAmazonwereveryhappywith thisoffer, but theynoticed that inoneplace—France—therewas no increase in sales. Is the French consumermore rationalthan the restofus?Unlikely.Rather, it turnedout, theFrenchcustomerswerereactingtoadifferentdeal.Here’s what happened. Instead of offering FREE! shipping on orders over a

certainamount, theFrenchdivisionpriced theshippingfor thoseordersatonefranc. Just one franc—about 20 cents. This doesn’t seem very different fromFREE! but it was. In fact, when Amazon changed the promotion in France toinclude free shipping,France joined all theother countries in adramatic salesincrease. Inotherwords,whereasshippingforonefranc—arealbargain—wasvirtuallyignoredbytheFrench,FREE!shippingcausedanenthusiasticresponse.AmericaOnline (AOL) had a similar experience several years agowhen it

switched from pay-per-hour service to amonthly payment schedule (inwhichyoucouldloginasmanyhoursasyouwantedforafixed$19.95permonth).Inpreparation for the new price structure, AOL geared up for what it estimatedwould be a small increase in demand.What did it get?Anovernight increasefrom140,000to236,000customersloggingintothesystem,andadoublingofthe average time online. That may seem good—but it wasn’t good. AOL’scustomers encountered busy phone lines, and soon AOL was forced to leaseservicesfromotheronlineproviders(whowereonlytoohappytosellbandwidthtoAOL—atthepremiumofsnowshovelsinasnowstorm).WhatBobPittman(the president of AOL at the time) didn’t realize was that consumers would

respondtotheallureofFREE!likestarvingpeopleatabuffet.

WHENCHOOSINGBETWEENtwoproducts,then,weoftenoverreacttothefreeone.Wemight opt for a FREE! checking account (with no benefits attached) ratherthanonethatcostsfivedollarsamonth.Butifthefive-dollarcheckingaccountincludesfreetraveler’schecks,onlinebilling,etc.,andtheFREE!onedoesn’t,wemayendupspendingmorefor thispackageofserviceswiththeFREE!accountthanwiththefive-dollaraccount.Similarly,wemightchooseamortgagewithnoclosingcosts,butwithinterestratesandfeesthatareoffthewall;andwemightgetaproductwedon’treallywantsimplybecauseitcomeswithafreegift.My most recent personal encounter with this involved a car. When I was

lookingforanewcarafewyearsago,IknewthatIreallyshouldbuyaminivan.Infact,IhadreaduponHondaminivansandknewallaboutthem.ButthenanAudicaughtmyeye,atfirst throughanappealingoffer—FREE!oilchangesforthenextthreeyears.HowcouldIresist?Tobeperfectlyhonest,theAudiwassportyandred,andIwasstillresisting

theideaofbeingamatureandresponsiblefathertotwoyoungkids.Itwasn’tasifthefreeoilchangecompletelyswayedme,butitsinfluenceonmewas,fromarationalperspective,unjustifiablylarge.JustbecauseitwasFREE!itservedasanadditionalallurethatIcouldclingto.So I bought theAudi—and the FREE! oil. (A fewmonths later,while Iwas

drivingonahighway, thetransmissionbroke—butthat isadifferentstory.)Ofcourse,withacoolerheadImighthavemadeamorerationalcalculation.Idriveabout7,000milesayear; theoilneeds tobechangedevery10,000miles;andthe cost per change is about $75. Over three years, then, I would save about$150,orabout0.5percentofthepurchasepriceofthecar—notagoodreasontobasemydecisionon.Itgetsworse,though:nowIhaveanAudithatispackedtotheceilingwithaction figures,a stroller,abike,andotherkids’paraphernalia.Oh,foraminivan.

THECONCEPTOFzeroalsoappliestotime.Timespentononeactivity,afterall,istimetakenawayfromanother.Soifwespend45minutes ina linewaitingforourturntogetaFREE!tasteoficecream,orifwespendhalfanhourfillingoutalongformfora tiny rebate, there is somethingelse thatwearenotdoingwithourtime.Myfavoritepersonalexampleisfree-entrancedayatamuseum.Despite the

factthatmostmuseumsarenotveryexpensive,Ifinditmuchmoreappealingtosatisfymydesireforartwhenthepriceiszero.OfcourseIamnotaloneinthisdesire.SoonthesedaysIusuallyfindthatthemuseumisovercrowded,theline

is long, it ishard toseeanything,andfighting thecrowdsaround themuseumand in the cafeteria is unpleasant. Do I realize that it is amistake to go to amuseumwhenitisfree?YoubetIdo—butIgonevertheless.

ZEROMAYALSO affect food purchases. Foodmanufacturers have to convey allkinds of information on the side of the box. They have to tell us about thecalories,fatcontent,fiber,etc.Isitpossiblethatthesameattractionwehavetozeropricecouldalsoapply tozerocalories,zero trans fats,zerocarbs,etc.? Ifthe samegeneral rules apply, Pepsiwill sellmore cans if the label says “zerocalories”thanifitsays“onecalorie.”Supposeyouareatabar,enjoyingaconversationwithsomefriends.Withone

brandyougetacalorie-freebeer,andwithanotheryougetathree-caloriebeer.Whichbrandwillmakeyoufeelthatyouaredrinkingareallylightbeer?Eventhoughthedifferencebetweenthetwobeersisnegligible,thezero-caloriebeerwillincreasethefeelingthatyou’redoingtherightthing,healthwise.Youmightevenfeelsogoodthatyougoaheadandorderaplateoffries.

SO YOU CAN maintain the status quo with a 20-cent fee (as in the case ofAmazon’s shipping in France), or you can start a stampede by offeringsomething FREE! Think how powerful that idea is! Zero is not just anotherdiscount. Zero is a different place. The difference between two cents and onecentissmall.Butthedifferencebetweenonecentandzeroishuge!Ifyouareinbusiness,andunderstandthat,youcandosomemarvelousthings.

Want to draw a crowd? Make something FREE! Want to sell more products?MakepartofthepurchaseFREE!Similarly, we can use FREE! to drive social policy. Want people to drive

electric cars? Don’t just lower the registration and inspection fees—eliminatethem,sothatyouhavecreatedFREE!Inthesameway,ifhealthisyourconcern,focusonearlydetectionasawaytoeliminatetheprogressionofsevereillnesses.Want people to do the right thing—in terms of getting regular colonoscopies,mammograms, cholesterol checks, diabetes checks, and such? Don’t justdecrease the cost (by decreasing the co-pay). Make these critical proceduresFREE!Idon’tthinkmostpolicystrategistsrealizethatFREE!isanaceintheirhand,

let aloneknowhow to play it. It’s certainly counterintuitive, in these times ofbudgetcutbacks, tomakesomethingFREE!Butwhenwestopto thinkabout it,FREE!canhaveagreatdealofpower,anditmakesalotofsense.

ReflectionsonthePriceoffree!We learned from our experiments that we all get a bit too excited whensomethingisfree!andthatconsequently,wecanmakedecisionsthatarenotinourbestinterest.Forexample, imaginethatyouwerechoosingbetweentwocreditcards:one

thatoffersyoua12percentAPRbuthasnoyearlyfee(free!),andonethatoffersyoua lower interest rateof9percentAPRbutchargesyoua$100annualfee.Whichonewouldyou take?Most peoplewouldoveremphasize theyearly feeand inpursuitof the free!offerwouldendupgetting thecard that costs themmuchmore in the long run—when they inevitablymiss a payment or carry abalance.*Although identifyingand fighting theallureof free! is important inorder to

avoidtrapswhilewearemakingdecisions, therearealsosomecases inwhichwecanusefree!toouradvantage.Take,forexample,thecommonexperienceofgoingtoarestaurantwithfriends.Whentheserverdropsoffthecheckattheendof ameal, people often scramble to figureout thenorms for payment.Doweeachpayforwhatweordered?Dowesplitthebillevenly,evenifJohnhadthatextraglassofwineandthecrèmebrûlée?free!canhelpussolvethisproblem,andintheprocesshelpusgetmorejoyfromdiningoutwithourfriends.Theanswer,asit turnsout, is thatonepersonshouldpaytheentirebill,and

that thepeople involvedshould take turnspayingover time.Here is the logic:Whenwepay—regardlessoftheamountofmoney—wefeelsomepsychologicalpain,whichsocialscientistscallthe“painofpaying.”Thisistheunpleasantnessassociatedwithgivingupourhard-earnedcash,regardlessofthecircumstances.Itturnsoutthatthepainofpayinghastwointerestingfeatures.First,andmostobviously,whenwepaynothing(forexample,whensomeoneelsefootsthebill)wedon’tfeelanypainofpaying.Second,andlessobviously,thepainofpayingisrelativelyinsensitivetotheamountthatwepay.Thismeansthatwefeelmorepainofpayingasthebillincreases,buteveryadditionaldollaronthebillpainsus less. (We call this “diminishing sensitivity.” Analogously, if you add onepound toanemptybackpack, it feels likeasubstantial increase inweight.Butaddingapoundtoabackpackthat’salreadyladenwithalaptopandsomebooksdoesnot feel like abigdifference.)Thisdiminishing sensitivity to thepainofpaying means that the first dollar we pay will cause us the highest pain, theseconddollarwillcauseusless,andsoon,untilwefeeljustatinytwingefor,say,theforty-seventhdollar.Soifwearediningwithothers,wearehappiestwhenwepaynothing(free!);

wearelesshappywhenwehavetopaysomething;andtheadditionaldollarswe

forkovercauseusasmallerandsmalleradditionalamountofpainasthesizeofthebillincreases.Thelogicalconclusionisthatonepersonshouldpaythewholebill.Ifyou’restillunconvinced,considerthefollowingexample:Imaginethatfour

people shareamealand thebill comes to$100.Now, if everyoneat the tablepays$25,everypersonwould feel somepainofpaying. Inorder tomake thisless abstract, let’s assign “units” as ameasure of this pain.We’ll assume thatpaying$25translatesinto10unitsofpainforatotalof40unitsofpainforthewholetablewhenitcomestimetosplitthebill.Butwhatifonepersonpaystheentirebill?Sincethepainofpayingdoesnotincreaselinearlywiththeamountofpayment,thepersonwhoispayingwillfeel10unitsofpainforthefirst$25thatheorshepays;maybe7unitsforthenext$25;5unitsforthenext$25;and4unitsforthelast$25.Thetotalof26unitsofpainlowerstheamountofpainfortheentiretableby14units.Thegeneralpointisthis:wealllovegettingourmeals fornothing,andas longaswecanalternatepayers,wecanenjoymanyfree! dinners and derive greater overall benefit from our friendships in theprocess.“Aha,”youmight say, “butwhat about timeswhen I eatonlyagreen salad

while my friend’s husband orders a green salad, a filet mignon dinner, twoglasses of the most expensive cabernet sauvignon, and a crème brûlée fordessert?Orwhen the number of people changes the next timewe gather?Orwhen some people in the group leave town altogether? All of this leavesmeholdingthebag.”Certainly,thereisnoquestionthatalltheseconsiderationsmakethe“I’llbuy

thistime,youbuynexttime”approachlesseconomicallyefficient.Nevertheless,giventhehugebenefitsintermsofthepainofpayingthatthismethoddelivers,Ipersonallywouldbewillingtosacrificeafewbuckshereandtheretoreducethepainofpayingformyfriendsandmyself.

Appendix:Chapter3Letmeexplainhowthe logicofstandardeconomic theorywouldapply tooursetting.Whenapersoncanselectoneandonlyoneoftwochocolates,heneedstoconsidernottheabsolutevalueofeachchocolatebutitsrelativevalue—whathe gets and what he gives up. As a first step the rational consumer needs tocomputetherelativenetbenefitsofthetwochocolates(thevalueoftheexpectedtasteminus the cost), andmake a decision based onwhich chocolate has thelargernetbenefit.HowwouldthislookwhenthecostoftheLindttrufflewas15centsand thecostof theHershey’sKisswasonecent?The rationalconsumerwouldestimatetheamountofpleasureheexpectstogetfromthetruffleandthe

Kiss(let’ssaythisis50pleasureunitsandfivepleasureunits,respectively)andsubtract thedispleasurehewouldget frompaying15centsandonecent (let’ssay this is 15 displeasure units and one displeasure unit, respectively). Thiswouldgivehimatotalexpectedpleasureof35pleasureunits(50-15)for thetruffle,andatotalexpectedpleasureoffourpleasureunits(5-1)fortheKiss.The truffle leads by 31 points, so it’s an easy choice—the truffle wins handsdown.Whatabout thecasewhen thecost is reducedby the sameamount forboth

products?(Trufflescost14centsand theKiss is free.)Thesamelogicapplies.The taste of the chocolates has not changed, so the rational consumer wouldestimate the pleasure to be 50 and five pleasure units, respectively.What haschanged is the displeasure. In this setting the rational consumerwould have alower level of displeasure for both chocolates because the prices have beenreducedbyonecent(andonedispleasureunit).Hereisthemainpoint:becauseboth products were discounted by the same amount, their relative differencewouldbeunchanged.The totalexpectedpleasurefor the trufflewouldnowbe36pleasureunits (50 -14),and the totalexpectedpleasure for theKisswouldnowbefivepleasureunits(5-0).Thetruffleleadsbythesame31points,soitshouldbethesameeasychoice.Thetrufflewinshandsdown.Thisishowthepatternofchoiceshouldlook,iftheonlyforcesatplaywere

those of a rational cost-benefit analysis. The fact that the results from ourexperimentsaresodifferenttellsusloudandclearthatsomethingelseisgoingon,andthatthepriceofzeroplaysauniqueroleinourdecisions.

Chapter4TheCostofSocialNorms

WhyWeAreHappytoDoThings,butNotWhenWeArePaidtoDoThem

You are at your mother-in-law’s house for Thanksgiving dinner, and what asumptuous spread shehasputon the table foryou!The turkey is roasted to agoldenbrown; thestuffing ishomemadeandexactly thewayyou like it.Yourkids are delighted: the sweet potatoes are crowned with marshmallows. Andyourwife is flattered:her favorite recipe forpumpkinpiehasbeenchosen fordessert.Thefestivitiescontinueintothelateafternoon.Youloosenyourbeltandsipa

glassofwine.Gazingfondlyacrossthetableatyourmother-in-law,yourisetoyourfeetandpulloutyourwallet.“Mom,forall theloveyou’veput intothis,how much do I owe you?” you say sincerely. As silence descends on thegathering,youwaveahandfulofbills.“Doyouthinkthreehundreddollarswilldoit?No,wait,Ishouldgiveyoufourhundred!”This is not a picture thatNormanRockwellwouldhavepainted.Aglass of

wine falls over; your mother-in-law stands up red-faced; your sister-in-lawshoots you an angry look; and your niece bursts into tears. Next year’sThanksgiving celebration, it seems, may be a frozen dinner in front of thetelevisionset.

WHAT’SGOINGONhere?Whydoesanofferfordirectpaymentputsuchadamperontheparty?AsMargaretClark,JudsonMills,andAlanFiskesuggestedalongtimeago,theansweristhatwelivesimultaneouslyintwodifferentworlds—onewheresocialnormsprevail,and theotherwheremarketnormsmake therules.

Thesocialnormsincludethefriendlyrequeststhatpeoplemakeofoneanother.Couldyouhelpmemovethiscouch?Couldyouhelpmechangethistire?Socialnormsarewrappedupinoursocialnatureandourneedforcommunity.Theyareusuallywarmandfuzzy.Instantpaybacksarenotrequired:youmayhelpmoveyour neighbor’s couch, but this doesn’t mean he has to come right over andmoveyours.It’slikeopeningadoorforsomeone:itprovidespleasureforbothofyou,andreciprocityisnotimmediatelyrequired.The second world, the one governed by market norms, is very different.

There’s nothing warm and fuzzy about it. The exchanges are sharp-edged:wages,prices, rents, interest,andcosts-and-benefits.Suchmarket relationshipsare not necessarily evil or mean—in fact, they also include self-reliance,inventiveness, and individualism—but they do imply comparable benefits andpromptpayments.Whenyouareinthedomainofmarketnorms,yougetwhatyoupayfor—that’sjustthewayitis.Whenwe keep social norms andmarket norms on their separate paths, life

humsalongprettywell.Takesex,forinstance.Wemayhaveitfreeinthesocialcontext,whereitis,wehope,warmandemotionallynourishing.Butthere’salsomarket sex, sex that is on demand and that costs money. This seems prettystraightforward.Wedon’thavehusbands(orwives)cominghomeaskingfora$50trick;nordowehaveprostituteshopingforeverlastinglove.Whensocialandmarketnormscollide,troublesetsin.Takesexagain.Aguy

takesagirloutfordinnerandamovie,andhepaysthebills.Theygooutagain,andhepaysthebillsoncemore.Theygooutathirdtime,andhe’sstillspringingfor the meal and the entertainment. At this point, he’s hoping for at least apassionatekissatthefrontdoor.Hiswalletisgettingperilouslythin,butworseiswhat’sgoingon inhishead:he’shaving troublereconciling thesocialnorm(courtship)withthemarketnorm(moneyforsex).Onthefourthdatehecasuallymentions howmuch this romance is costing him. Now he’s crossed the line.Violation!Shecallshimabeastandstormsoff.Heshouldhaveknownthatonecan’tmix social andmarketnorms—especially in this case—without implyingthattheladyisatramp.HeshouldalsohaverememberedtheimmortalwordsofWoodyAllen:“Themostexpensivesexisfreesex.”

AFEWYEARSago,JamesHeyman(aprofessorattheUniversityofSt.Thomas)andIdecidedtoexploretheeffectsofsocialandmarketnorms.SimulatingtheThanksgivingincidentwouldhavebeenwonderful,butconsideringthedamagewe might have done to our participants’ family relationships, we chosesomethingmoremundane.Infact,itwasoneofthemostboringtaskswecouldfind(thereisatraditioninsocialscienceofusingveryboringtasks).

Inthisexperiment,acirclewaspresentedontheleftsideofacomputerscreenandaboxwaspresentedontheright.Thetaskwastodragthecircle,usingthecomputermouse,onto the square.Once thecirclewas successfullydragged tothe square, it disappeared from the screen and a new circle appeared at thestartingpoint.Weaskedtheparticipants todragasmanycirclesas theycould,andwemeasuredhowmanycirclestheydraggedwithinfiveminutes.Thiswasourmeasureoftheirlaboroutput—theeffortthattheywouldputintothistask.Howcouldthissetupshedlightonsocialandmarketexchanges?Someofthe

participantsreceivedfivedollarsforparticipatingintheshortexperiment.Theyweregiventhemoneyastheywalkedintothelab;andtheyweretoldthatattheendofthefiveminutes,thecomputerwouldalertthemthatthetaskwasdone,atwhichpointtheyweretoleavethelab.Becausewepaidthemfortheirefforts,weexpectedthemtoapplymarketnormstothissituationandactaccordingly.Participantsinasecondgroupwerepresentedwiththesamebasicinstructions

andtask;butforthemtherewardwasmuchlower(50centsinoneexperimentand10cents in theother).Againweexpected theparticipants toapplymarketnormstothissituationandactaccordingly.Finally,we had a third group, towhomwe introduced the tasks as a social

request.Wedidn’toffertheparticipantsinthisgroupanythingconcreteinreturnfortheireffort;nordidwementionmoney.Itwasmerelyafavorthatweaskedof them.We expected these participants to apply social norms to the situationandactaccordingly.How hard did the different groups work? In line with the ethos of market

norms,thosewhoreceivedfivedollarsdraggedonaverage159circles,andthosewho received 50 cents dragged on average 101 circles. As expected, moremoneycausedourparticipantstobemoremotivatedandworkharder(byabout50percent).What about the conditionwith nomoney?Did these participantswork less

thantheoneswhogotthelowmonetarypayment—or,intheabsenceofmoney,didtheyapplysocialnormstothesituationandworkharder?Theresultsshowedthatonaveragetheydragged168circles,muchmorethanthosewhowerepaid50cents,andjustslightlymorethanthosewhowerepaidfivedollars.Inotherwords,ourparticipantsworkedharderunderthenonmonetarysocialnormsthanforthealmightybuck(OK,50cents).Perhapswe shouldhave anticipated this.There aremanyexamples to show

that people will work more for a cause than for cash. A few years ago, forinstance, the AARP asked some lawyers if they would offer less expensiveservices toneedyretirees,atsomething like$30anhour.The lawyerssaidno.ThentheprogrammanagerfromAARPhadabrilliantidea:heaskedthelawyers

iftheywouldofferfreeservicestoneedyretirees.Overwhelmingly,thelawyerssaidyes.Whatwasgoingonhere?Howcouldzerodollarsbemoreattractivethan$30?

Whenmoneywasmentioned,thelawyersusedmarketnormsandfoundtheofferlacking, relative to their market salary.When no money was mentioned theyusedsocialnormsandwerewillingtovolunteertheirtime.Whydidn’ttheyjustacceptthe$30,thinkingofthemselvesasvolunteerswhoreceived$30?Becauseoncemarketnormsenterourconsiderations,thesocialnormsdepart.AsimilarlessonwaslearnedbyNachumSicherman,aneconomicsprofessor

at Columbia, who was taking martial arts lessons in Japan. The sensei (themasterteacher)wasnotchargingthegroupforthetraining.Thestudents,feelingthatthiswasunfair,approachedthemasteronedayandsuggestedthattheypayhimforhistimeandeffort.Settingdownhisbambooshinai, themastercalmlyrepliedthatifhechargedthem,theywouldnotbeabletoaffordhim.

IN THE PREVIOUS experiment, then, those who got paid 50 cents didn’t say tothemselves,“Goodforme;Igettodothisfavorfortheseresearchers,andIamgetting somemoneyoutof this,” andcontinue toworkharder than thosewhowerepaidnothing.Insteadtheyswitchedthemselvesovertothemarketnorms,decided that 50 centswasn’tmuch, andworked halfheartedly. In otherwords,whenthemarketnormsenteredthelab,thesocialnormswerepushedout.Butwhatwouldhappenifwereplacedthepaymentswithagift?Surelyyour

mother-in-lawwould accept a good bottle of wine at dinner. Or how about ahousewarming present (such as an eco-friendly plant) for a friend? Are giftsmethods of exchange that keep us within the social exchange norms?Wouldparticipantsreceivingsuchgiftsswitchoutofthesocialnormsandintomarketnorms,orwouldofferinggiftsasrewardsmaintaintheparticipantsinthesocialworld?Tofindoutjustwheregiftsfallonthelinebetweensocialandmarketnorms,

James and I decided on a new experiment. This time, we didn’t offer ourparticipants money for dragging circles across a computer screen; we offeredthemgifts instead.We replaced the50-cent rewardwithaSnickersbar (worthabout50cents), and the five-dollar incentivewithaboxofGodivachocolates(worthaboutfivedollars).The participants came to the lab, got their reward,worked asmuch as they

liked, and left. Then we looked at the results. As it turned out, all threeexperimental groupsworked about equally hard during the task, regardless ofwhethertheygotasmallSnickersbar(theseparticipantsdraggedonaverage162circles), the Godiva chocolates (these participants dragged on average 169

circles),ornothingatall(theseparticipantsdraggedonaverage168circles).Theconclusion:nooneisoffendedbyasmallgift,becauseevensmallgiftskeepusinthesocialexchangeworldandawayfrommarketnorms.

BUTWHATWOULDHAPPEN ifwemixed the signals for the two typesofnorms?Whatwould happen ifwe blended themarket normwith the social norm? Inotherwords, ifwesaidthatwewouldgivethema“50-centSnickersbar”ora“five-dollarboxofGodivachocolates,”whatwouldtheparticipantsdo?Woulda“50-centSnickersbar”makeourparticipantsworkashardasa“Snickersbar”made themwork; or would it make themwork halfheartedly, as the 50-centsmade them work? Or would it be somewhere in the middle? The nextexperimenttestedtheseideas.Asitturnedout,theparticipantswerenotmotivatedtoworkatallwhenthey

gotthe50-centSnickersbar,andinfacttheefforttheyinvestedwasthesameaswhentheygotapaymentof50cents.Theyreactedtotheexplicitlypricedgiftinexactlythewaytheyreactedtocash,andthegiftnolongerinvokedsocialnorms—bythementionofitscost,thegifthadpassedintotherealmofmarketnorms.By theway,we replicated thesetup laterwhenweaskedpassersbywhether

they would help us unload a sofa from a truck. We found the same results.People arewilling towork free, and theyarewilling towork for a reasonablewage;butoffer them just a small payment and theywillwalk away.Gifts arealsoeffectiveforsofas,andofferingpeopleagift,evenasmallone,issufficienttogetthemtohelp;butmentionwhatthegiftcostyou,andyouwillseethebackofthemfasterthanyoucansaymarketnorms.

THESERESULTSSHOWthatformarketnormstoemerge,itissufficienttomentionmoney(evenwhennomoneychangeshands).But,ofcourse,marketnormsarenot justabouteffort—theyrelate toabroadrangeofbehaviors, includingself-reliance,helping,andindividualism.Wouldsimplygettingpeopletothinkaboutmoneyinfluencethemtobehavedifferentlyintheserespects?Thispremisewasexplored inasetof fantasticexperimentsbyKathleenVohs(aprofessorat theUniversity of Minnesota), Nicole Mead (a graduate student at Florida StateUniversity),andMirandaGoode(agraduatestudentattheUniversityofBritishColumbia).They asked the participants in their experiments to complete a “scrambled-

sentence task,” that is, to rearrange sets of words to form sentences. For theparticipantsinonegroup,thetaskwasbasedonneutralsentences(forexample,“It’s cold outside”); for the other group, the task was based on sentences orphrasesrelatedtomoney(forexample,“High-payingsalary”*).Wouldthinking

aboutmoneyinthismannerbesufficienttochangethewayparticipantsbehave?Inoneoftheexperiments,theparticipantsfinishedtheunscramblingtaskand

werethengivenadifficultpuzzle,inwhichtheyhadtoarrange12disksintoasquare.Astheexperimenterlefttheroom,hetoldthemthattheycouldcometohim if theyneeded anyhelp.Whodoyou think asked for help sooner—thosewho had worked on the “salary” sentences, with their implicit suggestion ofmoney;orthosewhohadworkedonthe“neutral”sentences,abouttheweatherandothersuchtopics?Asitturnedout,thestudentswhohadfirstworkedonthe“salary”taskstruggledwiththepuzzleforaboutfiveandahalfminutesbeforeaskingforhelp,whereasthosewhohadfirstworkedontheneutraltaskaskedforhelp after about three minutes. Thinking about money, then, made theparticipants in the “salary” groupmore self-reliant and lesswilling to ask forhelp.But these participants were also less willing to help others. In fact, after

thinking about money these participants were less willing to help anexperimenter enter data, less likely to assist another participant who seemedconfused,andlesslikelytohelpa“stranger”(anexperimenterindisguise)who“accidentally”spilledaboxofpencils.Overall, the participants in the “salary” group showed many of the

characteristics of the market: they were more selfish and self-reliant; theywanted to spend more time alone; they were more likely to select tasks thatrequired individual input rather than teamwork; andwhen theywere decidingwhere theywanted to sit, they chose seats farther away fromwhomever theyweretoldtoworkwith.Indeed,justthinkingaboutmoneymakesusbehaveasmosteconomistsbelievewebehave—andlesslikethesocialanimalsweareinourdailylives.Thisleadsmetoafinalthought:whenyou’reinarestaurantwithadate,for

heaven’s sake don’t mention the price of the selections. Yes, they’re printedclearlyonthemenu.Yes,thismightbeanopportunitytoimpressyourdatewiththecaliberof the restaurant.But ifyou rub it in,you’llbe likely to shiftyourrelationship from the social to the market norm. Yes, your date may fail torecognizehowmuchthismealissettingyouback.Yes,yourmother-in-lawmayassumethatthebottleofwineyou’vepresentedisa$10blend,whenit’sa$60special reservemerlot.That’s the price youhave to pay, though, to keepyourrelationshipsinthesocialdomainandawayfrommarketnorms.

SOWELIVE intwoworlds:onecharacterizedbysocialexchangesandtheothercharacterizedbymarketexchanges.Andweapplydifferentnormstothesetwokinds of relationships. Moreover, introducing market norms into social

exchanges, as we have seen, violates the social norms and hurts therelationships.Oncethistypeofmistakehasbeencommitted,recoveringasocialrelationship is difficult. Once you’ve offered to pay for the delightfulThanksgivingdinner,yourmother-in-lawwillremembertheincidentforyearstocome.Andifyou’veeverofferedapotentialromanticpartnerthechancetocuttothechase,splitthecostofthecourtingprocess,andsimplygotobed,theoddsarethatyouwillhavewreckedtheromanceforever.My good friendsUriGneezy (a professor at theUniversity ofCalifornia at

San Diego) and Aldo Rustichini (a professor at the University ofMinnesota)provided a very clever test of the long-termeffects of a switch from social tomarketnorms.Afewyearsago,theystudiedadaycarecenterinIsraeltodeterminewhether

imposingafineonparentswhoarrivedlatetopickuptheirchildrenwasausefuldeterrent.UriandAldoconcluded that thefinedidn’tworkwell,and infact ithad long-term negative effects. Why? Before the fine was introduced, theteachers andparentshad a social contract,with social normsaboutbeing late.Thus,ifparentswerelate—astheyoccasionallywere—theyfeltguiltyaboutit—andtheirguiltcompelledthemtobemorepromptinpickinguptheirkidsinthefuture.(InIsrael,guiltseemstobeaneffectivewaytogetcompliance.)Butonce the finewas imposed, the day care center had inadvertently replaced thesocial norms with market norms. Now that the parents were paying for theirtardiness,theyinterpretedthesituationintermsofmarketnorms.Inotherwords,sincetheywerebeingfined,theycoulddecideforthemselveswhethertobelateornot,andtheyfrequentlychosetobelate.Needlesstosay, thiswasnotwhatthedaycarecenterintended.

BUTTHEREALstoryonlystartedhere.Themost interestingpartoccurredafewweekslater,whenthedaycarecenterremovedthefine.Nowthecenterwasbacktothesocialnorm.Wouldtheparentsalsoreturntothesocialnorm?Wouldtheirguiltreturnaswell?Notatall.Oncethefinewasremoved,thebehavioroftheparentsdidn’tchange.Theycontinuedtopickuptheirkidslate.Infact,whenthefinewas removed, therewas a slight increase in the number of tardy pickups(afterall,boththesocialnormsandthefinehadbeenremoved).This experiment illustrates an unfortunate fact:when a social norm collides

withamarketnorm,thesocialnormgoesawayforalongtime.Inotherwords,socialrelationshipsarenoteasytoreestablish.Oncethebloomisofftherose—onceasocialnormistrumpedbyamarketnorm—itwillrarelyreturn.

THEFACTTHATweliveinboththesocialworldandthemarketworldhasmany

implicationsforourpersonal lives.Fromtimetotime,weallneedsomeonetohelpusmovesomething,ortowatchourkidsforafewhours,ortotakeinourmailwhenwe’reoutof town.What’s thebestwaytomotivateourfriendsandneighborstohelpus?Wouldcashdoit—agift,perhaps?Howmuch?Ornothingat all? This social dance, as I’m sure you know, isn’t easy to figure out—especially when there’s a risk of pushing a relationship into the realm of amarketexchange.Here are some answers. Asking a friend to help move a large piece of

furnitureorafewboxesisfine.Butaskingafriendtohelpmovealotofboxesorfurnitureisnot—especiallyifthefriendisworkingsidebysidewithmoverswhoaregettingpaidforthesametask.Inthiscase,yourfriendmightbegintofeelthathe’sbeingused.Similarly,askingyourneighbor(whohappenstobealawyer)tobringinyourmailwhileyou’reonvacationisfine.Butaskinghimtospendthesameamountoftimepreparingarentalcontractforyou—free—isnot.

THEDELICATEBALANCEbetweensocialandmarketnorms isalsoevident in thebusiness world. In the last few decades companies have tried to marketthemselvesassocialcompanions—that is, they’d likeus to think that theyandweare family,orat leastare friendswho liveon thesamecul-de-sac.“Likeagood neighbor, State Farm is there” is one familiar slogan. Another is HomeDepot’sgentleurging:“Youcandoit.Wecanhelp.”Whoeverstartedthemovementtotreatcustomerssociallyhadagreatidea.If

customers and a company are family, then the company gets several benefits.Loyalty is paramount. Minor infractions—screwing up your bill and evenimposing a modest hike in your insurance rates—are accommodated.Relationshipsofcoursehaveupsanddowns,butoverall they’reaprettygoodthing.But here’swhat I find strange: although companies have poured billions of

dollarsintomarketingandadvertisingtocreatesocialrelationships—oratleastanimpressionofsocialrelationships—theydon’tseemtounderstandthenatureofasocialrelationship,andinparticularitsrisks.For example, what happens when a customer’s check bounces? If the

relationshipisbasedonmarketnorms,thebankchargesafee,andthecustomershakes it off.Business is business.While the fee is annoying, it’s nonethelessacceptable. In a social relationship, however, a hefty late fee—rather than afriendly call from the manager or an automatic fee waiver—is not only arelationship-killer;it’sastabintheback.Consumerswilltakepersonaloffense.They’llleavethebankangryandspendhourscomplainingtotheirfriendsaboutthisawfulbank.Afterall, thiswasa relationship framedasasocialexchange.

Nomatterhowmanycookies,slogans,andtokensoffriendshipabankprovides,one violation of the social exchange means that the consumer is back to themarketexchange.Itcanhappenthatquickly.What’stheupshot?Ifyou’reacompany,myadviceistorememberthatyou

can’thaveitbothways.Youcan’ttreatyourcustomerslikefamilyonemomentandthentreatthemimpersonally—or,evenworse,asanuisanceoracompetitor—amomentlaterwhenthisbecomesmoreconvenientorprofitable.Thisisnothow social relationshipswork. If youwant a social relationship, go for it, butrememberthatyouhavetomaintainitunderallcircumstances.Ontheotherhand,ifyouthinkyoumayhavetoplaytoughfromtimetotime

—chargingextraforadditionalservicesorrappingknucklesswiftlytokeeptheconsumers in line—youmight not want to waste money in the first place onmakingyourcompanythefuzzyfeel-goodchoice.Inthatcase,sticktoasimplevalue proposition: state what you give and what you expect in return. Sinceyou’renotsettingupanysocialnormsorexpectations,youalsocan’tviolateany—afterall,it’sjustbusiness.

COMPANIES HAVE ALSO tried to establish social norms with their employees. Itwasn’t always thisway.Years ago, theworkforceofAmericawasmoreof anindustrial,market-drivenexchange.Backthenitwasoftenanine-to-five,time-clockkindofmentality.Youputinyour40hoursandyougotyourpaycheckonFriday.Sinceworkerswerepaidbythehour,theyknewexactlywhentheywereworkingfor theman,andwhen theyweren’t.Thefactorywhistleblew(or thecorporate equivalent took place), and the transactionwas finished.Thiswas aclearmarketexchange,anditworkedadequatelyforbothsides.Todaycompaniesseeanadvantageincreatingasocialexchange.Afterall,in

today’s market we’re the makers of intangibles. Creativity counts more thanindustrial machines. The partition between work and leisure has likewiseblurred.Thepeoplewhorun theworkplacewantus to thinkaboutworkwhilewe’re drivinghomeandwhilewe’re in the shower.They’vegivenus laptops,cell phones, and BlackBerries to bridge the gap between the workplace andhome.Furtherblurring thenine-to-fiveworkday is the trend inmanycompanies to

move away from hourly rates tomonthly pay. In this 24/7work environmentsocialnormshaveagreatadvantage: they tend tomakeemployeespassionate,hardworking,flexible,andconcerned.Inamarketwhereemployees’ loyalty totheiremployersisoftenwilting,socialnormsareoneofthebestwaystomakeworkersloyal,aswellasmotivated.Open-source software shows the potential of social norms. In the case of

Linuxandothercollaborativeprojects,youcanpostaproblemaboutabugononeofthebulletinboardsandseehowfastsomeone,oroftenmanypeople,willreacttoyourrequestandfixthesoftware—usingtheirownleisuretime.Couldyoupayforthislevelofservice?Mostlikely.Butifyouhadtohirepeopleofthesame caliber they would cost you an arm and a leg. Rather, people in thesecommunitiesarehappytogivetheirtimetosocietyatlarge(forwhichtheygetthesamesocialbenefitsweallgetfromhelpingafriendpaintaroom).Whatcanwe learn from this that is applicable to the business world? There are socialrewardsthatstronglymotivatebehavior—andoneoftheleastusedincorporatelifeistheencouragementofsocialrewardsandreputation.

INTREATINGTHEIREMPLOYEES—muchasintreatingtheircustomers—companiesmustunderstandtheir implied long-termcommitment. Ifemployeespromise toworkhardertoachieveanimportantdeadline(evencancelingfamilyobligationsfor it), if theyareasked togetonanairplaneatamoment’snotice toattendameeting,thentheymustgetsomethingsimilarinreturn—somethinglikesupportwhen they are sick, or a chance to hold on to their jobs when the marketthreatenstotaketheirjobsaway.Althoughsomecompanieshavebeensuccessfulincreatingsocialnormswith

their workers, the current obsession with short-term profits, outsourcing, anddraconiancostcutting threatens toundermine itall. Inasocialexchange,afterall,peoplebelievethatifsomethinggoesawrytheotherpartywillbethereforthem, toprotectandhelp them.Thesebeliefsarenotspelledout inacontract,buttheyaregeneralobligationstoprovidecareandhelpintimesofneed.Again,companiescannothave itbothways. Inparticular, I amworried that

the recent cuts we see in employees’ benefits—child care, pensions, flextime,exercise rooms, the cafeteria, family picnics, etc.—are likely to come at theexpense of the social exchange and thus affect workers’ productivity. I amparticularly worried that cuts and changes in medical benefits are likely totransform much of the employer-employee social relationship to a marketrelationship.Ifcompanieswanttobenefitfromtheadvantagesofsocialnorms,theyneed

todoabetterjobofcultivatingthosenorms.Medicalbenefits,andinparticularcomprehensive medical coverage, are among the best ways a company canexpress its side of the social exchange.Butwhat aremany companies doing?Theyaredemandinghighdeductibles in their insuranceplans,andat thesametime are reducing the scope of benefits. Simply put, they are undermining thesocial contract between the company and the employees and replacing itwithmarket norms. As companies tilt the board, and employees slide from social

normstotherealmofmarketnorms,canweblamethemforjumpingshipwhenabetterofferappears?It’sreallynosurprisethat“corporateloyalty,”intermsoftheloyaltyofemployeestotheircompanies,hasbecomeanoxymoron.Organizationscanalsothinkconsciouslyabouthowpeoplereacttosocialand

marketnorms.Shouldyougiveanemployeeagiftworth$1,000orpayhimorher an extra $1,000 in cash?Which is better? If you ask the employees, themajority will most likely prefer cash over the gift. But the gift has its value,though this is sometimes ill understood—it can provide a boost to the socialrelationshipbetween theemployerand theemployee,andbydoingsoprovidelong-term benefits to everyone. Think of it this way: who do you suppose islikely to work harder, show more loyalty, and truly love his work more—someonewho is getting $1,000 in cash or someonewho is getting a personalgift?Ofcourse,agiftisasymbolicgesture.Andtobesure,nooneisgoingtowork

forgiftsratherthanasalary.Forthatmatter,nooneisgoingtoworkfornothing.ButifyoulookatcompanieslikeGoogle,whichoffersawidevarietyofbenefitsforemployees(includingfreegourmetlunches),youcanseehowmuchgoodwillis created by emphasizing the social side of the company-worker relationship.It’sremarkablehowmuchworkcompanies(particularlystart-ups)cangetoutofpeople when social norms (such as the excitement of building somethingtogether)arestrongerthanmarketnorms(suchassalariessteppingupwitheachpromotion).If corporations started thinking in termsof socialnorms, theywould realize

that these norms build loyalty and—more important—make people want toextend themselves to the degree that corporations need today: to be flexible,concerned,andwillingtopitchin.That’swhatasocialrelationshipdelivers.

THISQUESTIONOF social norms in theworkplace is onewe shouldbe thinkingaboutfrequently.America’sproductivitydependsincreasinglyonthetalentandeffortsofitsworkers.Coulditbethatwearedrivingbusinessfromtherealmofsocialnormsintomarketnorms?Areworkersthinkingintermsofmoney,ratherthan the social values of loyalty and trust? What will that do to Americanproductivityinthelongrun,intermsofcreativityandcommitment?Andwhatof the “social contract”betweengovernment and the citizen? Is that at risk aswell?At some levelweallknow theanswers.Weunderstand, for instance, that a

salary alone will not motivate people to risk their lives. Police officers,firefighters,soldiers—theydon’tdiefortheirweeklypay.It’sthesocialnorms—prideintheirprofessionandasenseofduty—thatwillmotivatethemtogiveup

their lives and health. A friend of mine in Miami once accompanied a U.S.customs agent on a patrol of the offshorewaters.The agent carried an assaultrifleandcouldcertainlyhavepoundedseveralholesintoafleeingdrugboat.Buthadheeverdoneso?Noway,hereplied.Hewasn’tabouttogethimselfkilledfor the government salary he received. In fact, he confided, his group had anunspoken agreementwith the drug couriers: the fedswouldn’t fire if the drugdealersdidn’tfire.Perhapsthat’swhywerarely(ifever)hearaboutgunbattlesontheedgesofAmerica’s“warondrugs.”Howcouldwechangethissituation?First,wecouldmakethefederalsalary

sogoodthatthecustomsagentwouldbewillingtoriskhislifeforit.Buthowmuchmoneyisthat?Compensationequaltowhatthetypicaldrugtraffickergetsfor racingaboat fromtheBahamas toMiami?Alternatively,wecouldelevatethesocialnorm,makingtheofficerfeelthathismissionisworthmorethanhisbasepay—thatwehonorhim(aswehonorourpoliceandfirefighters)forajobwhichnotonlystabilizesthestructureofsocietybutalsosavesourkidsfromallkindsofdangers.Thatwouldtakesomeinspirationalleadership,ofcourse,butitcouldbedone.Letmedescribehow that same thought applies to theworldof education. I

recently joined a federal committee on incentives and accountability in publiceducation. This is one aspect of social andmarket norms that Iwould like toexplore in the years to come. Our task is to reexamine the “No Child LeftBehind” policy, and to help find ways to motivate students, teachers,administrators,andparents.Myfeelingsofaristhatstandardizedtestingandperformance-basedsalaries

are likely to push education from social norms to market norms. The UnitedStatesalready spendsmoremoneyper student thananyotherWestern society.Woulditbewisetoaddmoremoney?Thesameconsiderationappliestotesting:wearealready testingveryfrequently,andmore testing isunlikely to improvethequalityofeducation.Isuspectthatoneanswerliesintherealmofsocialnorms.Aswelearnedin

ourexperiments,cashwilltakeyouonlysofar—socialnormsaretheforcesthatcanmakeadifference in the long run. Insteadof focusing the attentionof theteachers,parents,andkidsontestscores,salaries,andcompetition,itmightbebettertoinstillinallofusasenseofpurpose,mission,andprideineducation.Todothiswecertainlycan’ttakethepathofmarketnorms.TheBeatlesproclaimedsometimeagothatyou“Can’tBuyMeLove”andthisalsoappliestotheloveoflearning—youcan’tbuyit;andifyoutry,youmightchaseitaway.So how can we improve the educational system?We should probably first

rethink school curricula, and link them inmore obvious ways to social goals

(eliminationofpovertyandcrime,elevationofhumanrights,etc.),technologicalgoals (boosting energy conservation, space exploration, nanotechnology, etc.),andmedicalgoals(curesforcancer,diabetes,obesity,etc.)thatwecareaboutasasociety.Thiswaythestudents,teachers,andparentsmightseethelargerpointin educationandbecomemoreenthusiastic andmotivatedabout it.We shouldalso work hard on making education a goal in itself, and stop confusing thenumberofhoursstudentsspendinschoolwiththequalityoftheeducationtheyget.Kidscangetexcitedaboutmanythings(baseball,forexample),anditisourchallenge as a society to make them want to know as much about Nobellaureates as they now know about baseball players. I am not suggesting thatignitingasocialpassionforeducationissimple;butifwesucceedindoingso,thevaluecouldbeimmense.

MONEY,ASITturnsout,isveryoftenthemostexpensivewaytomotivatepeople.Socialnormsarenotonlycheaper,butoftenmoreeffectiveaswell.Sowhat good ismoney? In ancient times,moneymade trading easier: you

didn’thavetoslingagooseoveryourbackwhenyouwenttomarket,ordecidewhatsectionofthegoosewasequivalenttoaheadoflettuce.Inmoderntimesmoneyhasevenmorebenefits,asitallowsustospecialize,borrow,andsave.Butmoneyhasalsotakenonalifeofitsown.Aswehaveseen,itcanremove

the best in human interactions. So dowe needmoney?Of coursewe do.Butcould there be some aspects of our life that would be, in some ways, betterwithoutit?That’saradical idea,andnotaneasyoneto imagine.ButafewyearsagoI

had a taste of it. At that time, I got a phone call from John Perry Barlow, aformerlyricistfortheGratefulDead,invitingmetoaneventthatprovedtobebothan importantpersonalexperienceandan interestingexercise increatingamoneylesssociety.BarlowtoldmethatIhadtocometoBurningManwithhim,andthatifIdid,IwouldfeelasifIhadcomehome.BurningManisanannualweeklongeventofself-expressionandself-relianceheldinBlackRockDesert,Nevada,regularlyattendedbymorethan40,000people.BurningManstartedin1986onBakerBeachinSanFrancisco,whenasmallcrowddesigned,built,andeventuallysetfiretoaneight-footwoodenstatueofamanandasmallerwoodendog.Sincethenthesizeofthemanbeingburnedandthenumberofpeoplewhoattend the festivities has grown considerably, and the event is now one of thelargestartfestivals,andanongoingexperimentintemporarycommunity.BurningMan has many extraordinary aspects, but for me one of the most

remarkable is its rejectionofmarketnorms.Money isnotacceptedatBurningMan. Rather, the whole place works as a gift exchange economy—you give

thingstootherpeople,withtheunderstandingthattheywillgivesomethingbacktoyou(or tosomeoneelse)atsomepoint in thefuture.Thus,peoplewhocancookmightfixameal.Psychologistsofferfreecounselingsessions.Masseusesmassagethoselyingontablesbeforethem.Thosewhohavewateroffershowers.Peoplegiveawaydrinks,homemadejewelry,andhugs.(ImadesomepuzzlesatthehobbyshopatMIT,andgavethemtopeople.Mostly,peopleenjoyedtryingtosolvethem.)Atfirstthiswasallverystrange,butbeforelongIfoundmyselfadoptingthe

normsofBurningMan. Iwassurprised, in fact, to find thatBurningManwasthemostaccepting,social,andcaringplaceIhadeverbeen.I’mnotsureIcouldeasilysurviveinBurningManforall52weeksoftheyear.Butthisexperiencehas convinced me that life with fewer market norms and more social normswouldbemoresatisfying,creative,fulfilling,andfun.The answer, I believe, is not to re-create society as Burning Man, but to

rememberthatsocialnormscanplayafargreaterroleinsocietythanwehavebeengivingthemcreditfor.Ifwecontemplatehowmarketnormshavegraduallytaken over our lives in the past few decades—with their emphasis on highersalaries,more income,andmore spending—wemay recognize that a return tosomeoftheoldsocialnormsmightnotbesobadafterall.Infact,itmightbringquiteabitoftheoldcivilitybacktoourlives.

ReflectionsonSocialNorms:LessonsonGiftsWhenwemix social andmonetary norms, strange and undesirable things canhappen. For example, if you walk your date home after a wonderful eveningtogether,don’tmentionhowmuchtheeveningsetyouback.Thatisnotagoodstrategyforgettingapassionategood-nightkiss.(Icertainlydonotrecommendthisasanexperiment,butifyoudotryit,letmeknowhowitturnsout.)Dating,of course, is just one arena inwhichwe canmess up a social relationship byintroducingfinancialnorms,andthisdangerlurksaroundmanycorners.On some level we all know this, and therefore we sometimes deliberately

makedecisionsthatdonotfallintolinewithrationaleconomictheory.Thinkofgifts, for example.Froma standard economicperspective, they are awasteofmoney.Imaginethatyouinvitemetoyourhomefordinneroneevening,andIdecidetospend$50onanicebottleofBordeauxasatokenofgratitude.Therearesomeproblemswiththisdecision:YoumightnotlikeBordeaux.Youmighthave preferred something else: a copy of Predictably Irrational, a DVD ofCitizenKane,orablender.Thismeansthatthebottleofwinethatcostme$50

mightbeworth,atmost,$25toyouintermsofitsutility.Thatis,for$25youcouldgetsomethingelsethatwouldmakeyoujustashappyasmy$50bottleofwine.Now, ifgivinggiftswasa rationalactivity, Iwouldcometodinnerandsay,

“Thankyouforinvitingmefordinner.Iwasgoingtospend$50onabottleofBordeaux,butIrealizethatthismightprovideyouwithfarlesshappinessthan$50incash.”Ipeelofffive$10bills,handthemtoyou,andadd,“Hereyougo.Youcandecidehowbesttospendit.”OrmaybeIwouldgiveyou$40incashand make us both better off—not to mention saving myself the trouble ofshoppingforwine.Although we all realize that offering cash instead of gifts is more

economicallyefficient,Idon’texpectthatmanypeoplewillfollowthisrationaladvice,becauseweallknowthatdoingsowillinnowayendearustoourhosts.Ifyouwanttodemonstrateaffection,orstrengthenyourrelationship,thengivingagift—evenat therisk that itwon’tbeappreciatedasmuchasyouhoped—istheonlywaytogo.So imagine two scenarios. Let’s say it’s the holidays, and two different

neighbors invite you to their parties in the same week. You accept bothinvitations.Inonecase,youdotheirrationalthingandgiveNeighborXabottleof Bordeaux; for the second party you adopt the rational approach and giveNeighbor Z $50 in cash. The followingweek, you need some helpmoving asofa.Howcomfortablewouldyoubeapproachingeachofyourneighbors,andhowdoyouthinkeachwouldreacttoyourrequestforafavor?TheoddsarethatNeighborXwillstepintohelp.AndNeighborZ?Sinceyouhavealreadypaidhim once (to make and share dinner with you), his logical response to yourrequestforhelpmightbe,“Fine.Howmuchwillyoupaymethistime?”Again,theprospectofactingrationally,financiallyspeaking,soundsdeeplyirrationalintermsofsocialnorms.Thepoint is thatwhilegiftsarefinancially inefficient, theyareanimportant

social lubricant. They help usmake friends and create long-term relationshipsthatcansustainusthroughtheupsanddownsoflife.Sometimes,itturnsout,awasteofmoneycanbeworthalot.

ReflectionsonSocialNorms:BenefitsintheWorkplaceThesamegeneralprinciplesregardingsocialnormsalsoapplytotheworkplace.Ingeneral,peopleworkforapaycheck,but thereareother, intangiblebenefits

wegetfromourjobs.Thesearealsoveryrealandveryimportant,yetmuchlessunderstood.Often,when I’m on a flight and the people sharing the rowwithme don’t

immediatelyputtheirheadphoneson,Ienterintoaninterestingdiscussionwithoneof them. Invariably, I learna lot aboutmyneighbor’swork,workhistory,andfutureprojects.Ontheotherhand,Idiscoververylittleabout theperson’sfamily, favorite music, movies, or hobbies. Unless my neighbor gives me abusinesscard,Ialmostneverlearnhisorhernameuntilthemomentwearebothabouttoleavetheplane.Thereareprobablymanyreasonsforthis,butIsuspectthatoneofthemisthatmostpeopletakealotofprideintheirwork.Ofcoursethismaynotbetrueofeveryone,butIthinkthatformanypeopletheworkplaceisnotjustasourceofmoneybutalsoasourceofmotivationandself-definition.Suchfeelingsbenefitboth theworkplaceand theemployee.Employerswho

canfoster thesefeelingsgaindedicated,motivatedemployeeswho thinkaboutsolving job-related problems even after the workday is over. And employeeswhotakepride in theirworkfeelasenseofhappinessandpurpose.But in thesamewaythatmarketnormsmayunderminesocialnorms,itmaybethatmarketnorms also erode the pride and meaning people get from the workplace (forexample,whenwepayschoolteachersaccordingtotheirstudents’performanceonstandardizedtests).Imaginethatyouworkforme,andthatIwanttogiveyouayear-endbonus.I

offer you a choice: $1,000 in cash or an all-expenses-paid weekend in theBahamas,whichwouldcostme$1,000.Whichoptionwouldyouchoose?Ifyouarelikemostpeoplewhohaveansweredthisquestion,youwouldtakethecash.Afterall,youmayhavealreadybeentotheBahamasandmaynothaveenjoyedbeing there verymuch, ormaybeyou’dprefer to spend aweekend at a resortclosertohomeandusetheremainderofthebonusmoneytobuyanewiPod.Ineither case, you think that you can best decide for yourself how to spend themoney.Thisarrangementseemstobefinanciallyefficient,butwoulditincreaseyour

happinesswithyourwork,oryourloyaltytothecompany?Woulditmakemeabetterboss?Woulditimprovetheemployer-employeerelationshipinanyway?Isuspect thatbothyourandmybest interestswouldbebetterservedifIsimplydidn’tofferyouachoiceand justsentyouon theBahamasvacation.Considerhowmuchmorerelaxedandrefreshedyouwouldfeel,andhowwellyouwouldperform, after a relaxing weekend of sun and sand, compared with how youwould feelandbehaveafteryougot the$1,000bonus.Whichwouldhelpyoufeelmorecommittedtoyourjob,moreenjoymentinyourwork,morededicationtoyour boss?Whichgiftwouldmakeyoumore likely to stay longhours one

nighttomeetanimportantdeadline?Onallofthese,thevacationbeatsthecashhandsdown.This principle doesn’t apply only to gifts.Many employers, in an effort to

showtheiremployeeshowwelltheyaretreatingthem,adddifferentlineitemstotheir paycheck stubs, describing exactly how much money the employer isspending on health care, retirement plans, the gym atwork, and the cafeteria.These items are all legitimate, and they reflect real costs to the employer, butovertly stating the prices of these items changes the workplace from a socialenvironment inwhich theemployerandemployeehaveadeepcommitment toeachothertoatransactionalrelationship.Explicitlystatingthefinancialvalueofthese benefits can also diminish enjoyment, motivation, and loyalty to theworkplace—negatively affecting both the employer-employee relationship andourownprideandhappinessatwork.Giftsandemployeebenefitsseem,atfirstglance,tobeanoddandinefficient

way of allocating resources. But with the understanding that they fulfill animportant role in creating long-term relationships, reciprocity, and positivefeelings,companiesshouldtrytokeepbenefitsandgiftsinthesocialrealm.

ReflectionsonMarketNormsandRomanceOne of the great philosophers of our time, Jerry Seinfeld, unintentionallydemonstrated that social andmarket norms—much like an acid and a base inchemistry—clashifwetrytomixthem.InoneepisodeofSeinfeld,Jerryhiresamaid. This is not all that unusual in itself, except that in this case, the maidhappenstobeveryattractiveandnaturally(forNewYorkCity)sheiswaitingtobe “discovered.” Elaine predicts the inevitable, that Jerrywill eventually startdating the maid. Later, after celebrating being right about her prediction, shecommentssarcasticallyonwhataprudentundertaking it is todateone’smaid.HereElainesagelypointsouttheinherentdifficultiesinunitingthemarketnorm(maid)andsocialnorm(girlfriend).Jerry,expectingasmuch,givesahaphazarddefense,arguingthathewouldnevertriplightlyintosuchafraughtsituationandclaiming that their personal and work relationships are completely separate.When the next inevitable evolution of their “relationship” occurs—that is, themaid/girlfriendstopscleaningentirely (but takes themoneyanyway)—Krameris horrified and calls Jerry a john, picking up on the fact that it’s not exactlynormal to pay one’s significant other for services rendered.Both relationships(girlfriend and maid) end when Jerry claims that they’re through and, in thesamebreath,thatshe’sfired.WhathappenedisthatJerrymixedtwocompeting

norms—social and market—before realizing that they cannot comfortablycoexist.Romantic relationships, in both fiction and real life, can provide useful

insightsintoalotofareasinbehavioraleconomics.Butaswe’vealreadyseen,theyareparticularlyusefulinhelpingusthinkaboutthestrangecombinationsofsocialandmarketnorms.Onewonderfullysadexampleofapersonwhodidnotunderstand this complexity is a woman in NewYork who, in 2007, posted apersonaladonCraigslist.Inherad,shesaidthatshewasseekingahusbandwhoearned more than $500,000 a year. She described herself as “spectacularlybeautiful,” “articulate,” and “superficial.” She also said thatwhile she had noproblemsdatingbusinessmenwhomade$250,000,shewasunabletobreakthe$250,000barrierandfindsomeoneabovethis incomelevel.Shehopedtodatesomeonewhocouldgetherwhatshereallywanted:aniceapartmentonCentralParkWest.Let’s assume, for the sake of argument, that this woman really was

spectacularly beautiful, articulate, and wonderful in every way. What wouldhappen if she walked into a bar filled with stockbrokers, found her guy, andexplicitly statedher goal as she did in the ad, andhe acceptedher offer?Thetermsof therelationshipwouldcertainlybeestablished,puttingthemfirmlyinthemarketnorm,ratherthanthesocialnorm,domain.Now, say that this “happy” couple eventually gets married. What would

happenthefirsttimeshedidn’twanttohavesexwithherstockbrokerhusbandorrefusedtospendtheholidayswithhismother?Myguessisthatthegive-and-takethatissocommonandacceptableinregularromanticrelationships(andinevery social exchange)wouldnot be part of this relationship . . . and that theexplicitexchangeofbeautyformoneywouldensurethattherelationshipwouldbreakdown.Idon’tactuallyknowwhatbecameofthiswoman,buttheresponsestoherad

makeme suspect that this approach to finding ahusbanddidnot have agoodending.Because shebluntly introducedmarketnorms into the relationship shewaslookingfor,manyrespondentscomparedheroffertoabusinesstransaction.In fact,oneanonymous respondent tookhermarketnormsframing to thenextlevel. He assured the woman that he met her criteria but explained that theproposalwasa“crappybusinessdeal”becausehisassets(money)werelikelytoappreciateovertime,whileherassets(looks)wouldcertainlydepreciateassheaged.He also added, correctly, that in this situation, the economically rationalthingtodowouldbetoleaseratherthanbuy.

Chapter5ThePowerofaFreeCookie

HowfreeCanMakeUsLessSelfish

Sometimeago,Idecidedtogowatchfirsthandoneofthemostinfamousactsofraw,unabashed,supply-and-demandcapitalisminaction.Iamtalking,ofcourse,aboutFilene’sBasement’s“RunningoftheBrides”—aneventthathasbeenheldannually since 1947 and is the department store’s answer to the famous“RunningoftheBulls”inPamplona,Spain.Insteadofwatchingthousand-poundbulls trampling and goring foolhardy humans, I observed about a thousandblushingbrides-to-be(andtheirminions)tramplingoneanotherinamassgrabfordiscount-priceddesignerweddingdresses.Accordingtothestore’sWebsite,5gowns originally priced at thousands of dollars are on this day offered for apittance,from$249to$699.Earlyonthemorningofthesale,thebrides,eachwithasmallarmyofmoms

andfriends,lineupoutsidethestore(someevencampoutthenightbefore).Theminutethedoorsopen,theyturnintoafrantic,screaming,pushingmob,runningto the racks to tear off as many dresses as they can carry. (One piece ofparticularly useful advice for brides: put all your friends in brightly coloreduniformsor sillyheadgear soyoucan identify them in themeleeas theygrabarmfulsofdresses.) It takes just aminuteor so for the racks tobe stripped tobaremetal.Assoonastheyhavetheirpilesofdresses,thewomenstripofftheirclothesandbegintryingthemon.Dressesthatdon’tfitaretossedaside,andthepoor,bedraggledstoreassistantstrytopickthemoffthefloorandre-rackthem.AlthoughI’dheardhorrorstoriesofinjuriesandscuffles,Ipersonallydidn’t

seealotofviolence.ButIdidwitnessrampantselfishness,tosaynothingoftheairturningbluefromtheterriblelanguage.(Isuspectthatiftheirfiancéswereto

witness this event, it might have led to a serious rethinking of marriageproposals.)NOW, TRADITIONAL ECONOMICS takes a very simple and straightforwardviewofthe scene at Filene’s Basement when prices on wedding gowns are sodramatically reduced. When a Vera Wang gown is reduced from $10,000 to$249, the excitement (“demand,” in economic-speak) over the gowndramatically increases. More precisely, demand increases for two reasons.Accordingtothefirstlawofdemand,itincreasesbecausemorewomenarenowinthemarketfordesignergowns(theycannowaffordthem).Andaccordingtothesecondlawofdemand,itincreasesbecauseatthesepriceswomenmightbuymultiple units. This second law is less relevant for wedding gowns, wherewomenpresumablyneed justone,butcentral incaseswhereweneedmultipleunits (cookies, sweaters, etc.). Still, even in the case of wedding dresses,multiplewomen have been sighted leaving Filene’sBasementwithmore thanonegown.Thesetwolawsarethenutsandboltsofthestandardeconomicruleof demand. (Admittedly, the Filene’s event isn’t just any occurrence of“increaseddemand.”It’smorelikeanall-outbridalbattlefield.)THESE TWO ECONOMIC laws of demand seem perfectly reasonable, but as welearnedinChapter4,“TheCostofSocialNorms,”marketrulesarejustsomeofthe forces that operateonus.As social animals,we alsohave social forces tocontend with—and when economic and social forces mix, the outcome issometimes different from what we would expect. When we explored theinteractionsbetweensocialandmarketnorms,webasicallyfoundthatwhenweaddmoneytoasituationthatoperatesonsocialnorms,motivationcandecreaserather than increase. For example, if I asked you to helpme changemy tire,you’llprobablythinktoyourself:“Okay,Dan’saniceenoughguymostof thetime,soIwillbehappytohelphimout.”ButifIaskedyou:“Wouldyouhelpme change the tire of my car—how about [checking my wallet] $3 for yourhelp?”Nowyou’ll think:“Man,noway,whata jerk!Doeshe really thinkmytimeisworththatlittle?”WhatthismeansisthatwhenIaskyouforafavorandadd$3 to themix,youdon’t think toyourself:“Howwonderful! Iget tohelpDanandIgettoearn$3.”Instead,youchangeyourperspectiveonthesituation,look at it aswork, and conclude that it is notworthyour time (of course, if Iofferedyou$175,youwouldmostlikelytakeonthisjob).Thebasiclesson,then,isthatwhenweofferpeopleafinancialpaymentina

situation that is governed by social norms, the added payment could actuallyreducetheirmotivationtoengageandhelpout.But what if the situation was reversed and we asked people to pay us for

something?Would theeffectofsocialnormswork in thesameway?Thiswas

thequestionthatUriGneezy(aprofessorattheUniversityofCaliforniaatSanDiego),ErnanHaruvy(aprofessorat theUniversityofTexasatDallas),and Iwantedtoexplore:theeffectofmixingsocialandmarketnormsondemand.Tothinkmoreconcretelyaboutthiseffect,imaginethatoneofyourcoworkers

—let’scallherSusan—alsohappenstobearathertalentedbaker.Oneweekend,in a fit of boredom, Susan bakes a hundred chewy chocolate-chip-oatmealcookiesusinghergrandmother’sfamousrecipe,anditjustsohappensthatthereareaboutahundredpeopleintheoffice.Sinceyourdeskisadjacenttohers,Susancomesto your office first and places before you the box with all those delicious-smelling confections.Howmanywould you take, and howwould you decidethis?Chancesareyouwouldquicklyconsider,amongotherthings,yourlevelofhunger, yourwaistline, and your love of chocolate-chip-oatmeal cookies. Youmightalsothinkabouthowyourcoworkerswouldfeelifthecookiesranout,andiftheylearnedthatyoutookalotofthem.Withallthisinmind,includingtheimportanceofsocialnorms,youdecidetotakeoneortwo.Now,consider avariationof this situation.This time,Susancomesbyyour

deskaskingyouifyouwanttobuycookiesforanickelapiece.Nowhowmanywouldyoutake,andwhatwoulddictateyourdecision?Mostlikely,youwouldagain take into account your level of hunger, yourwaistline, andyour loveofchocolate-chip-oatmealcookies.Butunlikethepreviouscase,thistimeyouwillhavenocompunctionaboutbuyingabunchtoeatandtakehome(knowinghowmuchyourkidswouldlovethem),andyouwouldnoteventhinkaboutthefactthat by getting somany of Susan’s cookies you are depriving your coworkersfromthatsamejoy.Why would your decision change so much once Susan asks for a nickel

apiece?Because,verysimply,byaskingformoney,shehas introducedmarketnorms into the equation, and these have chased away the social norms thatgovernedthecaseof thefreecookies.Moreinteresting, it’sclear inbothcasesthatifyoutakemultiplecookies,therewillbefewerfortheotherpeopleinyouroffice.ButifSusanoffershercookiesforfree,Iamwillingtobetthatyouwillthinkaboutsocialjustice,theconsequencesofappearinggreedy,andthewelfareof your coworkers. Once money is introduced into the exchange, you stopthinking about what’s socially right and wrong, and you simply want tomaximizeyourcookieintake.Inthesameway,ifyougotoFilene’sBasementanddiscoverafantasticdeal

onwedding gowns, you don’t naturally think about all the otherwomenwhowouldalsoliketoscoreasimilardealontheirVeraWangs—andthereforeyou

grab as many dresses as you can. In economic exchanges, we are perfectlyselfishandunfair.Andwethinkthatfollowingourwallets is theright thingtodo.URI, ERNAN, AND I decided to find outwhatwould actually happen in the twoSusancookiescenarios.Tothatend,wesetuponeofourmakeshiftcandystandsat the MIT student center and watched for the outcome of two experimentalscenarios:Scenario 1: Pretend you’re a college student hurrying through the student

centeronyourway toa lateafternoonclass.Youseeaboothupaheadwithasign that reads “Starburst Fruit Chews for 1¢ each.” Let’s say that, thinkingquickly, you recall that youhaven’t eaten lunch, that the last timeyouboughtStarburstwasinthemovietheater,and,hey,they’reonlyonecenteach.SoyougooverandbuytenStarbursts.Lunchisserved!Scenario2: The setting is the same, but this time the sign reads “Starburst

FruitChewsforfree.”Youreminisceoverthememoryofpoppingthesecandiesinyourmouthwhenyouwent to themoviesasakid,happily recalling that itwas one of the few times your parents allowed you to eat lots of sugar.Nowwhatwould you do?HowmanyStarburstswould you take?According to thetwo laws of demand, with this new, irresistibly reduced price of zero, morepeoplewillgofortheStarburst,andthosewhodowilltakemoreofthecolorfulsquarecandy.Wesetupourcandyboothintheafternoonhourswhenthestreamofstudents

wasmoreor lesssteady,andfromtimetotime,weswitchedtheconditionsbyalternatingthefreeandthe1¢signs(thepennypricerepresentedwhatwecalledthe“monetarycondition”).WecountedthenumberofstudentswhostoppedbyourboothandhowmanyStarburststheyeitherboughtorpickedup.Wefoundthatduringanaveragehourinthemonetarycondition,about58studentsstoppedby and purchased candy, while in an average hour in the free condition, 207studentsstoppedbytotakecandy.Altogether,nearlythreetimesthenumberofstudents stopped at the boothwhenStarburstswere free. Just as the theory ofdemand predicts, the decrease in price resulted in a greaternumber of peopleconsumingtheproduct.Sofarsogoodforthefirstlawofdemand.Now,giventhesecondlawofdemand,you’dassumethatoncethepricedrops

from1¢ to zero, eachof the studentswho took candywould takemore units.And since the number of studentswho stopped bywas almost three times aslarge,youmightexpectthattogetherthesetwoforcesofdemandwillmakethetotaldemandinourfreeconditionmuchlargerthanthedemandinthemonetarycondition.SohowmanymoreStarburstsdidourstudentspickup

whentheywerefree?Trickquestion:TheypickedupfewerStarbursts!When the Starbursts cost a cent apiece, the average number of candies per

customerwas3.5,butwhenthepricewentdowntozero,theaveragewentdownto1.1percustomer.Thestudentslimitedthemselvestoalargedegreewhenthecandywasfree.Infact,almostallthestudentsappliedaverysimplesocial-normrule in this situation—they politely took one and only one Starburst. This, ofcourse, is the opposite of the second law of demand.And how did these twoforcesofdemandworktogether?Intotal,theincreaseduetothegreaternumberofpeoplethatstoppedbyandthedecreaseduetothereductioninthenumberofcandies that each person took resulted in students collectively taking fewerStarburstsasthepricedecreasedfrom1¢tofree.Whattheseresultsmeanisthatwhenpriceisnotapartoftheexchange,we

become less selfish maximizers and start caring more about the welfare ofothers.Wesaw thisdemonstratedby the fact thatwhen thepricedecreased tozero, customers restrained themselves and took far fewer units. So while theproduct (candy, in our case)wasmore attractive tomore people, it alsomadepeoplethinkmoreaboutothers,careaboutthem,andsacrificetheirowndesiresforthebenefitofothers.Asitturnsout,wearecaringsocialanimals,butwhentherulesofthegameinvolvemoney,thistendencyismuted.THERESULTSFROMourexperimentalsohelpexplainoneofthegreatmysteriesinlife:why,whenwe are dining outwith friends, taking the last olive feels likesuchabigdeal.Imagine you go to a friend’s birthday party. The appetizers are luscious:

there’salovelyspreadofcheeseandfruit;dishesofgherkins,kalamataolives,andtapenades;andlotsoftinylittlecrostini.Youwalkaroundtheroomtalkingto old friends, and the wine is flowing. At some point, you wander into thekitchen and notice the delicious-looking four-decker Red Velvet cake (yourpersonalfavorite).Asyouchitchatwiththeotherguests,youcan’tstopthinkingabout thatmouthwatering cake.All you reallywant to do is abscondwith theentire thing, eat as much as you can in the laundry room without anyoneknowing,andblamethedogifanyoneasks.Butwhatdoyoudo?Youbalanceyour owndesirewith the desires of your friends, and you end upwith only amedium-sizedslice.Recently, I was in an analogous situation with two of my colleagues and

friends,JiwoongShinandNinaMazar.Ifyou’veeverbeentoasushirestaurantwith friends, you know that as the California rolls and sashimi pieces on theplate in the middle of the table start to dwindle, the people sitting around itgraduallybecomeshyeraboutpoppingthemintotheirmouths.Attheendofourmeal,therewasonelonelyspicytunaleft,andnoneofusseemedtobewilling

toputitoutofitsmisery.Whenthewaitresscametobringusthecheckandtakeawaytheplatewiththelonesushi,Iaskedherhowoftenpeopleleaveasinglepieceattheendofthemeal.“Oh,”shesaid,“Ifindoneextrapieceleftalmosteverytime.Ithinkitisevenmorecommonthanpeoplefinishingalltheirsushi.”NowIhaveeatenalotofsushiinmylife,andIcan’trememberatimeeither

whenIwasdiningaloneorwhenIgotmyownpersonalportionofsushiwhenIleft anythingon theplate.Somehow,when it’s justmewho’s eating, I alwaysmanagetofinishitall.Butwhenthesushiisservedinalargeplateinthemiddleofthetable,itjustfeelsliketakingthelastonewouldbe,well,abitdéclassé.“Ireallycan’teatanymore,”Imightsaytomyfriends.“Goahead.Youtakeit.”Whatisthissushimagic?Simplyput,thecommunalplatetransformsthefood

intoasharedresource,andoncesomethingispartofthesocialgood,itleadsusintotherealmofsocialnorms,andwiththattherulesforsharingwithothers.BACKTOOURexperiments,thenextquestionwewantedtoexaminewaswhetherthepatternofdemandthatweobservedintheexperimentswasreallyduetothechange fromsomepayment tonopayment.Orwould it alsohappenwhenwediscountpricesof candies to anything above zero?According to the theoryofsocialnorms,thisoddbehaviorofdemandshouldmanifestitselfonlywhenthepricedropstozero—becauseonlywhenpriceisnotapartofanexchangedowestartthinkingaboutsocialconsequencesofouractions.Uri,Ernan,andIdecidedtotakeacloserlookatthishypothesisinournextexperiment.Thisexperimentworkedmuchlikethepreviousone,exceptwereturnedtothe

trusty and super-delicious Lindt chocolate truffles (which were by now anexperimental staple forus).Weoffered the chocolates topassing students at abroader range of prices.We’d already seenwhat economists call a “backwardsloping demand curve”when the pricewas reduced from1¢ to free (meaningdemandwentdowninsteadofupwhenthepricedecreased).Whatwouldhappentodemandwhenwedecreasedthepricefrom10¢to5¢?From5¢to1¢?Or,asinthefirstexperiment,whenwedecreasedthepricefrom1¢tofree?Whenwedroppedthechocolatepricesfrom10¢to5¢,thepredictionsofboth

laws of demandwere verified, and in total we saw an increase in demand ofabout240percent.Similarly,whenthepricewentfrom5¢to1¢,thepredictionsofbothlawsofdemandwereverified,andintotalwesawanincreaseindemandofabout400percent.But,aswesawinourfirstexperimentwhenwereducedthe price from 1¢ to free, the first law of demandwas verified (more peoplestopped for chocolate) but the second law of demand was disconfirmed (thepeoplewho tookchocolate took lessnotmore),and in total,withmorepeopletakingless,wesawadecreaseindemandofabout50percent.What theseresultsmeanis that the theoryofdemandisasolidone—except

whenwe’redealingwiththepriceofzero.Wheneverthepriceisnotpartoftheexchange, social norms become entangled. These social norms get people toconsider thewelfareofothersand, therefore, limit consumption toa level thatdoesnotplacetoomuchofaburdenontheavailableresource.Inessence,whenprices are zero and social normsare apart of the equation, people lookat theworld as a communal good. The important lesson from all of this? Notmentioningpricesushersinsocialnorms,andwiththosesocialnorms,westartcaringmoreaboutothers.ANOTHER IMPORTANTLESSON fromChapter4wasabout theability toobfuscateexchanges innonfinancial termsand,bydoingso,avoidsquashing(“crowdingout,” ineconomic terms) thebenefitsofsocialnorms.(Givingyourmother-in-lawagiftisagoodidea,butpayingherforawonderfulThanksgivingdinnerisnot recommended, even if both gestures would cost you the same amount ofmoney.)Ifobfuscationcanprovideanimportantwedgethatkeepsushummingalong

thesocialnormtrack,andifgiftsareonemechanismforobfuscating,whataboutothersuchmechanisms?Whatabouteffort?Overtheyears,Ihavebeenabetatesterformanysoftwareproducts,andinretrospect,itisamazingtorealizehowmuchtimeandeffortandhowmanycomputercrashesIhaveenduredfromthisactivity. Could it be that because these software companies askedme for mytime and effortwithout offeringmoney, Iwas eager and happy to help them,evenatsubstantialcosttomyself?Now, effort is clearly not the same as a gift, but could it be that it is also

different from money? Perhaps there’s a range with strict financial exchangenorms at one extreme, pure social norms at the other, and effort somewherealong this spectrum? What, we wondered, might happen in a nonmonetaryexchange involving only effort? Would effort undermine social norms in thesameway that financial transactions do?Does an exchange of effort keep thesocial norms intact, similar to the effect of not mentioning money at all? Ormightitfallsomewhereinthemiddleofthisspectrum?To explore this notion, we set up a new experiment. This time, we had a

researchassistantroamaroundtheMITMediaLaboratorywithatraythatwasalwaysstackedwithfiftyLindttruffles.Inthe“free”condition,shesimplyaskedpeople, “Would you like some chocolates?” (Note the plural, which indicatesthatitwouldbeacceptabletotakemorethanone.)Inthe“monetary”condition,sheasked,“Wouldyoulikesomechocolates?Thecostisonecenteach.”Finally,in the “effort” condition, she handed people a stack of pages with randomarrangementsofprintedletters.Foreverypairofs’s theyfound,shesaid, theycouldhaveaLindttruffle(buttheydidnothavetotakeone).Theycouldwork

as long as they wanted, putting in asmuch or as little effort as they wished.(Therewerewelloverfiftypairsofs’samongallthesheetsofletters,anditwasveryeasytospotthem.)Theapparentlyvoraciouspeopleinthemonetaryconditiontookanaverageof

30 truffleseach.Those in the freecondition tookapolite averageof1.5.Andhow do you think effort-as-payment for truffles went over? This group fellsomewhereinthemiddle,butclosertothefreecondition:ourparticipantstookanaverageof8.6truffleseachinexchangeforfindingpairsofs’s(oranaverageofabout21fewerthanthoseinthemonetarycondition).Theseresultssuggestthateffortfallssomewhereinthemiddleoftherange.It

doesnotproducethesamelevelofsocialself-consciousnessthatfreedoes,butparticipantsdidseemtoconsidertheimplicationsoftheiractionsonotherswhentheydecidedhowmanytrufflestotake.Wefoundthatwheneffortispartoftheequation, it manages to keep a large part of the social norms, though by nomeansallofit.Asitturnsout,theoldmaxim“Timeismoney”—or,inourcase,“Effortismoney”—isnotexactlycorrect.Perhapsamoreaccuratereframingofourfindingswouldbethateffortissomewhereonthespectrumbetweenmarketandsocialnorms.Themainlessonhereisthatbecauseexchangesinvolvingeffortcanmaintain

socialnormstoalargerdegreerelativetofinancialexchanges,wemightwanttothink about how to get people to switch frompaying for services to investingmoreoftheirownefforts.Aswegoaboutourdailylives,weareoftenaskedtoinvesteffortinrecycling,spendingtimeonaneighborhoodwatch,helpinginourkids’schools,volunteeringinasoupkitchen,andmuchmore.Ineachof thesecases,onecouldarguethattakingpartintheseactivitiesmakeslittleeconomicsense.Whynotpaysomeonetorecycleforus,watchourneighborhood,helpinour kids’ schools, or hand out food in the soup kitchen? Sure, it might beeconomicallyinefficient,butinvestingeffortratherthancashmighthelpkeepusinthedomainofsocialnormsandconsequentlytakeintoaccountthewelfareofothers.FORTHEMOSTpartinthischapter,I’vediscussedinstanceswherepriceschangefromsomethingtonothing.Ofcourse,somethingsthataregenerallyfreeorareconsideredacommonresourcecanberelocatedintotherealmofmarketforces.Forinstance,carbonemissionstradingisanareawhereweoughttoconsidertheintersectionbetweensocialandmarketnorms.*“CapandTrade”isaprogramofeconomicincentivesdesignedtoencourageindustriesandcompaniestopolluteless; the less they pollute, the fewer pollution allowances they have to buy.Moreover,ifcompaniesdon’tusealltheirallowances,theycanprofitfromtheircleanlinessbysellingtheirextraallowancestocompaniesthatpollutemore.It’s

virtuethatpays!However,inlightoftheexperimentsdescribedinthischapter(aswellasthose

in Chapter 4), wemight want to consider the dark side of putting a price onpollution. If a company can be charged for spewing poisons into theenvironment, itmightwell decide, after a cost-benefit analysis, that it can goaheadandpollutealotmore.Oncepollutionisamarketandcompaniespayfortheir right to pollute,morality and concern for the environment are nonissues.Ontheotherhand,ifpollutionissomethingthatcannotbepurchasedortraded,itwouldmorenaturallyfallintothedomainofsocialnorms.Tobesure,ifwewanttoplacepollutionunderthecontrolofsocialnorms,we

can’t stand back and hope that people will start caring. We need to makepollution into an easilymeasurable and observable quantity and get people topay attention to it and understand its importance. We could, for example,publically post the pollutant amounts of different countries, states, andcompanies together with their environmental impact. We could include thisinformationon companies’ financial statements to their shareholdersormaybeforce companies to post it on their products, much as we do for nutritionalinformationonpackagedfood.I’mnotsayingthatCapandTradeisnecessarilyabadidea,butIdothinkthat

whenpublicpolicyorenvironmentalissuesareatstake,ourtaskistofigureoutwhich of the two—social or market norms—will produce the most desirableoutcome.Inparticular,policymakersshouldbecarefulnottoaddmarketnormsthatcouldunderminethesocialones.NOWTHATWE’VE learned how social norms get people to care less about theirown selfish goals and paymore attention to thewelfare of others, youmightexpectmetoproposeabrilliantideaforinjectingmoresocialnormsandcivilityintotheFilene’sBasement“RunningoftheBrides.”IwishIhadasolutionforgettingthesewomentobehaveinamoreconsiderateoratleastlessviolentway.Butthehauntingmemoriesofwatchingtheliveeventsuggesttomethatgettingafuturebridetoconcentrateonanabstractidealike“otherpeople”asopposedto the concrete reality of a discounted wedding gown might be nearlyimpossible. (For weeks afterward, I would look into the faces of my femalefriendsandwonderwhetherthey,too,werecapableoftramplingeachotherinanabjectactofretaillust.)And why, you might ask, am I so easily giving up on this social science

challenge?BecauseIsuspectthatforsocialnormstooperate,peoplecannotbeattheirmostemotionallypiquedstate.Whenyou’refocused,mindandbody,onone highly emotional objective—grabbing that wedding dress—it’s hard tofactorinothers’well-being.Aswewillseeinthenextchapter,whenemotions

runhigh,socialnormsinevitablygettrampledlikesomanyVeraWangveils.

Chapter6TheInfluenceofArousal

WhyHotIsMuchHotterThanWeRealize

Ask most twentysomething male college students whether they would everattemptunprotectedsexandtheywillquicklyrecitechapterandverseabouttherisk of dreaded diseases and pregnancy. Ask them in any dispassionatecircumstances—while they are doing homework or listening to a lecture—whether they’denjoybeingspanked,orenjoysex ina threesomewithanotherman, and they’ll wince. Noway, they’d tell you. Furthermore, they’d narrowtheir eyes at you and think,What kindof sicko are you anyhow, asking thesequestionsinthefirstplace?In2001,whileIwasvisitingBerkeleyfortheyear,myfriend,academichero,

and longtime collaborator George Loewenstein and I invited a few brightstudents to help us understand the degree towhich rational, intelligent peoplecan predict how their attitudes will change when they are in an impassionedstate.Inordertomakethisstudyrealistic,weneededtomeasuretheparticipants’responseswhile theywere smack in themidst of such an emotional state.Wecould havemade our participants feel angry or hungry, frustrated or annoyed.Butwepreferredtohavethemexperienceapleasurableemotion.Wechosetostudydecisionmakingundersexualarousal—notbecausewehad

kinkypredilectionsourselves,butbecauseunderstanding the impactofarousalonbehaviormighthelpsocietygrapplewithsomeofitsmostdifficultproblems,such as teen pregnancy and the spread of HIV-AIDS. There are sexualmotivations everywherewe look, andyetweunderstandvery little about howtheseinfluenceourdecisionmaking.Moreover,sincewewantedtounderstandwhetherparticipantswouldbeable

to predict how theywouldbehave in a particular emotional state, the emotionneededtobeonethatwasalreadyquitefamiliartothem.Thatmadeourdecisioneasy. If there’s anything predictable and familiar about twentysomethingmalecollegestudents,it’stheregularitywithwhichtheyexperiencesexualarousal.

ROY,ANAFFABLE,studiousbiologymajoratBerkeley,isinasweat—andnotoverfinals. Propped up in the single bed of his darkened dorm room, he’smasturbatingrapidlywithhisrighthand.Withhisleft,he’susingaone-handedkeyboard tomanipulateaSaran-wrapped laptopcomputer.Ashe idles throughpicturesofbuxomnakedwomenlollingaroundinvariouseroticposes,hisheartpoundsevermoreloudlyinhischest.Ashebecomes increasinglyexcited,Royadjusts the“arousalmeter”on the

computer screenupward.Ashe reaches thebright red“high”zone, aquestionpopsuponthescreen:Couldyouenjoysexwithsomeoneyouhated?Roymoveshislefthandtoascalethatrangesfrom“no”to“yes”andtapshis

answer.Thenextquestionappears:“Wouldyouslipawomanadrugtoincreasethechancethatshewouldhavesexwithyou?”Again, Roy selects his answer, and a new question pops up. “Would you

alwaysuseacondom?”

BERKELEYITSELFISadichotomousplace.Itwasasiteofantiestablishmentriotsinthe1960s,andpeopleintheBayAreasnarkilyrefertothefamouslyleft-of-centercityas the“People’sRepublicofBerkeley.”But the largecampus itselfdrawsasurprisinglyconformistpopulationoftop-levelstudents.Inasurveyofincoming freshmen in 2004, only 51.2 percent of the respondents thought ofthemselves as liberal. More than one-third (36 percent) deemed their viewsmiddle-of-the-road,and12percentclaimedtobeconservatives.Tomysurprise,when I arrived atBerkeley, I found that the studentswere in general not verywild,rebellious,orlikelytotakerisks.The ads we posted around Sproul Plaza read as follows: “Wanted: Male

research participants, heterosexual, 18 years-plus, for a study on decisionmakingandarousal.”Theadnotedthattheexperimentalsessionswoulddemandaboutanhourof theparticipants’ time, that theparticipantswouldbepaid$10persession,and that theexperimentscould involvesexuallyarousingmaterial.ThoseinterestedinapplyingcouldrespondtoMike,theresearchassistant,bye-mail.Forthisstudy,wedecidedtoseekoutonlymen.Intermsofsex,theirwiring

is a lot simpler than that of women (as we concluded after much discussion

amongourselvesandourassistants,bothmaleandfemale).AcopyofPlayboyandadarkenedroomwereaboutallwe’dneedforahighdegreeofsuccess.Anotherconcernwasgetting theprojectapprovedatMIT’sSloanSchoolof

Management (where I had my primary appointment). This was an ordeal initself. Before allowing the research to begin, Dean Richard Schmalenseeassignedacommittee,consistingmostlyofwomen,toexaminetheproject.Thiscommittee had several concerns. What if a participant uncovered repressedmemories of sexual abuse as a result of the research? Suppose a participantfound thatheorshewasasexaddict?Theirquestionsseemedunwarranted tome,sinceanycollegestudentwithacomputerandanInternetconnectioncangetholdofthemostgraphicpornographyimaginable.Althoughthebusinessschoolwasstymiedbythisproject,Iwasfortunateto

haveapositionatMIT’sMediaLabaswell, andWalterBender,whowas thehead of the lab, happily approved the project. I was on my way. But myexperiencewithMIT’sSloanSchoolmadeitclearthatevenhalfacenturyafterKinsey,anddespiteitssubstantialimportance,sexisstilllargelyataboosubjectforastudy—atleastatsomeinstitutions.

INANYCASE,ouradswentout;and,collegemenbeingwhat theyare,wesoonhad a long list of hearty fellows awaiting the chance toparticipate—includingRoy.Roy,infact,wastypicalofmostofthe25participantsinourstudy.Bornand

raisedinSanFrancisco,hewasaccomplished,intelligent,andkind—thetypeofkid every prospectivemother-in-lawdreams of.Roy playedChopin études onthe piano and liked to dance to techno music. He had earned straight A’sthroughouthighschool,wherehewascaptainofthevarsityvolleyballteam.Hesympathized with libertarians and tended to vote Republican. Friendly andamiable,hehadasteadygirlfriendwhohe’dbeendatingforayear.HeplannedtogotomedicalschoolandhadaweaknessforspicyCalifornia-rollsushiandforthesaladsatCafeIntermezzo.Roymetwith our student research assistant,Mike, at Strada coffee shop—

Berkeley’spatio-stylepercolatorformanyanintellectualthought,includingtheidea for the solution toFermat’s last theorem.Mikewas slenderand tall,withshorthair,anartisticair,andanengagingsmile.MikeshookhandswithRoy,and theysatdown.“Thanks foransweringour

ad,Roy,”Mikesaid,pullingoutafewsheetsofpaperandplacingthemonthetable.“First,let’sgoovertheconsentforms.”Mike intoned the ritual decree: The study was about decision making and

sexual arousal. Participation was voluntary. Data would be confidential.

Participants had the right to contact the committee in charge of protecting therightsofthoseparticipatinginexperiments,andsoon.Roynoddedandnodded.Youcouldn’tfindamoreagreeableparticipant.“You can stop the experiment at any time,” Mike concluded. “Everything

understood?”“Yes,”Roysaid.Hegrabbedapenandsigned.Mikeshookhishand.“Great!”Miketookaclothbagoutofhisknapsack.“Here’swhat’sgoingto

happen.”HeunwrappedanAppleiBookcomputerandopeneditup.Inadditiontothestandardkeyboard,Roysawa12-keymulticoloredkeypad.“It’s a specially equipped computer,”Mike explained. “Please use only this

keypadtorespond.”Hetouchedthekeysonthecoloredpad.“We’llgiveyouacodetoenter,andthiscodewillletyoustarttheexperiment.Duringthesession,you’llbeaskedaseriesofquestionstowhichyoucanansweronascalerangingbetween‘no’and‘yes.’Ifyouthinkyouwouldliketheactivitydescribedinthequestion,answer‘yes,’andifyouthinkyouwouldnot,answer‘no.’Rememberthat you’re being asked to predict how you would behave and what kind ofactivitiesyouwouldlikewhenaroused.”Roynodded.“We’llaskyoutosit inyourbed,andset thecomputeruponachaironthe

leftsideofyourbed,inclearsightandreachofyourbed,”Mikewenton.“Placethekeypadnexttoyousothatyoucanuseitwithoutanydifficulty,andbesureyou’realone.”Roy’seyestwinkledalittle.“When you finishwith the session, e-mailme andwewillmeet again, and

you’llgetyourtenbucks.”Mikedidn’t tellRoyabout thequestions themselves.The session startedby

asking Roy to imagine that he was sexually aroused, and to answer all thequestions as he would if he were aroused. One set of questions asked aboutsexualpreferences. Would he, for example, find women’s shoes erotic? Could heimagine being attracted to a 50-year-oldwoman?Could it be fun to have sexwithsomeonewhowasextremelyfat?Couldhavingsexwithsomeonehehatedbeenjoyable?Would itbe fun toget tiedupor to tiesomeoneelseup?Could“justkissing”befrustrating?Asecondsetofquestionsaskedaboutthelikelihoodofengaginginimmoral

behaviors such as date rape. Would Roy tell a woman that he loved her toincrease thechance that shewouldhave sexwithhim?Wouldheencourageadatetodrinktoincreasethechancethatshewouldhavesexwithhim?Wouldhekeeptryingtohavesexafteradatehadsaid“no”?

AthirdsetofquestionsaskedaboutRoy’slikelihoodofengaginginbehaviorsrelated to unsafe sex. Does a condom decrease sexual pleasure? Would healways use a condom if he didn’t know the sexual history of a new sexualpartner?Would he use a condom even if he was afraid that a woman mightchangehermindwhilehewenttogetit?*Afewdayslater,havingansweredthequestionsinhis“cold,”rationalstate,

RoymetagainwithMike.“Thoseweresomeinterestingquestions,”Roynoted.“Yes,Iknow,”Mikesaidcoolly.“Kinseyhadnothingonus.Bytheway,we

have another set of experimental sessions. Would you be interested inparticipatingagain?”Roysmiledalittle,shrugged,andnodded.Mikeshovedafewpagestowardhim.“Thistimewe’reaskingyoutosignthe

sameconsentform,butthenexttaskwillbeslightlydifferent.Thenextsessionwill be verymuch the same as the last one, but this timewewant you to getyourself into an excited state by viewing a set of arousing pictures andmasturbating.Whatwewantyoutodoisarouseyourselftoahighlevel,butnottoejaculate.Incaseyoudo,though,thecomputerwillbeprotected.”MikepulledouttheAppleiBook.Thistimethekeyboardandthescreenwere

coveredwithathinlayerofSaranwrap.Roymadeaface.“Ididn’tknowcomputerscouldgetpregnant.”“Not a chance,”Mike laughed. “This one had its tubes tied.Butwe like to

keepthemclean.”MikeexplainedthatRoywouldbrowsethroughaseriesoferoticpictureson

thecomputertohelphimgettotherightlevelofarousal;thenhewouldanswerthesamequestionsasbefore.

WITHIN THREE MONTHS, some fine Berkeley undergraduate students hadundergone a variety of sessions in different orders. In the set of sessionsconducted when they were in a cold, dispassionate state, they predicted whattheir sexual andmoral decisionswould be if theywere aroused. In the set ofsessionsconductedwhen theywere inahot,arousedstate, theyalsopredictedtheir decisions—but this time, since theywere actually in the grip of passion,theywerepresumablymore awareof their preferences in that state.When thestudy was completed, the conclusions were consistent and clear—overwhelminglyclear,frighteninglyclear.In every case, our bright young participants answered the questions very

differently when they were aroused from when they were in a “cold” state.Across the19questions about sexual preferences,whenRoy and all theother

participantswerearousedtheypredictedthattheirdesiretoengageinavarietyofsomewhatoddsexualactivitieswouldbenearlytwiceashighas(72percenthigher than) theyhadpredictedwhentheywerecold.Forexample, the ideaofenjoyingcontactwithanimalswasmorethantwiceasappealingwhentheywereinastateofarousalaswhentheywereinacoldstate.Inthefivequestionsabouttheir propensity to engage in immoral activities,when theywere aroused theypredictedtheirpropensitytobemorethantwiceashighas(136percenthigherthan)theyhadpredictedinthecoldstate.Similarly,inthesetofquestionsaboutusing condoms, and despite the warnings that had been hammered into themover the years about the importance of condoms, they were 25 percent morelikelyinthearousedstatethaninthecoldstatetopredictthattheywouldforegocondoms.Inallthesecasestheyfailedtopredicttheinfluenceofarousalontheirsexualpreferences,morality,andapproachtosafesex.TheresultsshowedthatwhenRoyandtheotherparticipantswereinacold,

rational,superego-drivenstate,theyrespectedwomen;theywerenotparticularlyattractedtotheoddsexualactivitiesweaskedthemabout;theyalwaystookthemoral high ground; and they expected that theywould always use a condom.They thought that they understood themselves, their preferences, and whatactions they were capable of. But as it turned out, they completelyunderestimatedtheirreactions.Nomatterhowwelookedatthenumbers,itwasclearthatthemagnitudeof

underprediction by the participants was substantial. Across the board, theyrevealed in their unaroused state that they themselvesdidnotknowwhat theywere like once aroused. Prevention, protection, conservatism, and moralitydisappeared completely from the radar screen. They were simply unable topredictthedegreetowhichpassionwouldchangethem.*

IMAGINE WAKING UP one morning, looking in the mirror, and discovering thatsomeoneelse—somethingalienbuthuman—has takenoveryourbody.You’reuglier,shorter,hairier;yourlipsarethinner,yourincisorsarelonger,yournailsarefilthy,yourfaceisflatter.Twocold,reptilianeyesgazebackatyou.Youlongtosmashsomething,rapesomeone.Youarenotyou.Youareamonster.Beset by this nightmarish vision, Robert Louis Stevenson screamed in his

sleep in the early hours of an autumnmorning in 1885. Immediately after hiswifeawokehim,hesettoworkonwhathecalleda“finebogeytale”—Dr.JekyllandMr.Hyde—inwhichhesaid,“Manisnottrulyone,buttrulytwo.”Thebookwasanovernightsuccess,andnowonder.Thestorycaptivatedtheimaginationof Victorians, who were fascinated with the dichotomy between repressivepropriety—represented by the mild-mannered scientist Dr. Jekyll—and

uncontrollablepassion,embodiedinthemurderousMr.Hyde.Dr.Jekyllthoughtheunderstoodhowtocontrolhimself.ButwhenMr.Hydetookover,lookout.The storywas frightening and imaginative, but it wasn’t new. Long before

Sophocles’sOedipusRexandShakespeare’sMacbeth, thewarbetween interiorgood and evil had been the stuff ofmyth, religion, and literature. In Freudianterms,eachofushousesadarkself,anid,abrutethatcanunpredictablywrestcontrol away from the superego.Thus apleasant, friendlyneighbor, seizedbyroad rage, crashes his car into a semi.A teenager grabs a gun and shoots hisfriends.Apriestrapesaboy.Alltheseotherwisegoodpeopleassumethattheyunderstand themselves. But in the heat of passion, suddenly, with the flip ofsomeinteriorswitch,everythingchanges.OurexperimentatBerkeleyrevealednotjusttheoldstorythatwearealllike

Jekyll andHyde, but also somethingnew—that everyoneof us, regardless ofhow“good”weare,underpredictstheeffectofpassiononourbehavior.Ineverycase,theparticipantsinourexperimentgotitwrong.Eventhemostbrilliantandrational person, in the heat of passion, seems to be absolutely and completelydivorcedfromthepersonhethoughthewas.Moreover,itisnotjustthatpeoplemake wrong predictions about themselves—their predictions are wrong by alargemargin.Mostofthetime,accordingtotheresultsofthestudy,Royissmart,decent,

reasonable,kind,andtrustworthy.Hisfrontallobesarefullyfunctioning,andheisincontrolofhisbehavior.Butwhenhe’sinastateofsexualarousalandthereptilianbraintakesover,hebecomesunrecognizabletohimself.Roy thinks he knows how he will behave in an aroused state, but his

understanding is limited. He doesn’t truly understand that as his sexualmotivationbecomesmore intense, hemay throwcaution to thewind.Hemayrisksexuallytransmitteddiseasesandunwantedpregnanciesinordertoachievesexualgratification.Whenheisgrippedbypassion,hisemotionsmayblur theboundarybetweenwhat is right andwhat iswrong. In fact, he doesn’t have acluetohowconsistentlywildhereallyis,forwhenheisinonestateandtriestopredicthisbehaviorinanotherstate,hegetsitwrong.Moreover,thestudysuggestedthatourinabilitytounderstandourselvesina

different emotional state does not seem to improvewith experience;we get itwrong even if we spend as much time in this state as our Berkeley studentsspend sexually aroused. Sexual arousal is familiar, personal, very human, andutterlycommonplace.Evenso,weallsystematicallyunderpredictthedegreetowhicharousalcompletelynegatesoursuperego,andthewayemotionscantakecontrolofourbehavior.

WHATHAPPENS,THEN,whenourirrationalselfcomesaliveinanemotionalplacethatwethinkisfamiliarbutinfactisunfamiliar?Ifwefailtoreallyunderstandourselves,isitpossibletosomehowpredicthowweorotherswillbehavewhen“out of our heads”—whenwe’re really angry, hungry, frightened, or sexuallyaroused?Isitpossibletodosomethingaboutthis?Theanswerstothesequestionsareprofound,fortheyindicatethatwemustbe

wary of situations in which our Mr. Hyde may take over. When the bosscriticizesuspublicly,wemightbetemptedtorespondwithavehemente-mail.Butwouldn’twebebetteroffputtingour reply in the“draft” folder fora fewdays?Whenwearesmittenbyasportscarafteratest-drivewiththewindinourhair,shouldn’twetakeabreak—anddiscussourspouse’splantobuyaminivan—beforesigningacontracttobuythecar?Hereareafewmoreexamplesofwaystoprotectourselvesfromourselves:

SafeSexManyparents and teenagers,while in a cold, rational,Dr. Jekyll state, tend tobelieve that the mere promise of abstinence—commonly known as “Just sayno”—issufficientprotectionagainstsexuallytransmitteddiseasesandunwantedpregnancies. Assuming that this levelheaded thought will prevail even whenemotionsreachtheboilingpoint,theadvocatesof“justsayingno”seenoreasontocarryacondomwiththem.Butasourstudyshows,intheheatofpassion,weareallindangerofswitchingfrom“Justsayno”to“Yes!”inaheartbeat;andifnocondomisavailable,wearelikelytosayyes,regardlessofthedangers.Whatdoesthissuggest?First,widespreadavailabilityofcondomsisessential.

Weshouldnotdecideinacoolstatewhetherornottobringcondoms;theymustbe there just in case.Second,unlessweunderstandhowwemight react in anemotionalstate,wewillnotbeabletopredictthistransformation.Forteenagers,thisproblemismostlikelyexacerbated,andthussexeducationshouldfocuslesson the physiology and biology of the reproductive system, and more onstrategies to dealwith the emotions that accompany sexual arousal.Third,wemust admit that carrying condoms and even vaguely understanding theemotionalfirestormofsexualarousalmaynotbeenough.Therearemostlikelymanysituationswhereteenagerssimplywon’tbeableto

copewiththeiremotions.Abetterstrategy,forthosewhowanttoguaranteethatteenagersavoidsex,istoteachteenagersthattheymustwalkawayfromthefireofpassionbefore theyarecloseenough tobedrawn in.Accepting this advicemight not be easy, but our results suggest that it is easier for them to fighttemptationbeforeitarisesthanafterithasstartedtolurethemin.Inotherwords,

avoidingtemptationaltogetheriseasierthanovercomingit.To be sure, this sounds a lot like the “Just say no” campaign,which urges

teenagerstowalkawayfromsexwhentempted.Butthedifferenceisthat“Justsayno”assumeswecanturnoffpassionatwill,atanypoint,whereasourstudyshows this assumption to be false. Ifwe put aside the debate on the pros andconsofteenagesex,whatisclearisthatifwewanttohelpteenagersavoidsex,sexually transmitted diseases, and unwanted pregnancies, we have twostrategies.Eitherwecanteachthemhowtosaynobeforeanytemptationtakeshold,andbeforeasituationbecomesimpossibletoresist;oralternatively,wecanget them prepared to dealwith the consequences of saying yes in the heat ofpassion (by carrying a condom, for example). One thing is sure: if we don’tteach our young people how to dealwith sexwhen they are half out of theirminds,wearenotonlyfoolingthem;we’refoolingourselvesaswell.Whateverlessons we teach them, we need to help them understand that they will reactdifferentlywhentheyarecalmandcoolfromwhentheirhormonesareragingatfeverpitch(andofcoursethesamealsoappliestoourownbehavior).

SafeDrivingSimilarly,weneedtoteachteenagers(andeveryoneelse)nottodrivewhentheiremotions are at a boil. It’s not just inexperience and hormones that make somany teenagers crash their own or their parents’ cars. It’s also the car full oflaughing friends,with theCDplayerblaringat anadrenaline-pumpingdecibellevel,andthedriver’srighthandsearchingforthefrenchfriesorhisgirlfriend’sknee.Who’s thinking about risk in that situation? Probably no one. A recentstudyfoundthatateenagerdrivingalonewas40percentmorelikelytogetintoanaccidentthananadult.Butwithoneotherteenagerinthecar,thepercentagewas twice that—and with a third teenager along for the ride, the percentagedoubledagain.6Toreacttothis,weneedaninterventionthatdoesnotrelyonthepremisethat

teenagerswill remember how theywanted to behavewhile in a cold state (orhow their parents wanted them to behave) and follow these guidelines evenwhen theyare inahot state.Whynotbuild intocarsprecautionarydevices tofoil teenagers’behavior?SuchcarsmightbeequippedwithamodifiedOnStarsystem that the teenager and the parents configure in a cold state. If a carexceeds65milesperhouronthehighway,ormorethan40milesperhourinaresidentialzone,forexample,therewillbeconsequences.Ifthecarexceedsthespeedlimitorbeginstomakeerraticturns,theradiomightswitchfrom2PactoSchumann’s Second Symphony (this would slow most teenagers). Or the car

might blast the air conditioning in winter, switch on the heat in summer, orautomaticallycallMom(arealdownerifthedriver’sfriendsarepresent).Withthesesubstantialandimmediateconsequencesinmind,then,thedriverandhisorherfriendswouldrealizethatit’stimeforMr.HydetomoveoverandletDr.Jekylldrive.This isnotatall far-fetched.Moderncarsarealreadyfullofcomputers that

control the fuel injection, the climate system, and the sound system. Carsequipped with OnStar are already linked to a wireless network.With today’stechnology,itwouldbeasimplematterforacartoautomaticallycallMom.

BetterLifeDecisionsNotuncommonly,womenwhoarepregnantforthefirst timetell theirdoctors,before the onset of labor, that they will refuse any kind of painkiller. Thedecisionmadeintheircoldstateisadmirable,buttheymakethisdecisionwhenthey can’t imagine the pain that can come with childbirth (let alone thechallenges of child rearing).After all is said and done, theymaywish they’dgonefortheepidural.With this inmind, Sumi (my lovelywife) and I, readying ourselves for the

birth of our first child, Amit, decided to test our mettle before making anydecisions about using an epidural. To do this, Sumi plunged her hands into abucketoficefortwominutes(wedidthisontheadviceofourbirthcoach,whoswore to us that the resultingpainwouldbe similar to thepainof childbirth),while I coached her breathing. If Sumi was unable to bear the pain of thisexperience, we figured, she’d probably want painkillers when she was goingthrough the actual birth. After two minutes of holding her hands in the icebucket, Sumi clearly understood the appeal of an epidural. During the birthitself, any ounce of love Sumi ever had for her husband was completelytransferred to the anesthesiologist, who produced the epidural at the criticalpoint. (With our second child, we made it to the hospital about two minutesbeforeNetawasborn,soSumididendupexperiencingananalgesic-freebirthafterall.)

LOOKING FROM ONE emotional state to another is difficult. It’s not alwayspossible;andasSumilearneditcanbepainful.Buttomakeinformeddecisionsweneedtosomehowexperienceandunderstandtheemotionalstatewewillbeinattheothersideoftheexperience.Learninghowtobridgethisgapisessentialtomakingsomeoftheimportantdecisionsofourlives.It is unlikely thatwewouldmove to a different citywithout asking friends

who live there how they like it, or even choose to see a filmwithout readingsomereviews.Isn’titstrangethatweinvestsolittleinlearningaboutbothsidesofourselves?Whyshouldwereservethissubjectforpsychologyclasseswhenfailure tounderstanditcanbringaboutrepeatedfailures insomanyaspectsofourlives?Weneedtoexplorethetwosidesofourselves;weneedtounderstandthecoldstateandthehotstate;weneedtoseehowthegapbetweenthehotandcoldstatesbenefitsourlives,andwhereitleadsusastray.What did our experiments suggest? It may be that our models of human

behavior need to be rethought. Perhaps there is no such thing as a fullyintegratedhumanbeing.Wemay,infact,beanagglomerationofmultipleselves.Although there is nothing much we can do to get our Dr. Jekyll to fullyappreciate the strength of ourMr.Hyde, perhaps just being aware thatwe arepronetomakingthewrongdecisionswhengrippedbyintenseemotionmayhelpus, in some way, to apply our knowledge of our “Hyde” selves to our dailyactivities.How can we try to force our “Hyde” self to behave better? This is what

Chapter7isabout.

Appendix:Chapter6A complete list of the questions we asked, with the mean response andpercentage differences. Each question was presented on a visual-analog scalethatstretchedbetween“no”ontheleft(zero)to“possibly”inthemiddle(50)to“yes”ontheright(100).

TABLE1RATETHEATTRACTIVENESSOFDIFFERENTACTIVITIES

Question-Arewomen’sshoeserotic?Nonaroused-42Aroused-65Difference,percent-55Question-Canyouimaginebeingattractedtoa12-year-oldgirl?Nonaroused-23Aroused-46Difference,percent-100Question-Canyouimaginehavingsexwitha40-year-oldwoman?Nonaroused-58Aroused-77

Difference,percent-33Question-Canyouimaginehavingsexwitha50-year-oldwoman?Nonaroused-28Aroused-55Difference,percent-96Question-Canyouimaginehavingsexwitha60-year-oldwoman?Nonaroused-7Aroused-23Difference,percent-229Question-Canyouimaginehavingsexwithaman?Nonaroused-8Aroused-14Difference,percent-75Question-Coulditbefuntohavesexwithsomeonewhowasextremelyfat?Nonaroused-13Aroused-24Difference,percent-85Question-Couldyouenjoyhavingsexwithsomeoneyouhated?Nonaroused-53Aroused-77Difference,percent-45Question-Ifyouwereattractedtoawomanandsheproposedathreesomewithaman,wouldyoudoit?Nonaroused-19Aroused-34Difference,percent-79Question-Isawomansexywhenshe’ssweating?Nonaroused-56Aroused-72Difference,percent-29Question-Isthesmellofcigarettesmokearousing?Nonaroused-13Aroused-22Difference,percent-69Question-Woulditbefuntogettiedupbyyoursexualpartner?Nonaroused-63Aroused-81Difference,percent-29Question-Woulditbefuntotieupyoursexualpartner?

Nonaroused-47Aroused-75Difference,percent-60Question-Woulditbefuntowatchanattractivewomanurinating?Nonaroused-25Aroused-32Difference,percent-28Question-Wouldyoufinditexcitingtospankyoursexualpartner?Nonaroused-61Aroused-72Difference,percent-18Question-Wouldyoufinditexcitingtogetspankedbyanattractivewoman?Nonaroused-50Aroused-68Difference,percent-36Question-Wouldyoufinditexcitingtohaveanalsex?Nonaroused-46Aroused-77Difference,percent-67Question-Canyouimaginegettingsexuallyexcitedbycontactwithananimal?Nonaroused-6Aroused-16Difference,percent-167Question-Isjustkissingfrustrating?Nonaroused-41Aroused-69Difference,percent-68

TABLE2RATETHELIKELIHOODOFENGAGINGINIMMORALBEHAVIORS

LIKEDATERAPE(ASTRICTORDEROFSEVERITYISNOTIMPLIED)

Question-Wouldyoutakeadatetoafancyrestauranttoincreaseyourchanceofhavingsexwithher?Nonaroused-55Aroused-70Difference,percent-27Question -Wouldyou tell awoman that you lovedher to increase the chance

thatshewouldhavesexwithyou?Nonaroused-30Aroused-51Difference,percent-70Question-Wouldyouencourageyourdatetodrinktoincreasethechancethatshewouldhavesexwithyou?Nonaroused-46Aroused-63Difference,percent-37Question-Wouldyoukeeptryingtohavesexafteryourdatesays“no”?Nonaroused-20Aroused-45Difference,percent-125Question-Wouldyouslipawomanadrugtoincreasethechancethatshewouldhavesexwithyou?Nonaroused-5Aroused-26Difference,percent-420

TABLE3RATEYOURTENDENCYTOUSE,ANDOUTCOMESOFNOTUSING,

BIRTHCONTROLQuestion-Birthcontrolisthewoman’sresponsibility.Nonaroused-34Aroused-44Difference,percent-29Question-Acondomdecreasessexualpleasure.Nonaroused-66Aroused-78Difference,percent-18Question-Acondominterfereswithsexualspontaneity.Nonaroused-58Aroused-73Difference,percent-26Question - Would you always use a condom if you didn’t know the sexualhistoryofanewsexualpartner?Nonaroused-88Aroused-69

Difference,percent-22Question-Wouldyouuseacondomevenifyouwereafraidthatawomanmightchangehermindwhileyouwenttogetit?Nonaroused-86Aroused-60Difference,percent-30

Chapter7TheProblemofProcrastinationandSelf-Control

WhyWeCan’tMakeOurselvesDoWhatWeWanttoDo

Onto the American scene, populated by big homes, big cars, and big-screenplasma televisions, comes another big phenomenon: the biggest decline in thepersonalsavingsratesincetheGreatDepression.Goback25years,anddouble-digitsavingsrateswerethenorm.Asrecently

as1994 thesavings ratewasnearly fivepercent.Butby2006 thesavings ratehad fallen below zero—to negative one percent.Americanswere not only notsaving;theywerespendingmorethantheyearned.Europeansdoalotbetter—they save an average of 20 percent. Japan’s rate is 25 percent. China’s is 50percent.Sowhat’supwithAmerica?I suppose one answer is that Americans have succumbed to rampant

consumerism.Go back to a home built beforewe had to have everything, forinstance, and check out the size of the closets. Our house in Cambridge,Massachusetts, for example, was built in 1890. It has no closets whatsoever.Housesinthe1940shadclosetsbarelybigenoughtostandin.Theclosetofthe1970swas abit larger, perhapsdeepenough for a fonduepot, aboxof eight-tracktapes,andafewdiscodresses.Buttheclosetoftodayisadifferentbreed.“Walk-incloset”meansthatyoucanliterallywalkinforquiteadistance.Andnomatterhowdeep theseclosetsare,Americanshavefoundways tofill themrightuptotheclosetdoor.Another answer—the other half of the problem—is the recent explosion in

consumercredit.TheaverageAmericanfamilynowhassixcreditcards(in2005alone, Americans received 6 billion direct-mail solicitations for credit cards).

Frighteningly,theaveragefamilydebtonthesecardsisabout$9,000;andsevenin10householdsborrowoncreditcardstocoversuchbasiclivingexpensesasfood,utilities,andclothing.Sowouldn’titjustbewiserifAmericanslearnedtosave,asintheolddays,

andastherestoftheworlddoes,bydivertingsomecashtothecookiejar,anddelaying some purchases untilwe can really afford them?Why can’twe savepartofourpaychecks,asweknowweshould?Whycan’tweresist thosenewpurchases?Whycan’tweexertsomegoodold-fashionedself-control?Theroadtohell,theysay,ispavedwithgoodintentions.Andmostofusknow

whatthat’sallabout.Wepromisetosaveforretirement,butwespendthemoneyonavacation.Wevowtodiet,butwesurrendertotheallureofthedessertcart.Wepromise tohaveourcholesterolchecked regularly,and thenwecancelourappointment.Howmuchdowelosewhenourfleetingimpulsesdeflectusfromour long-

termgoals?Howmuchisourhealthaffectedbythosemissedappointmentsandourlackofexercise?Howmuchisourwealthreducedwhenweforgetourvowtosavemoreandconsumeless?Whydowelosethefightagainstprocrastinationsofrequently?

INCHAPTER6wediscussedhowemotionsgrabholdofusandmakeusviewtheworldfromadifferentperspective.Procrastination(fromtheLatinpro,meaningfor;andcras,meaningtomorrow)isrootedinthesamekindofproblem.Whenwe promise to save our money, we are in a cool state.When we promise toexercise and watch our diet, again we’re cool. But then the lava flow of hotemotioncomes rushing in: justwhenwepromise tosave,weseeanewcar,amountain bike, or a pair of shoes that we must have. Just when we plan toexerciseregularly,wefindareasontositalldayinfrontofthetelevision.Andasforthediet?I’lltakethatsliceofchocolatecakeandbeginthedietinearnesttomorrow. Giving up on our long-term goals for immediate gratification, myfriends,isprocrastination.As a university professor, I’m all too familiar with procrastination. At the

beginningofeverysemestermystudentsmakeheroicpromisestothemselves—vowing to read their assignmentson time, submit their papers on time, and ingeneral, stayon topof things.Andevery semester I’vewatchedas temptationtakesthemoutonadate,overtothestudentunionforameeting,andoffonaskitrip in themountains—while theirworkloadfalls fartherandfartherbehind. Intheend, theywindup impressingme,notwith theirpunctuality,butwith theircreativity—inventing stories, excuses, and family tragedies to explain theirtardiness.(Whydofamilytragediesgenerallyoccurduringthelasttwoweeksof

thesemester?)After I’d been teaching at MIT for a few years, my colleague Klaus

Wertenbroch (a professor at INSEAD, a business school with campuses inFranceandSingapore)andIdecidedtoworkupafewstudiesthatmightgettothe root of the problem, and just maybe offer a fix for this common humanweakness.Ourguineapigsthistimewouldbethedelightfulstudentsinmyclassonconsumerbehavior.Astheysettledintotheirchairsthatfirstmorning,fullofanticipation(and,no

doubt,with resolutions to stay on top of their class assignments), the studentslistened tome review the syllabus for the course. Therewould be threemainpapers over the 12-week semester, I explained. Together, these papers wouldconstitutemuchoftheirfinalgrade.“Andwhatarethedeadlines?”askedoneofthem,wavinghishandfromthe

back. I smiled. “Youcanhand in thepapers at any timebefore theendof thesemester,”Ireplied.“It’sentirelyuptoyou.”Thestudentslookedbackblankly.“Here’sthedeal,”Iexplained.“Bytheendoftheweek,youmustcommittoa

deadline date for each paper. Once you set your deadlines, they can’t bechanged.”Latepapers,Iadded,wouldbepenalizedattherateofonepercentoffthegradeforeachdaylate.Thestudentscouldalwaysturnintheirpapersbeforetheirdeadlineswithoutpenalty,ofcourse,butsinceIwouldn’tbereadinganyofthem until the end of the semester, therewould be no particular advantage intermsofgradesfordoingso.Inotherwords,theballwasintheircourt.Wouldtheyhavetheself-controlto

playthegame?“But Professor Ariely,” asked Gaurav, a clever master’s student with a

charming Indian accent, “given these instructions and incentives, wouldn’t itmakesenseforustoselectthelastdatepossible?”“Youcandothat,”Ireplied.“Ifyoufindthatitmakessense,byallmeansdo

it.”Undertheseconditions,whatwouldyouhavedone?

Ipromisetosubmitpaper1onweek———Ipromisetosubmitpaper2onweek———Ipromisetosubmitpaper3onweek———

What deadlines did the students pick for themselves? A perfectly rationalstudentwouldfollowGaurav’sadviceandsetallthedeadlinesforthelastdayofclass—afterall,itwasalwayspossibletosubmitpapersearlierwithoutapenalty,sowhytakeachanceandselectanearlierdeadline thanneeded?Delaying the

deadlines to the end was clearly the best decision if students were perfectlyrational. But what if the students are not rational? What if they succumb totemptationandarepronetoprocrastination?Whatiftheyrealizetheirweakness?Ifthestudentsarenotrational,andtheyknowit,theycouldusethedeadlinestoforcethemselvestobehavebetter.Theycouldsetearlydeadlinesandbydoingsoforcethemselvestostartworkingontheprojectsearlierinthesemester.Whatdidmystudentsdo?TheyusedtheschedulingtoolIprovidedthemwith

andspacedthetimingoftheirpapersacrossthewholesemester.Thisisfineandgood,asitsuggeststhatthestudentsrealizetheirproblemswithprocrastinationandthatifgiventherightopportunitiestheytrytocontrolthemselves—butthemainquestioniswhetherthetoolwasindeedhelpfulinimprovingtheirgrades.To find out about this, we had to conduct other variations of the sameexperiments in other classes and compare the quality of papers across thedifferentconditions(classes).

NOWTHATIhadGauravandhisclassmateschoosingtheirindividualdeadlines,Iwent to my other two classes—with markedly different deals. In the secondclass, I told the students that they would have no deadlines at all during thesemester.Theymerelyneededtosubmittheirpapersbytheendofthelastclass.Theycouldturnthepapersinearly,ofcourse,buttherewasnogradebenefittodoing so. I suppose they should have been happy: I had given them completeflexibilityandfreedomofchoice.Notonlythat,buttheyalsohadthelowestriskofbeingpenalizedformissinganintermediatedeadline.Thethirdclassreceivedwhatmightbecalledadictatorialtreatment:Idictated

threedeadlinesforthethreepapers,setatthefourth,eighth,andtwelfthweeks.Theseweremymarchingorders,andtheyleftnoroomforchoiceorflexibility.Ofthesethreeclasses,whichdoyouthinkachievedthebestfinalgrades?Was

it Gaurav and his classmates, who had some flexibility? Or the second class,which had a single deadline at the end, and thus complete flexibility?Or thethird class,which had its deadlines dictated fromabove, and therefore had noflexibility?Whichclassdoyoupredictdidworst?Whenthesemesterwasover,JoseSilva,theteachingassistantfortheclasses

(himselfanexpertonprocrastinationandcurrentlyaprofessorattheUniversityofCaliforniaatBerkeley),returnedthepaperstothestudents.Wecouldatlastcomparethegradesacrossthethreedifferentdeadlineconditions.Wefoundthatthe students in the classwith the three firmdeadlines got the best grades; theclass inwhich I set no deadlines at all (except for the final deadline) had theworstgrades;andtheclassinwhichGauravandhisclassmateswereallowedtochoose their own three deadlines (butwith penalties for failing tomeet them)

finishedinthemiddle,intermsoftheirgradesforthethreepapersandtheirfinalgrade.Whatdotheseresultssuggest?First,thatstudentsdoprocrastinate(bignews);

and second, that tightly restricting their freedom (equally spaced deadlines,imposed from above) is the best cure for procrastination. But the biggestrevelation is that simply offering the students a tool by which they couldprecommittodeadlineshelpedthemachievebettergrades.What this finding implies is that the students generally understood their

problemwithprocrastination and tookaction to fight itwhen theyweregiventheopportunity to do so, achieving relative success in improving their grades.Butwhywerethegradesintheself-imposeddeadlinesconditionnotasgoodasthe grades in the dictatorial (externally imposed) deadlines condition? Myfeeling is this: not everyone understands their tendency to procrastinate, andeventhosewhodorecognizetheirtendencytoprocrastinatemaynotunderstandtheirproblemcompletely.Yes,peoplemaysetdeadlinesforthemselves,butnotnecessarilythedeadlinesthatarebestforgettingthebestperformance.WhenIlookedatthedeadlinessetbythestudentsinGaurav’sclass,thiswas

indeedthecase.Althoughthevastmajorityofthestudentsinthisclassspacedtheirdeadlinessubstantially(andgotgradesthatwereasgoodasthoseearnedbystudents in thedictatorialcondition),somedidnotspace theirdeadlinesmuch,andafewdidnotspacetheirdeadlinesatall.Thesestudentswhodidnotspacetheirdeadlinessufficientlypulledtheaveragegradesofthisclassdown.Withoutproperly spaced deadlines—deadlines that would have forced the students tostart working on their papers earlier in the semester—the final work wasgenerally rushed and poorly written (even without the extra penalty of onepercentoffthegradeforeachdayofdelay).Interestingly, these results suggest that although almost everyone has

problemswith procrastination, thosewho recognize and admit their weaknessareinabetterpositiontoutilizeavailabletoolsforprecommitmentandbydoingso,helpthemselvesovercomeit.

SO THATWAS my experience with my students.What does it have to do witheverydaylife?Alot,Ithink.Resistingtemptationandinstillingself-controlaregeneralhumangoals,andrepeatedlyfailingtoachievethemisasourceofmuchofourmisery.WhenIlookaround,Iseepeopletryingtheirbesttodotherightthing, whether they are dieters vowing to avoid a tempting dessert tray orfamilies vowing to spend less and save more. The struggle for control is allaroundus.Weseeitinbooksandmagazines.Radioandtelevisionairwavesarechokedwithmessagesofself-improvementandhelp.

Andyet, for all this electronic chatter and focus in print,we find ourselvesagainandagaininthesamepredicamentasmystudents—failingoverandovertoreachourlong-termgoals.Why?Becausewithoutprecommitments,wekeeponfallingfortemptation.What’sthealternative?FromtheexperimentsthatIhavedescribedabove,the

mostobviousconclusionisthatwhenanauthoritative“externalvoice”givestheorders,mostofuswilljumptoattention.Afterall,thestudentsforwhomIsetthedeadlines—forwhomIprovidedthe“parental”voice—didbest.Ofcourse,barking orders, while very effective,may not always be feasible or desirable.What’s a good compromise? It seems that the best course might be to givepeopleanopportunitytocommitupfronttotheirpreferredpathofaction.Thisapproachmight not be as effective as the dictatorial treatment, but it canhelppushusintherightdirection(perhapsevenmoresoifwetrainpeopletodoit,andgivethemexperienceinsettingtheirowndeadlines).What’s the bottom line? We have problems with self-control, related to

immediateanddelayedgratification—nodoubtthere.Buteachoftheproblemswefacehaspotentialself-controlmechanisms,aswell.Ifwecan’tsavefromourpaycheck,wecantakeadvantageofouremployer’sautomaticdeductionoption;if we don’t have the will to exercise regularly alone, we can make anappointmenttoexerciseinthecompanyofourfriends.Thesearethetoolsthatwecancommit to inadvance,and theymayhelpusbe thekindofpeoplewewanttobe.

WHAT OTHER PROCRASTINATION problems might precommitment mechanismssolve?Considerhealthcareandconsumerdebt.

HealthCareEveryoneknowsthatpreventivemedicineisgenerallymorecost-effective—forboth individuals and society—than our current remedial approach. Preventionmeans getting health exams on a regular basis, before problems develop. Buthaving a colonoscopy ormammogram is an ordeal. Even a cholesterol check,whichrequiresbloodtobedrawn,isunpleasant.Sowhileourlong-termhealthand longevity depend on undergoing such tests, in the short term weprocrastinateandprocrastinateandprocrastinate.Butcanyouimagineifweallgottherequiredhealthexamsontime?Think

howmanyserioushealthproblemscouldbecaughtiftheywerediagnosedearly.Thinkhowmuch cost couldbe cut fromhealth-care spending, andhowmuchmiserywouldbesavedintheprocess.

Sohowdowefixthisproblem?Well,wecouldhaveadictatorialsolution,inwhichthestate(intheOrwelliansense)woulddictateourregularcheckups.Thatapproach worked well with my students, who were given a deadline andperformed well. In society, no doubt, we would all be healthier if the healthpolice arrived in a van and took procrastinators to theministry of cholesterolcontrolforbloodtests.Thismayseemextreme,butthinkoftheotherdictatesthatsocietyimposeson

usforourowngood.Wemayreceiveticketsforjaywalking,andforhavingourseat belts unsecured. No one thought 20 years ago that smoking would bebanned inmost public buildings acrossAmerica, aswell as in restaurants andbars, but today it is—with a hefty fine incurred for lighting up.And nowwehave the movement against trans fats. Should people be deprived of heart-cloggingfrenchfries?Sometimeswe strongly support regulations that restrain our self-destructive

behaviors,andatothertimeswehaveequallystrongfeelingsaboutourpersonalfreedom.Eitherway,it’salwaysatrade-off.Butifmandatoryhealthcheckupswon’tbeacceptedbythepublic,whatabout

a middle ground, like the self-imposed deadlines I gave to Gaurav and hisclassmates (the deadlines that offered personal choice, but also had penaltiesattachedfortheprocrastinators)?Thismightbetheperfectcompromisebetweenauthoritarianism, on the one hand, and what we have too often in preventivehealthtoday—completefreedomtofail.Supposeyourdoctortellsyouthatyouneedtogetyourcholesterolchecked.

Thatmeans fasting the night before the blood test, driving to the lab the nextmorningwithoutbreakfast,sittinginacrowdedreceptionroomforwhatseemslikehours,andfinally,havingthenursecomeandgetyousothatshecanstickaneedle into your arm. Facing those prospects, you immediately begin toprocrastinate.Butsupposethedoctorchargedyouanup-front$100depositforthe test, refundable only if you showed up promptly at the appointed time.Wouldyoubemorelikelytoshowupforthetest?Whatifthedoctoraskedyouifyouwouldliketopaythis$100depositforthe

test?Would you accept this self-imposed challenge?And if you did,would itmakeyoumorelikelytoshowupfortheprocedure?Supposetheprocedurewasmorecomplicated:acolonoscopy,forinstance.Wouldyoubewillingtocommittoa$200deposit,refundableonlyifyouarrivedattheappointmentontime?Ifso, you will have replicated the condition that I offered Gaurav’s class, acondition that certainlymotivated the students to be responsible for their owndecisions.

HOW ELSE COULD we defeat procrastination in health care? Suppose we couldrepackage most of our medical and dental procedures so that they werepredictableandeasilydone.Letmetellyouastorythatillustratesthisidea.Severalyearsago,FordMotorCompanystruggledtofindthebestwaytoget

car owners back into the dealerships for routine automobilemaintenance.TheproblemwasthatthestandardFordautomobilehadsomethinglike18,000partsthatmightneedservicing,andunfortunatelytheydidn’tallneedservicingatthesame time (one Ford engineer determined that a particular axle bolt neededinspectionevery3,602miles).Andthiswasjustpartoftheproblem:sinceFordhadmorethan20vehicletypes,plusvariousmodelyears,theservicingofthemall was nearly impossible to ponder. All that consumers, as well as serviceadvisers, could do was page through volumes of thick manuals in order todeterminewhatserviceswereneeded.But Ford began to notice something over at the Honda dealerships. Even

though the 18,000 or so parts in Honda cars had the same idealmaintenanceschedulesastheFordcars,Hondahadlumpedthemallintothree“engineeringintervals” (for instance,everysixmonthsor5,000miles,everyyearor10,000miles,andeverytwoyearsor25,000miles).Thislistwasdisplayedonthewallof the reception room in the service department. All the hundreds of serviceactivitieswere boiled down to simple,mileage-based service events thatwerecommonacrossallvehiclesandmodelyears.Theboardhadeverymaintenanceserviceactivitybundled,sequenced,andpriced.Anyonecouldseewhenservicewasdueandhowmuchitwouldcost.But the bundle board wasmore than convenient information: It was a true

procrastination-buster, as it instructed customers to get their service done atspecifictimesandmileages.Itguidedthemalong.Anditwassosimplethatanycustomer could understand it. Customers were no longer confused. They nolongerprocrastinated.ServicingtheirHondasontimewaseasy.Some people at Ford thought this was a great idea, but at first the Ford

engineersfoughtit.Theyhadtobeconvincedthat,yes,driverscouldgo9,000mileswithout an oil change—but that 5,000mileswould align the oil changewith everything else that needed to be done.They had to be convinced that aMustangandaF-250SuperDutytruck,despitetheirtechnologicaldifferences,couldbeputonthesamemaintenanceschedule.Theyhadtobeconvincedthatrebundlingtheir18,000maintenanceoptionsintothreeeasilyscheduledserviceevents—makingmaintenanceaseasyasorderingaValueMealatMcDonald’s—was not bad engineering, but good customer service (not to mention goodbusiness).Thewinningargument,infact,wasthatitisbettertohaveconsumersservice their vehicles at somewhat compromised intervals than not to service

thematall!In the end, it happened: Ford joined Honda in bundling its services.

Procrastinationstopped.Ford’sservicebay,whichhadbeen40percentvacant,filledup.Thedealersmademoney,andinjustthreeyearsFordmatchedHonda’ssuccessintheservicebay.Socouldn’twemakecomprehensivephysicalsandtestsassimple—and,with

the addition of self-imposed financial penalties (or better, a “parental” voice),bring the quality of our healthwayup and at the same timemake the overallcosts significantly less? The lesson to learn from Ford’s experience is thatbundlingourmedicaltests(andprocedures)sothatpeopleremembertodothemisfarsmarterthanadheringtoanerraticseriesofhealthcommandsthatpeopleare unwilling to follow. And so the big question: can we shape America’smedicalmorassandmakeitaseasyasorderingaHappyMeal?Thoreauwrote,“Simplify!Simplify!”And,indeed,simplificationisonemarkofrealgenius.

SavingsWecouldorderpeople to stop spending,asanOrwellianedict.Thiswouldbesimilar to the case ofmy third group of students, forwhom the deadlinewasdictatedbyme.Butarethereclevererwaystogetpeopletomonitor theirownspending?Afewyearsago,forinstance,Iheardaboutthe“iceglass”methodforreducingcreditcardspending.It’sahomeremedyforimpulsivespending.Youputyourcreditcardintoaglassofwaterandputtheglassinthefreezer.Then,whenyouimpulsivelydecidetomakeapurchase,youmustfirstwaitfortheiceto thaw before extracting the card.By then, your compulsion to purchase hassubsided.(Youcan’tjustputthecardinthemicrowave,ofcourse,becausethenyou’ddestroythemagneticstrip.)Buthere’sanotherapproachthatisarguablybetter,andcertainlymoreup-to-

date.JohnLelandwroteaveryinterestingarticleintheNewYorkTimesinwhichhedescribedagrowingtrendofself-shame:“WhenawomanwhocallsherselfTriciadiscoveredlastweekthatsheowed$22,302onhercreditcards,shecouldnotwait to spread the news. Tricia, 29, does not talk to her family or friendsaboutherfinances,andsayssheisashamedofherpersonaldebt.Yetfromthelaundry room of her home in northern Michigan, Tricia does something thatwould have been unthinkable—and impossible—a generation ago: She goesonline and posts intimate details of her financial life, including her networth(nowanegative$38,691), thebalanceandfinancechargesonhercreditcards,and the amount of debt she has paid down ($15,312) since starting the blogaboutherdebtlastyear.”

ItisalsoclearthatTricia’sblogispartofalargertrend.Apparently,therearedozensofWeb sites (maybe there are thousandsbynow)devoted to the samekindofdebtblogging(from“PoorerthanYou”poorerthanyou.comand“We’reinDebt”wereindebt.comto“MakeLoveNotDebt”makelovenotdebt.comandTricia’s Web page: bloggingawaydebt.com). Leland noted, “Consumers areasking others to help themselves develop self-control because so manycompaniesarenotshowinganyrestraint.”7Bloggingaboutoverspendingisimportantanduseful,butaswesawinthelast

chapter,onemotions,whatwetrulyneedisamethodtocurbourconsumptionatthemomentoftemptation,ratherthanawaytocomplainaboutitafterthefact.Whatcouldwedo?Couldwecreatesomethingthatreplicatedtheconditions

ofGaurav’sclass,withsomefreedomofchoicebutbuilt-inboundariesaswell?Ibegantoimagineacreditcardofadifferentkind—aself-controlcreditcardthatwouldletpeoplerestricttheirownspendingbehavior.Theuserscoulddecideinadvancehowmuchmoneytheywantedtospendineachcategory,ineverystore,andineverytimeframe.Forinstance,userscouldlimittheirspendingoncoffeeto $20 everyweek, and their spending on clothing to $600 every sixmonths.Cardholders could fix their limit for groceries at $200 a week and theirentertainment spending at $60 amonth, andnot allowany spendingon candybetweentwoandfivePM.Whatwouldhappeniftheysurpassedthelimit?Thecardholderswouldselecttheirpenalties.Forinstance,theycouldmakethecardget rejected; or they could tax themselves and transfer the tax to Habitat forHumanity,afriend,orlong-termsavings.Thissystemcouldalsoimplementthe“ice glass”method as a cooling-off period for large items; and it could evenautomaticallytriggerane-mailtoyourspouse,yourmother,orafriend:

DearSumi,Thise-mailistodrawyourattentiontothefactthatyourhusband,DanAriely,whoisgenerallyanuprightcitizen,hasexceededhisspendinglimitonchocolateof$50permonthby$73.25.Withbestwishes,Theself-controlcreditcardteam

Nowthismaysoundlikeapipedream,butitisn’t.Thinkaboutthepotentialof Smart Cards (thin, palm-size cards that carry impressive computationalpowers),whicharebeginningtofillthemarket.Thesecardsofferthepossibilityofbeingcustomizedtoeachindividual’screditneedsandhelpingpeoplemanagetheir credit wisely. Why couldn’t a card, for instance, have a spending“governor” (like the governors that limit the top speed on engines) to limit

monetary transactions in particular conditions? Why couldn’t they have thefinancialequivalentofatime-releasepill,sothatconsumerscouldprogramtheircardstodispensetheircredittohelpthembehaveastheyhopetheywould?

AFEWYEARSagoIwassoconvincedthata“self-control”creditcardwasagoodideathatIaskedforameetingwithoneofthemajorbanks.Tomydelight,thisvenerable bank responded, and suggested that I come to its corporateheadquartersinNewYork.I arrived in New York a few weeks later, and after a brief delay at the

reception desk, was led into a modern conference room. Peering through theplateglassfromonhigh,IcouldlookdownonManhattan’sfinancialdistrictandastreamofyellowcabspushingthroughtherain.Withinafewminutestheroomhad filled with half a dozen high-powered banking executives, including theheadofthebank’screditcarddivision.Ibeganbydescribinghowprocrastinationcauseseveryoneproblems. In the

realmofpersonalfinance,Isaid,itcausesustoneglectoursavings—whilethetemptationofeasycreditfillsourclosetswithgoodsthatwereallydon’tneed.Itdidn’ttakelongbeforeIsawthatIwasstrikingaverypersonalchordwitheachofthem.Then I began to describe how Americans have fallen into a terrible

dependenceoncreditcards,howthedebtiseatingthemalive,andhowtheyarestrugglingtofindtheirwayoutofthispredicament.America’sseniorsareoneofthehardest-hitgroups.Infact,from1992to2004therateofdebtofAmericansage 55 and over rose faster than that of any other group. Some of themwereevenusingcreditcardstofillthegapsintheirMedicare.Otherswereatriskoflosingtheirhomes.I began to feel like George Bailey begging for loan forgiveness in It’s a

WonderfulLife.Theexecutivesbegantospeakup.Mostofthemhadstoriesofrelatives,spouses,andfriends(notthemselves,ofcourse)whohadhadproblemswithcreditdebt.Wetalkeditover.NowthegroundwasreadyandIstarteddescribingtheself-controlcreditcard

ideaasawaytohelpconsumersspendlessandsavemore.Atfirst I thinkthebankerswereabit stunned. Iwas suggesting that theyhelpconsumerscontroltheir spending.Did I realize that the bankers and credit card companiesmade$17billionayearininterestfromthesecards?Hello?Theyshouldgivethatup?Well, I wasn’t that naive. I explained to the bankers that therewas a great

businesspropositionbehindtheideaofaself-controlcard.“Look,”Isaid,“thecredit card business is cutthroat. You send out six billion direct-mail pieces ayear,andallthecardoffersareaboutthesame.”Reluctantly,theyagreed.“But

suppose one credit card company stepped out of the pack,” I continued, “andidentified itself as a good guy—as an advocate for the credit-crunchedconsumer?Supposeonecompanyhadthegutstoofferacardthatwouldactuallyhelpconsumerscontroltheircredit,andbetterstill,divertsomeoftheirmoneyintolong-termsavings?”Iglancedaroundtheroom.“Mybetisthatthousandsofconsumerswouldcutuptheirothercreditcards—andsignupwithyou!”Awaveofexcitementcrossedtheroom.Thebankersnoddedtheirheadsand

chatted to one another. It was revolutionary! Soon thereafter we all departed.They shookmyhandwarmlyandassuredme thatwewouldbe talkingagain,soon.Well, theynevercalledmeback.(Itmighthavebeenthattheywereworried

about losing the$17billion in interest charges,ormaybe itwas justgoodoldprocrastination.) But the idea is still there—a self-control credit card—andmaybeonedaysomeonewilltakethenextstep.

ReflectionsonImmediateGratificationandSelf-ControlOscarWilde once said, “I never put off till tomorrowwhat I can do the dayafter.”Heseemedtoacceptandevenembracetheroleofprocrastinationinhislife, butmost of us find the allure of immediate gratification so strong that itwrecks our best-laid plans for dieting, savingmoney, cleaning the house—thelistisendless.Whenwehaveproblemswithself-control,sometimeswedelaytasksthatwe

shoulddoimmediately.Butwealsoexhibitproblemswithself-controlwhenweattend too frequently to tasks that we should put off—such as obsessivelycheckingoure-mail.Thedangerofcontinuallycheckinge-mailwascrucial in theplotlineof the

movieSevenPounds:WillSmith’scharactercheckshisphonefore-mailwhiledrivingandveershead-onintoanoncomingvan,killinghiswifeandsixotherpeople.Thisisjustamovie,ofcourse,butcompulsivelycheckinge-mailwhiledriving ismorecommon thanmostofuswouldcare toadmit (goahead, raiseyourhand*).Ihopethatyou’renotthataddictedtoe-mail,buttoomanyofussufferfrom

an unhealthy attachment to it. A recent Australian report found that workersspent an average of 14.5 hours, or more than two working days a week,checking,reading,arranging,deleting,andrespondingtoe-mail.8Addtothistherise of social networks and news groups, and you canmost likely double the

timewespendinvirtualinteractionandmessagemanagement.I, for one, have verymixed feelings about e-mail. On one hand, it letsme

communicatewithcolleaguesandfriendsallovertheworldwithoutthedelaysof snailmail or the constraints of talking on the phone. (Is it too late to call?WhattimeisitinAucklandanyway?)Ontheotherhand,Ireceivehundredsofmessages a day, including many involving things I don’t really care about(announcements,minutesofmeetings,andsoon).RegardlessofwhetherIcare,theongoingstreamofe-mailisaconstantdistraction.Ioncetriedtoovercomethisdistractionbyresolvingtochecke-mailonlyat

night,butIquicklydiscoveredthatthiswouldnotdo.Otherpeopleexpectedmeto do as they do—check e-mail constantly and rely on it as a sole means ofcommunication. As a result of not checking my e-mail regularly, I ended upgoingtomeetingsthathadbeencanceled,orarrivingatthewrongtimeorplace.SoIgavein,andnowIchecke-mailwaytoooften,andasIdoIconstantlysortthemessages into categories: spam and unimportant e-mail that I delete rightaway;messages Imightcareaboutorneed to respond toat somepoint in thefuture;messagesIneedtorespondtoimmediately;andsoon.Inbygonedaysthemailcartcamearoundtheofficeonceortwiceadaywith

afewlettersandmemos—notsowithe-mail,whichnevertakesabreak.Forme,the day goes like this: I start working on something and get deeply into it.EventuallyIgetstuckonsomedifficultpoint,anddecidetotakeaquickbreak—obviously,tochecke-mail.TwentyminuteslaterIgetbacktothetask,withlittlerecollectionofwhereIwasandwhat Iwas thinking.By the timeI’mbackontrack,I’velostbothtimeandsomeofmyfocus,andthisoutcomeassuredlydoesnothelpmesolvewhateverproblemcausedmetotakefiveinthefirstplace.Sadly, thisisnotwherethestoryends.Entersmartphones—anevengreater

timesink.AwhileagoIgotoneoftheselovely,distractinggadgetsintheformof an iPhone, whichmeant that I could also check e-mail while waiting in acheckout line,walking into theoffice, riding in theelevator,while listening tootherpeople’slectures(Ihaven’tyetfiguredouthowtodothisduringmyownlectures),andevenwhile sittingat traffic lights. In truth, the iPhonehasmadethe level of my addiction very clear. I check it almost ceaselessly.(Businesspeoplerecognizetheaddictivepropertiesofthesedevices:thisiswhytheyoftencalltheirBlackBerries“CrackBerries.”)I THINK E-MAIL addiction has something to do with what the behavioralpsychologist B. F. Skinner called “schedules of reinforcement.” Skinner usedthisphrasetodescribetherelationshipbetweenactions(inhiscase,ahungryratpressingaleverinaso-calledSkinnerbox)andtheirassociatedrewards(pelletsof food). In particular, Skinner distinguished between fixed-ratio schedules of

reinforcement and variable-ratio schedules of reinforcement. Under a fixedschedule,aratreceivedarewardoffoodafteritpressedtheleverafixednumberoftimes—say100times.(Tomakeahumancomparison,aused-cardealermightgeta$1,000bonusforevery10carssold.)Underthevariableschedule,theratearned the food pellet after it pressed the lever a random number of times.Sometimes it would receive the food after pressing 10 times, and sometimesafterpressing200times.(Analogously,ourused-cardealerwouldearna$1,000bonusaftersellinganunknownnumberofcars.)Thus,underthevariablescheduleofreinforcement,thearrivaloftherewardis

unpredictable.On the face of it, onemight expect that the fixed schedules ofreinforcementwouldbemoremotivatingandrewardingbecausetherat(ortheused-cardealer)can learn topredict theoutcomeofhiswork. Instead,Skinnerfound that the variable schedules were actually more motivating. The mosttelling result was that when the rewards ceased, the rats whowere under thefixed schedules stopped working almost immediately, but those under thevariablescheduleskeptworkingforaverylongtime.This variable schedule of reinforcement alsoworkswonders formotivating

people.Itisthemagic(or,moreaccurately,darkmagic)thatunderliesgamblingandplayingthelottery.Howmuchfunwoulditbetoplayaslotmachineifyouknew in advance that youwould always losenine timesbeforewinningonce,and that this sequence would continue for as long as you played? It wouldprobablybenofunatall!Infact,thejoyofgamblingcomesfromtheinabilitytopredictwhenrewardsarecoming,sowekeepplaying.So,what do food pellets and slotmachines have to dowith e-mail? If you

think about it, e-mail is verymuch like gambling.Most of it is junk and theequivalent topullingthe leverofaslotmachineandlosing,buteverysooftenwereceiveamessagethatwereallywant.Maybeitcontainsgoodnewsaboutajob,abitofgossip,anotefromsomeonewehaven’theardfrominalongtime,or some important piece of information. We are so happy to receive theunexpected e-mail (pellet) that we become addicted to checking, hoping formoresuchsurprises.Wejustkeeppressingthatlever,overandoveragain,untilwegetourreward.Thisexplanationgivesmeabetterunderstandingofmye-mailaddiction,and

moreimportant, itmightsuggestafewmeansofescapefromthisSkinnerboxanditsvariablescheduleofreinforcement.OnehelpfulapproachI’vediscoveredistoturnofftheautomatice-mail-checkingfeature.Thisactiondoesn’teliminatemychecking,butitreducesthefrequencywithwhichmycomputernotifiesmethat I have new e-mailwaiting (some of it, Iwould think tomyself,must beinteresting or relevant). Additionally, many applications allow users to link

differentcolorsandsoundstodifferent incominge-mail.Forexample,Iassigneverye-mailonwhichI’mcc’dtothecolorgray,andsenditdirectlytoafolderlabeled “Later.” Similarly, I setmy application to play a particularly cheerfulsound when I receive a message from a source I’ve marked as urgent andimportant (these includemessages frommywife, students, ormembersofmydepartment).Sure,ittakessometimetosetupsuchfilters,buthavingoncegonetothetroubleofdoingso,I’vereducedtherandomnessofthereward,madethescheduleofreinforcementmorefixed,andultimatelyimprovedmylife.Asforovercoming the temptations of checkingmy iPhone too frequently—I am stillworkingonthatone.

FurtherReflectiononSelf-Control:TheLessonofInterferonSeveral years ago I heard an interview onNPRwith the Delany sisters, wholived to be 102 and 104. There was one particular part of the interview thatremainedwithme.Thesisterssaid thatoneof theirsecrets fora long lifewasnevermarrying,becausetheyneverhadhusbandsto“worrythemtodeath.”Thissoundsreasonableenough,butitisn’tsomethingtowhichIcanpersonallyattest(anditalsoturnsoutthatmenbenefitmorefrommarriageanyway).9Oneofthesisterssaidthatanothersecretwastoavoidhospitals,whichseemedsensiblefortwo reasons—if you’re healthy in the first place, you don’t need to go, andyou’realsolesslikelytocatchanillnessfrombeinginthehospital.I certainly understood what she was talking about. When I was first

hospitalized for my burns, I acquired hepatitis from a blood transfusion.Obviously, there’snogood time togethepatitis,but the timingcouldnothavebeenworseforme.Thediseaseincreasedtherisksofmyoperations,delayedmytreatment, and causedmybody to rejectmany of the skin transplants.After awhilethehepatitissubsided,butitstillslowedmyrecoverybyflaringupfromtimetotimeandwreakinghavoconmysystem.Thiswasin1985,beforemytypeofhepatitishadbeenisolated; thedoctors

knewitwasn’thepatitisAorB,butitremainedamystery,sotheyjustcalleditnon-A-non-Bhepatitis.In1993,whenIwasingraduateschool,Ihadaflare-up;IcheckedintothestudenthealthcenterandthedoctortoldmeIhadhepatitisC,which had recently been isolated and identified. Thiswas good news for tworeasons. First, I now knew what I had, and second, a new experimentaltreatment, interferon, looked promising. Given the threat of liver fibrosis,cirrhosis,andthepossibilityofearlydeathfromhepatitisC,itseemedtomethat

beingpartofanexperimentalstudywasclearlythelesseroftwoevils.Interferon was initially approved by the FDA for treatment of hairy cell

leukemia (which has no other real treatment) and, as is often the case withcancer therapy, the treatment regimen was particularly distasteful. The initialprotocolcalledforself-injectionsofinterferonthreetimesaweek.Iwaswarnedthat after each injection I would experience fever, nausea, headaches, andvomiting, and this warning was accurate. So, for six months on Mondays,Wednesdays,andFridaysIwouldarrivehomefromschool,taketheneedlefromthemedicinecabinet,opentherefrigerator,loadthesyringewiththerightdosageofinterferon,andplungetheneedleintomythigh.ThenIwouldliedowninthebighammock—the only interesting piece of furniture in my loftlike studentapartment—fromwhich Ihadaperfectviewof the television. I kept abucketwithinreachtocatchthevomit thatwouldinevitablycomeup,afterwhichthefever, shivering,andheadachewouldbegin.At somepoint Iwould fall asleepandwakeupachingwithflulikesymptoms.BynoonIwouldbemoreorlessOKandwouldgobacktowork.ThedifficultythatI,andtherestofthepatients,hadwiththeinterferonwas

the basic problemof delayed gratification and self-control.On every injectiondayIwasfacedwithatrade-offbetweengivingmyselfaninjectionandfeelingsick for thenext16hours (anegative immediateeffect),and thehope that thetreatmentwouldcureme in the long term (apositive long-termeffect).At theendofthesix-monthtrialthedoctorstoldmethatIwastheonlypatientintheprotocolwhohad followed the regimen in theway theydesigned it.Everyoneelse in the study skipped the medication numerous times, which was hardlysurprising,giventhechallenges.(Lackofmedicalcomplianceis,infact,averypervasiveproblem.)SohowdidIdoit?DidIsimplyhavenervesofsteel?No.Likeanyoneelse,I

haveplentyofproblemswithself-control.ButIdidhaveatrick.Ibasicallytriedto harness my other desires in an effort to make the prospect of the terribleinjectionmorebearable.Forme,thekeywasmovies.I love movies. If I had the time, I would watch one every day.When the

doctors toldmewhat to expect, I decided that Iwould notwatch anymoviesuntilafterIinjectedmyself,andthenIcouldwatchasmanyasIwanteduntilIfellasleep.Oneveryinjectionday,Iwouldstopat thevideostoreonthewaytoschool

andpickupafewfilmsthatIwantedtosee.Iwouldhavetheseinmybagandwouldeagerlyanticipatewatchingthemlaterthatday.Then,immediatelyafterItooktheinjection,butbeforetheshiveringandheadachesetin,Ijumpedintomy

hammock,gotcomfortable,madesurethebucketwasinposition,andstartedmymini–film fest. This way, I learned to associate the initial injection with therewardingexperienceofwatchingawonderfulmovie.Onlyanhourlater,afterthenegativesideeffectskickedin,didIhavealessthanwonderfulfeelingaboutit.Planning my evenings in this way helped my brain associate the injection

morecloselywiththemoviethanwiththefever,chills,andvomiting,andthus,Iwasabletocontinuethetreatment.DURING THE SIX-MONTH treatment, it looked as though the interferon wasworking, and my liver function improved dramatically. Unfortunately, a fewweeks after the trial was over, the hepatitis returned, so I started a moreaggressivetreatment.Thisonelastedayearandinvolvednotonlyinterferonbutalsoadrugcalledribavirin.Tocompelmyself tofollowthis treatment,Iagaintried the injection-movie-hammock procedure as before. (Thanks to mysomewhatfaultymemory,IwasevenabletoenjoysomeofthesamemoviesIhadwatchedduringthefirsttreatmentwithinterferon.)Thistime,however,Iwasalsointerviewingatvariousuniversitiesforajobas

anassistantprofessor.Ihadtotravelto14cities,stayovernightinhotels,giveatalk to groups of academics, and then submit to one-on-one interviews withprofessors and deans. To avoid telling my prospective colleagues about myadventures with interferon and ribavirin, I would insist on a rather strangescheduleofinterviews.IroutinelyhadtomakesomeexcuseaboutwhyIarrivedearly thedaybefore the interviewbutcouldnotgooutfordinner thateveningwithmyhosts.Instead,Iwouldcheckintothehotel,takeouttheinjectionfromalittleiceboxthatIcarriedwithme,injectmyself,andwatchafewmoviesonthehoteltelevision.ThefollowingdayIwouldalsotrytodelaytheinterviewsforafewhours,butonceIfeltbetterIwouldgothroughtheinterviewasbestIcould.(Sometimesmyprocedureworked;sometimesIhadtomeetpeoplewhileIstillfeltwretched.) Fortunately, after I finishedmy interviews I received excellentnews. Not only had I been offered a job, but the combination treatment hadeliminatedthehepatitisfrommyliver.I’vebeenhepatitis-freeeversince.THE LESSON I took away from my interferon treatment is a general one: if aparticular desired behavior results in an immediate negative outcome(punishment),thisbehaviorwillbeverydifficulttopromote,eveniftheultimateoutcome(inmycase,improvedhealth)ishighlydesirable.Afterall,that’swhatthe problem of delayed gratification is all about. Certainly, we know thatexercisingregularlyandeatingmorevegetableswillhelpusbehealthier,evenifwedon’t live tobeasoldas theDelany sisters;butbecause it isveryhard toholdavivid imageofour futurehealth inourmind’seye,wecan’tkeep from

reachingforthedoughnuts.Inordertoovercomemanytypesofhumanfallibility,Ibelieveit’susefulto

lookfortricksthatmatchimmediate,powerful,andpositivereinforcementswiththenot-so-pleasantstepswehave to take towardour long-termobjectives.Forme,beginningamovie—beforeIfeltanysideeffects—helpedmetosustaintheunpleasantnessofthetreatment.Asamatteroffact,Itimedeverythingperfectly.ThemomentIfinishedinjectingmyself,IpressedthePlaybutton.IsuspectthathadIhitPlayafterthesideeffectskickedin,Iwouldnothavebeenassuccessfulinwinningthetug-of-war.Andwhoknows?MaybeifIhadwaitedforthesideeffects tokick inbefore I started themovies, Iwouldhave created anegativeassociationandwouldnowenjoymovieslessasaconsequence.*ONE OF MY colleagues at Duke University, Ralph Keeney, recently noted thatAmerica’s topkiller isn’t cancerorheartdisease,nor is it smokingorobesity.It’sour inability tomakesmartchoicesandovercomeourownself-destructivebehaviors.10Ralphestimatesthatabouthalfofuswillmakealifestyledecisionthatwillultimatelyleadustoanearlygrave.Andasifthiswerenotbadenough,itseemsthattherateatwhichwemakethesedeadlydecisionsisincreasingatanalarmingpace.Isuspectthatoverthenextfewdecades,realimprovementsinlifeexpectancy

andqualityarelesslikelytobedrivenbymedicaltechnologythanbyimproveddecision making. Since focusing on long-term benefits is not our naturaltendency,weneedtomorecarefullyexaminethecasesinwhichwerepeatedlyfail, and try to come up with some remedies for these situations. (For anoverweight movie lover, the key might be to enjoy watching a film whilewalkingon the treadmill.)The trick is to find the rightbehavioral antidote foreachproblem.Bypairingsomethingthatwelovewithsomethingthatwedislikebut that isgoodforus,wemightbeable toharnessdesirewithoutcome—andthusovercomesomeoftheproblemswithself-controlwefaceeveryday.

Chapter8TheHighPriceofOwnership

WhyWeOvervalueWhatWeHave

AtDukeUniversity,basketballissomewherebetweenapassionatehobbyandareligious experience. The basketball stadium is small and old and has badacoustics—the kind that turn the cheers of the crowd into thunder and pumpeveryone’sadrenalinelevelrightthroughtheroof.Thesmallsizeofthestadiumcreatesintimacybutalsomeanstherearenotenoughseatstocontainallthefanswhowant toattend thegames.This,by theway, ishowDuke likes it,and theuniversityhasexpressedlittleinterestinexchangingthesmall,intimatestadiumfor a larger one. To ration the tickets, an intricate selection process has beendevelopedovertheyears,toseparatethetrulydevotedfansfromalltherest.Evenbeforethestartofthespringsemester,studentswhowanttoattendthe

gamespitchtentsintheopengrassyareaoutsidethestadium.Eachtentholdsupto 10 students. The campers who arrive first take the spots closest to thestadium’s entrance, and the ones who come later line up farther back. Theevolving community is called Krzyzewskiville, reflecting the respect thestudentshaveforCoachK—MikeKrzyzewski—aswellastheiraspirationsforvictoryinthecomingseason.So that the serious basketball fans are separated from thosewithout “Duke

blue”runningthroughtheirveins,anairhornissoundedatrandomtimes.Atthesound,acountdownbegins,andwithinthenextfiveminutesatleastonepersonfrom each tentmust check inwith the basketball authorities. If a tent fails toregisterwithinthesefiveminutes,thewholetentgetsbumpedtotheendoftheline.Thisprocedurecontinuesformostofthespringsemester,andintensifiesinthelast48hoursbeforeagame.

Atthatpoint,48hoursbeforeagame,thechecksbecome“personalchecks.”From then on, the tents are merely a social structure: when the air horn issounded,everystudenthastocheckinpersonallywiththebasketballauthorities.Missingan“occupancycheck”inthesefinaltwodayscanmeanbeingbumpedtotheendoftheline.Althoughtheairhornsoundsoccasionallybeforeroutinegames,itcanbeheardatallhoursofnightanddaybeforethereallybigcontests(suchasgamesagainsttheUniversityofNorthCarolina-ChapelHillandduringthenationalchampionships).Butthat’snottheoddestpartoftheritual.Theoddestpartisthatforthereally

importantgames,suchasthenationaltitles,thestudentsatthefrontofthelinestilldon’tgetaticket.Rather,eachofthemgetsalotterynumber.Onlylater,astheycrowdaroundalistofwinnerspostedatthestudentcenter,dotheyfindoutiftheyhavereally,trulywonatickettothecovetedgame.

ASZIVCARMON(aprofessoratINSEAD)andIlistenedtotheairhornduringthecampout at Duke in the spring of 1994, we were intrigued by the real-lifeexperiment going on before our eyes.All the studentswhowere camping outwantedpassionatelytogotothebasketballgame.Theyhadallcampedoutforalongtimefortheprivilege.Butwhenthelotterywasover,someofthemwouldbecometicketowners,whileotherswouldnot.The question was this: would the students who had won tickets—who had

ownership of tickets—value those ticketsmore than the studentswho had notwon themeven though theyall“worked”equallyhard toobtain them?On thebasis of Jack Knetsch, Dick Thaler, and Daniel Kahneman’s research on the“endowmenteffect,”wepredictedthatwhenweownsomething—whetherit’sacaroraviolin,acatorabasketballticket—webegintovalueitmorethanotherpeopledo.Thinkabout this foraminute.Whydoes thesellerofahouseusuallyvalue

that property more than the potential buyer? Why does the seller of anautomobile envision a higher price than the buyer? Inmany transactionswhydoes the owner believe that his possession is worth more money than thepotentialowneriswillingtopay?There’sanoldsaying,“Oneman’sceilingisanotherman’s floor.”Well,when you’re the owner, you’re at the ceiling; andwhenyou’rethebuyer,you’reatthefloor.Tobesure,thatisnotalwaysthecase.Ihaveafriendwhocontributedafull

boxofrecordalbumstoagaragesale,forinstance,simplybecausehecouldn’tstandhaulingthemaroundanylonger.Thefirstpersonwhocamealongofferedhim$25 for thewholebox (without even looking at the titles), andmy friendacceptedit.Thebuyerprobablysoldthemfor10timesthatpricethefollowing

day.Indeed,ifwealwaysovervaluedwhatwehad,therewouldbenosuchthingasAntiques Roadshow. (“Howmuch did you pay for this powder horn? Fivedollars?Well,letmetellyou,youhaveanationaltreasurehere.”)But this caveat aside, we still believed that in general the ownership of

something increases its value in the owner’s eyes. Were we right? Did thestudents at Duke who had won the tickets—who could now anticipateexperiencing thepacked stands and theplayers racing across the court—valuethemmorethanthestudentswhohadnotwonthem?Therewasonlyonegoodwaytofindout:getthemtotellushowmuchtheyvaluedthetickets.Inthiscase,ZivandIwouldtrytobuyticketsfromsomeofthestudentswho

hadwonthem—andsellthemtothosewhodidn’t.That’sright;wewereabouttobecometicketscalpers.

THATNIGHTWEgotalistofthestudentswhohadwonthelotteryandthosewhohadn’t, and we started telephoning. Our first call was to William, a seniormajoringinchemistry.Williamwasratherbusy.Aftercampingforthepreviousweek, he had a lot of homework and e-mail to catch up on. He was not toohappy,either,becauseafterreachingthefrontoftheline,hewasstillnotoneoftheluckyoneswhohadwonaticketinthelottery.“Hi,William,”Isaid.“Iunderstandyoudidn’tgetoneof the tickets for the

finalfour.”“That’sright.”“Wemaybeabletosellyouaticket.”“Cool.”“Howmuchwouldyoubewillingtopayforone?”“Howaboutahundreddollars?”hereplied.“Toolow,”Ilaughed.“You’llhavetogohigher.”“Ahundredfifty?”heoffered.“Youhavetodobetter,”Iinsisted.“What’sthehighestpriceyou’llpay?”Williamthoughtforamoment.“Ahundredseventy-five.”“That’sit?”“That’sit.Notapennymore.”“OK,you’reon the list. I’ll let youknow,” I said. “By theway,how’dyou

comeupwiththathundredseventy-five?”Williamsaidhefiguredthatfor$175hecouldalsowatchthegameatasports

bar,free,spendsomemoneyonbeerandfood,andstillhavealotleftoverforafewCDsorevensomeshoes.Thegamewouldnodoubtbeexciting,hesaid,butatthesametime$175isalotofmoney.Ournextcallwas toJoseph.Aftercampingout foraweekJosephwasalso

behindonhisschoolwork.Buthedidn’tcare—hehadwonaticketinthelotteryandnow, in a fewdays, hewould bewatching theDuke players fight for thenationaltitle.“Hi, Joseph,” I said. “We may have an opportunity for you—to sell your

ticket.What’syourminimumprice?”“Idon’thaveone.”“Everyonehasaprice,”Ireplied,givingthecommentmybestAlPacinotone.Hisfirstanswerwas$3,000.“Comeon,”Isaid,“That’swaytoomuch.Bereasonable;youhavetooffera

lowerprice.”“Allright,”hesaid,“twenty-fourhundred.”“Areyousure?”Iasked.“That’saslowasI’llgo.”“OK. If I can findabuyerat thatprice, I’llgiveyouacall.By theway,” I

added,“howdidyoucomeupwiththatprice?”“Dukebasketballisahugepartofmylifehere,”hesaidpassionately.Hethen

went on to explain that the gamewould be a definingmemory of his time atDuke, an experience that hewould pass on to his children and grandchildren.“So how can you put a price on that?” he asked. “Can you put a price onmemories?”WilliamandJosephwerejusttwoofmorethan100studentswhomwecalled.

In general, the studentswho did not own a ticketwerewilling to pay around$170 for one. The price they were willing to pay, as inWilliam’s case, wastemperedbyalternativeusesforthemoney(suchasspendingitinasportsbarfordrinksand food).Thosewhoowneda ticket,on theotherhand,demandedabout $2,400 for it. Like Joseph, they justified their price in terms of theimportanceoftheexperienceandthelifelongmemoriesitwouldcreate.What was really surprising, though, was that in all our phone calls, not a

singlepersonwaswillingtosellaticketatapricethatsomeoneelsewaswillingtopay.Whatdidwehave?Wehadagroupofstudentsallhungryforabasketballticketbeforethelotterydrawing;andthen,bang—inaninstantafterthedrawing,theyweredividedintotwogroups—ticketownersandnon–ticketowners.Itwasan emotional chasm that was formed, between those who now imagined thegloryof thegame,and thosewho imaginedwhatelse theycouldbuywith thepriceoftheticket.Anditwasanempiricalchasmaswell—theaveragesellingprice (about $2,400) was separated by a factor of about 14 from the averagebuyer’soffer(about$175).Fromarationalperspective,boththeticketholdersandthenon–ticketholders

should have thought of the game in exactly the same way. After all, the

anticipatedatmosphereatthegameandtheenjoymentonecouldexpectfromtheexperienceshouldnotdependonwinninga lottery.Thenhowcoulda randomlotterydrawinghavechangedthestudents’viewofthegame—andthevalueofthetickets—sodramatically?

OWNERSHIPPERVADESOURlivesand,inastrangeway,shapesmanyofthethingswedo.AdamSmithwrote,“Everyman[andwoman]...livesbyexchanging,orbecomesinsomemeasureamerchant,andthesocietyitselfgrowstobewhatisproperly a commercial society.”That’s an awesome thought.Muchof our lifestorycanbetoldbydescribingtheebbandflowofourparticularpossessions—whatweget andwhatwegiveup.Webuyclothes and food, automobiles andhomes, for instance. Andwe sell things as well—homes and cars, and in thecourseofourcareers,ourtime.Sincesomuchofour lives isdedicated toownership,wouldn’t itbenice to

make thebestdecisions about this?Wouldn’t it benice, for instance, toknowexactlyhowmuchwewouldenjoyanewhome,anewcar,adifferentsofa,andanArmanisuit,so thatwecouldmakeaccuratedecisionsaboutowningthem?Unfortunately,thisisrarelythecase.Wearemostlyfumblingaroundinthedark.Why?Becauseofthreeirrationalquirksinourhumannature.Thefirstquirk,aswesawinthecaseofthebasketballtickets,isthatwefallin

lovewithwhatwealreadyhave.SupposeyoudecidetosellyouroldVWbus.Whatdoyoustartdoing?Evenbeforeyou’veputaFORSALEsigninthewindow,youbegintorecalltripsyoutook.Youweremuchyounger,ofcourse;thekidshadn’tsproutedintoteenagers.Awarmglowofremembrancewashesoveryouandthecar.ThisappliesnotonlytoVWbuses,ofcourse,buttoeverythingelse.Anditcanhappenfast.Forinstance,twoofmyfriendsadoptedachildfromChinaandtoldmethis

remarkablestory.TheywenttoChinawith12othercouples.Whentheyreachedtheorphanage,thedirectortookeachofthecouplesseparatelyintoaroomandpresented them with a daughter. When the couples reconvened the followingmorning, they all commented on the director’s wisdom: Somehow she knewexactlywhich littlegirl togive toeachcouple.Thematcheswereperfect.Myfriends felt the same way, but they also realized that the matches had beenrandom.What made each match seem perfect was not the Chinese woman’stalent,butnature’sabilitytomakeusinstantlyattachedtowhatwehave.Thesecondquirkisthatwefocusonwhatwemaylose,ratherthanwhatwe

maygain.WhenwepriceourbelovedVW,therefore,wethinkmoreaboutwhatwe will lose (the use of the bus) than what we will gain (money to buysomething else). Likewise, the ticket holder focuses on losing the basketball

experience,ratherthanimaginingtheenjoymentofobtainingmoneyoronwhatcanbepurchasedwithit.Ouraversiontolossisastrongemotion,andasIwillexplain later in thebook,onethatsometimescausesus tomakebaddecisions.Doyouwonderwhyweoftenrefusetosellsomeofourcherishedclutter,andifsomebodyofferstobuyit,weattachanexorbitantpricetagtoit?Assoonaswebeginthinkingaboutgivingupourvaluedpossessions,wearealreadymourningtheloss.The thirdquirk is thatweassumeotherpeoplewillsee the transactionfrom

the same perspective aswe do.We somehow expect the buyer of ourVW toshareourfeelings,emotions,andmemories.Orweexpectthebuyerofourhouseto appreciate how the sunlight filters through the kitchen windows.Unfortunately, thebuyerof theVWismore likely tonotice thepuffofsmokethatisemittedasyoushiftfromfirstintosecond;andthebuyerofyourhouseismorelikelytonoticethestripofblackmoldinthecorner.Itisjustdifficultforustoimaginethatthepersonontheothersideofthetransaction,buyerorseller,isnotseeingtheworldasweseeit.

OWNERSHIPALSOHASwhat I’dcall“peculiarities.”Forone, themoreworkyouputintosomething,themoreownershipyoubegintofeelforit.Thinkaboutthelast time you assembled some furniture. Figuring outwhich piece goeswhereandwhichscrewfitsintowhichholebooststhefeelingofownership.In fact, I can saywith a fair amount of certainty that pride of ownership is

inverselyproportionaltotheeasewithwhichoneassemblesthefurniture;wiresthehigh-definitiontelevisiontothesurround-soundsystem;installssoftware;orgetsthebabyintothebath,dried,powdered,diapered,andtuckedawayinthecrib.MyfriendandcolleagueMikeNorton(aprofessoratHarvard)andIhaveatermforthisphenomenon:the“Ikeaeffect.”Anotherpeculiarityisthatwecanbegintofeelownershipevenbeforeweown

something.Thinkaboutthelasttimeyouenteredanonlineauction.SupposeyoumakeyourfirstbidonMondaymorning,forawristwatch,andatthispointyouarethehighestbidder.Thatnightyoulogon,andyou’restillthetopdog.Dittoforthenextnight.Youstartthinkingaboutthatelegantwatch.Youimagineitonyour wrist; you imagine the compliments you’ll get. And then you go onlineagain one hour before the endof the auction. Somedoghas toppedyour bid!Someoneelsewilltakeyourwatch!Soyouincreaseyourbidbeyondwhatyouhadoriginallyplanned.Is thefeelingofpartialownershipcausingtheupwardspiralweoftenseein

onlineauctions? Is it thecase that the longer anauctioncontinues, thegreater

gripvirtualownershipwillhaveonthevariousbiddersandthemoremoneytheywill spend?Afewyearsago,JamesHeyman,YesimOrhun(aprofessorat theUniversityofChicago),andIsetupanexperimenttoexplorehowthedurationofanauctiongraduallyaffectstheauction’sparticipantsandencouragesthemtobid to the bitter end. As we suspected, the participants whowere the highestbidders,forthelongestperiodsoftime,endedupwiththestrongestfeelingsofvirtual ownership. Of course, they were in a vulnerable position: once theythought of themselves as owners, theywere compelled to prevent losing theirpositionbybiddinghigherandhigher.“Virtualownership,”ofcourse,isonemainspringoftheadvertisingindustry.

We see a happy couple driving down the California coastline in a BMWconvertible,andweimagineourselvesthere.WegetacatalogofhikingclothingfromPatagonia,seeapolyesterfleecepullover,and—poof—westartthinkingofitasours.Thetrapisset,andwewillinglywalkin.Webecomepartialownersevenbeforeweownanything.There’sanotherwaythatwecangetdrawnintoownership.Often,companies

will have “trial” promotions. If we have a basic cable television package, forinstance,weareluredintoa“digitalgoldpackage”byaspecial“trial”rate(only$59amonthinsteadoftheusual$89).Afterall,wetellourselves,wecanalwaysgobacktobasiccableordowngradetothe“silverpackage.”Butoncewetrythegoldpackage,ofcourse,weclaimownershipof it.Will

we really have the strength to downgrade back to basic or even to “digitalsilver”?Doubtful.At theonset,wemay think thatwe can easily return to thebasicservice,butoncewearecomfortablewiththedigitalpicture,webegintoincorporate our ownership of it into our viewof theworld andourselves, andquicklyrationalizeawaytheadditionalprice.Morethanthat,ouraversiontoloss—the lossof thatnicecrisp“goldpackage”pictureand theextrachannels—istoomuchforustobear.Inotherwords,beforewemaketheswitchwemaynotbe certain that the cost of the digital gold package isworth the full price; butoncewehaveit,theemotionsofownershipcomewellingup,totellusthatthelossof“digitalgold”ismorepainfulthanspendingafewmoredollarsamonth.We may think we can turn back, but that is actually much harder than weexpected.Anotherexampleofthesamehookisthe“30-daymoney-backguarantee.”If

wearenotsurewhetherornotweshouldgetanewsofa,theguaranteeofbeingable to change ourmind latermay push us over the hump so thatwe end upgettingit.Wefailtoappreciatehowourperspectivewillshiftoncewehaveitathome,andhowwewillstartviewingthesofa—asours—andconsequentlystartviewingreturningitasaloss.Wemightthinkwearetakingithomeonlytotryit

outforafewdays,butinfactwearebecomingownersofitandareunawareoftheemotionsthesofacanigniteinus.

OWNERSHIPISNOTlimitedtomaterialthings.Itcanalsoapplytopointsofview.Oncewetakeownershipofanidea—whetherit’saboutpoliticsorsports—whatdowedo?Weloveitperhapsmorethanweshould.Weprizeitmorethanitisworth.Andmost frequently,wehave trouble lettinggoof it becausewecan’tstand the ideaof its loss.Whatarewe leftwith then?An ideology—rigidandunyielding.

THERE IS NO known cure for the ills of ownership.AsAdam Smith said, it iswoven intoour lives.Butbeingawareof itmighthelp.Everywherearounduswe see the temptation to improve the quality of our lives by buying a largerhome,asecondcar,anewdishwasher,alawnmower,andsoon.But,oncewechangeourpossessionswehaveaveryhardtimegoingbackdown.AsInotedearlier,ownershipsimplychangesourperspective.Suddenly,movingbackwardto our pre-ownership state is a loss, one thatwe cannot abide.And so,whilemoving up in life, we indulge ourselves with the fantasy that we can alwaysratchet ourselves back if need be; but in reality, we can’t. Downgrading to asmallerhome,forinstance,isexperiencedasaloss,itispsychologicallypainful,andwearewillingtomakeallkindsofsacrificesinordertoavoidsuchlosses—evenif,inthiscase,themonthlymortgagesinksourship.Myownapproachistotrytoviewalltransactions(particularlylargeones)as

if I were a nonowner, putting some distance betweenmyself and the item ofinterest. In this attempt, I’m not certain if I have achieved the uninterest inmaterialthingsthatisespousedbytheHindusannyasi,butatleastItrytobeasZenasIcanaboutit.

ReflectionsontheChallengesofOwnershipIn2007and2008,homevaluesacrossAmericaplummetedasfastasGeorgeW.Bush’s approval ratings. Each month brought with it more bad news: moreforeclosures,morenewhomesforsaleinastagnantrealestatemarket,andmorestories of people who couldn’t get mortgages. Results from a study byZillow.com (a Web site that facilitates home searches and price estimations)illustrated just how strongly this news affected home owners: in the secondquarterof2008,nineoutof tenhomeowners(92percent)said therehadbeenforeclosuresintheirlocalrealestatemarket,andtheywereconcernedthattheseforeclosureshadloweredhomevaluesintheirneighborhoods.Moreover,fourin

fivehomeowners (82percent)didnot seemuchhope for improvement in therealestatemarketinthenearfuture.On the face of it, Zillow’s research suggested that homeowners had been

paying attention to the media, had an idea of what was happening in theeconomy,andunderstood that thehousingcrunchwasa reality.But this studyalsofoundthattheseseeminglywell-informedpeoplebelievedthatthevaluesoftheirownhomeshadnotdecreasedasmuch.Twooutofthreehomeowners(62percent)believed that thevalueof theirownhomehad increasedorstayed thesame,andabouthalf(56percent)plannedtoinvestinhomeimprovements,evenas theywatched thehousingmarketcollapsearound them.Whatexplained thewide gap between their inflated perception of their homes’ values and thegloomymarketreality?As we discussed in Chapter 8, ownership fundamentally changes our

perspective.Inthesamewaythatwethinkourownkidsaremorewonderfulandspecial than our friends’ and neighbors’ children (regardless of whether ourchildrendeserve suchesteem),weovervalue everything thatweown,whetherit’sapairofbasketballticketsorourdomiciles.But home ownership is even more interesting and complex than, say, the

regularcaseofowningacoffeemugorapairofbaseball tickets—becauseweinvest somuch in our houses. Think, for example, about all the changes andtinkeringwe do to our homes oncewemove into them.We replace laminatecountertopswithgranite.Wetakeoutawallandinstallanewwindowthatletsthelightshinejustsoonthediningroomtable.Wepaintthelivingroomwallsadeepearthyclaycolor.Wechangethebathroomtile.Weaddaporchandinstallakoipondinthebackyard.Littlebylittle,wemakechangeshereandthereuntilthe house feels perfectly tailored to our unique individual tastes, until itexpresses our elegant or eclectic sense of style to everyone else. When theneighborscomeover,theyadmireourcountertopsandlightfixtures.Butintheend,dootherpeoplevaluethechangeswehavesolovinglymadeasmuchaswedo?Dotheyvaluethesechangesatall?Considerahomeownerwhocomparesherownbeautifullyremodeledhouse

withasimilaronedownthestreet thathasbeen languishingon themarket formonths, or with another that has recently sold for much less than the askingprice. In so doing, she understandswhy the owners of these other homes hadsuch a hard time selling them. They had the laminate and not the granitecountertops, no earthy clay paint or light that fell just so on the dining roomtable.“Nowonderthosehousesdidn’tsell,”shethinkstoherself,“theysimplyarenotasniceasmine.”MYWIFE,SUMI,andIalsofellvictimtothisbias.WhenweworkedatMIT,we

boughtanewhouseinCambridge,Massachusetts(thehousewasoriginallybuiltin1890, but it felt new tous).Wepromptlywent about fixing it up.We tookdownsomewallstogivethehouseanopenfeel,whichweloved.Werenovatedthe bathrooms and set up a sauna in the basement. We also converted thecarriage house in the garden into a small combination office-apartment.Sometimes we would pack our laundry basket with some wine, food, andclothing,andescapetothecarriagehousefora“weekendaway.”Then,in2007,wetookjobsatDukeUniversityandmovedtoDurham,North

Carolina.Weassumed that thehousingmarketwouldcontinue todecline, andthat itwouldbe inourbest interest to sell theCambridgehouseasquicklyaspossible. We also wanted to avoid having to pay for heating, taxes, and amortgageontwohomes.ManypeoplecametoseeourbeautifullyremodeledCambridgehome.They

allseemedtoappreciatethestructureandthefeeloftheplace,butnooneputinanoffer.Peopletoldusthatthehousewasbeautiful,butsomehowtheycouldnotfullyappreciatethebenefit of the open floor plan. Instead, they wanted something with moreprivacy.Weheardwhattheysaid,butitdidn’tfullyregister.“Clearly,”wesaidto each other after each set of prospective buyers had come and gone, “thosepeoplearejustdullandunimaginative,andhavenotaste.Surelyourbeautiful,open,airyhomewillbejustrightfortheperfectsomeone.”Time passed. We paid double mortgages, double heating bills, and double

taxes while the housing market continued to slow down. Many more peoplecametoseethehouseandleftwithoutextendinganoffer.EventuallyJean,ourreal estateagent,delivered thebadnews tous thewayadoctor tells apatientthere’ssomethingfunnylookingonhisX-ray.“Ithink,”shesaidslowly,“thatifyouwanttosellthehouse,youwillhavetorebuildsomewallsandreversesomeofthechangesyouhavemade.”Untilshesaidthosewords,wehadnotacceptedthis truth.Despiteourdisbelief, and still fullyconvincedofour superior taste,we took the plunge andpaid a contractor to reerect somewalls.A fewweekslaterthehousewassold.Intheend,thebuyersdidn’twantourhome.Theywantedtheirs.Thiswasa

very expensive lesson, and I certainly wish we had had a better sense of theeffectofourmodificationsonpotentialbuyers.OURPROPENSITYTOovervaluewhatweownisabasichumanbias,anditreflectsamore general tendency to fall in love with, and be overly optimistic about,anythingthathastodowithourselves.Thinkaboutit—don’tyoufeelthatyouareabetter-than-averagedriver,aremorelikelytobeabletoaffordretirement,andarelesslikelytosufferfromhighcholesterol,getadivorce,orgetaparking

ticket if you overstay your meter by a few minutes? This positivity bias, aspsychologists call it, has another name: “The LakeWobegone Effect,” namedafterthefictionaltowninGarrisonKeillor’spopularradioseriesAPrairieHomeCompanion.InLakeWobegone,accordingtoKeillor,“allthewomenarestrong,allthemenaregood-looking,andallthechildrenareaboveaverage.”Idon’tthinkwecanbecomemoreaccurateandobjectiveinthewaywethink

about our children and houses, but maybe we can realize that we have suchbiasesandlistenmorecarefullytotheadviceandfeedbackwegetfromothers.

Chapter9KeepingDoorsOpen

WhyOptionsDistractUsfromOurMainObjective

In 210BC, aChinese commander namedXiangYu led his troops across theYangtze River to attack the army of the Qin (Ch’in) dynasty. Pausing on thebanksoftheriverforthenight,histroopsawakenedinthemorningtofind,totheirhorror,thattheirshipswereburning.Theyhurriedtotheirfeettofightofftheir attackers, but soondiscovered that itwasXiangYuhimselfwhohad settheirshipsonfire,andthathehadalsoorderedallthecookingpotscrushed.XiangYuexplainedtohistroopsthatwithoutthepotsandtheships,theyhad

no other choice but to fight their way to victory or perish. That did not earnXiangYuaplaceontheChinesearmy’slistoffavoritecommanders,butitdidhaveatremendousfocusingeffectonhistroops:grabbingtheirlancesandbows,they charged ferociously against the enemy andwon nine consecutive battles,completelyobliteratingthemain-forceunitsoftheQindynasty.XiangYu’sstoryisremarkablebecauseitiscompletelyantitheticaltonormal

humanbehavior.Normally,wecannotstandtheideaofclosingthedoorsonouralternatives.HadmostofusbeeninXiangYu’sarmor,inotherwords,wewouldhavesentoutpartofourarmytotendtotheships,justincaseweneededthemforretreat;andwewouldhaveaskedotherstocookmeals,justincasethearmyneeded tostayput fora fewweeks.Stillotherswouldhavebeen instructed topoundriceoutintopaperscrolls,justincaseweneededparchmentonwhichtosignthetermsofthesurrenderofthemightyQin(whichwashighlyunlikelyinthefirstplace).In the context of today’s world, wework just as feverishly to keep all our

optionsopen.Webuytheexpandablecomputersystem,justincaseweneedall

thosehigh-techbellsandwhistles.Webuytheinsurancepoliciesthatareofferedwiththeplasmahigh-definitiontelevision,justincasethebigscreengoesblank.Wekeepourchildrenineveryactivitywecanimagine—justincaseonesparkstheir interest ingymnastics,piano,French,organicgardening,or taekwondo.And we buy a luxury SUV, not because we really expect to drive off thehighway, but because just in case we do, we want to have some clearancebeneathouraxles.Wemightnotalwaysbeawareofit,butineverycasewegivesomethingup

forthoseoptions.Weendupwithacomputer thathasmorefunctionsthanweneed,orastereowithanunnecessarilyexpensivewarranty.Andin thecaseofourkids,wegiveuptheirtimeandours—andthechancethattheycouldbecomereallygoodatoneactivity—in trying togive themsomeexperience ina largerange of activities. In running back and forth among the things thatmight beimportant,we forget to spend enough time onwhat really is important. It’s afool’sgame,andonethatweareremarkablyadeptatplaying.Isawthispreciseprobleminoneofmyundergraduatestudents,anextremely

talentedyoungmannamedJoe.Asanincomingjunior,Joehadjustcompletedhisrequiredcourses,andnowhehadtochooseamajor.Butwhichone?Hehada passion for architecture—he spent his weekends studying the eclecticallydesignedbuildingsaroundBoston.Hecould seehimself asadesignerof suchproud structures one day. At the same time he liked computer science,particularly the freedom and flexibility that the field offered. He could seehimselfwithagood-payingjobatanexcitingcompanylikeGoogle.Hisparentswantedhimtobecomeacomputerscientist—andbesides,whogoestoMITtobeanarchitectanyway?*Still,hisloveofarchitecturewasstrong.As Joe spoke, hewrung his hands in frustration.The classes he needed for

majors in computer science and architecturewere incompatible. For computerscience, he needed Algorithms, Artificial Intelligence, Computer SystemsEngineering, Circuits and Electronics, Signals and Systems, ComputationalStructures,andalaboratoryinSoftwareEngineering.Forarchitecture,heneededdifferent courses: ExperiencingArchitecture Studio, Foundations in theVisualArts, Introduction toBuildingTechnology, Introduction toDesignComputing,Introduction to the History and Theory of Architecture, and a further set ofarchitecturestudios.Howcouldhe shut thedoorononecareeror theother? Ifhe started taking

classes in computer science, he would have a hard time switching over toarchitecture;andifhestartedinarchitecture,hewouldhaveanequallydifficulttime switching to computer science. On the other hand, if he signed up forclasses in both disciplines, he would most likely end up without a degree in

eitherfieldattheendofhisfouryearsatMIT,andhewouldrequireanotheryear(paidforbyhisparents)tocompletehisdegree.(Heeventuallygraduatedwithadegree in computer science, but he found the perfect blend in his first job—designingnuclearsubsfortheNavy.)Dana,anotherstudentofmine,hadasimilarproblem—butherscenteredon

twoboyfriends.Shecoulddedicateherenergyandpassiontoapersonshehadmet recently and, she hoped, build an enduring relationshipwith him.Or shecouldcontinuetoputtimeandeffortintoapreviousrelationshipthatwasdying.Sheclearlylikedthenewboyfriendbetterthantheformerone—yetshecouldn’tlet the earlier relationship go. Meanwhile, her new boyfriend was gettingrestless.“Doyoureallywanttorisklosingtheboyyoulove,”Iaskedher,“fortheremotepossibilitythatyoumaydiscover—atsomelaterdate—thatyouloveyourformerboyfriendmore?”Sheshookherhead“no,”andbrokeintotears.*Whatisitaboutoptionsthatissodifficultforus?Whydowefeelcompelled

tokeepasmanydoorsopenaspossible,evenatgreatexpense?Whycan’twesimplycommitourselves?*To try to answer these questions, Jiwoong Shin (a professor at Yale) and I

devised a series of experiments that we hoped would capture the dilemmarepresentedbyJoeandDana.Inourcase,theexperimentwouldbebasedonacomputergamethatwehopedwouldeliminatesomeofthecomplexitiesoflifeand would give us a straightforward answer about whether people have atendencytokeepdoorsopenfor toolong.Wecalledit the“doorgame.”Foralocation,we chose a dark, dismal place—a cavern that evenXiangYu’s armywouldhavebeenreluctanttoenter.

MIT’S EAST CAMPUS dormitory is a daunting place. It is home to the hackers,hardwareenthusiasts,oddballs,andgeneralmisfits (andbelieveme—it takesaseriousmisfit tobeamisfitatMIT).Onehallallowsloudmusic,wildparties,and even public nudity. Another is a magnet for engineering students, whosemodelsofeverythingfrombridges to rollercoasterscanbefoundeverywhere.(Ifyouevervisitthishall,pressthe“emergencypizza”button,andashorttimelaterapizzawillbedeliveredtoyou.)Athirdhallispaintedcompletelyblack.Afourthhasbathroomsadornedwithmuralsofvariouskinds:pressthepalmtreeor the samba dancer, and music, piped in from the hall’s music server (alldownloadedlegally,ofcourse),comeson.Oneafternoona fewyearsago,Kim,oneofmyresearchassistants, roamed

thehallwaysofEastCampuswithalaptoptuckedunderherarm.Ateachdoorsheaskedthestudentswhetherthey’dliketomakesomemoneyparticipatingina quick experiment. When the reply was in the affirmative, Kim entered the

room and found (sometimes only with difficulty) an empty spot to place thelaptop.Astheprogrambootedup,threedoorsappearedonthecomputerscreen:one

red, the second blue, and the third green. Kim explained that the participantscouldenteranyofthethreerooms(red,blue,orgreen)simplybyclickingonthecorresponding door. Once they were in a room, each subsequent click wouldearnthemacertainamountofmoney.Ifaparticularroomofferedbetweenonecentand10cents, for instance, theywouldmakesomething in that rangeeachtimetheyclickedtheirmouseinthatroom.Thescreentalliedtheirearningsastheywentalong.Gettingthemostmoneyoutofthisexperimentinvolvedfindingtheroomwith

thebiggestpayoffandclickinginitasmanytimesaspossible.Butthiswasn’ttrivial.Eachtimeyoumovedfromoneroomtoanother,youuseduponeclick(you had a total of 100 clicks). On one hand, switching from one room toanothermight be a good strategy for finding the biggest payout.On the otherhand,runningmadlyfromdoortodoor(androomtoroom)meantthatyouwereburningupclickswhichcouldotherwisehavemadeyoumoney.Albert,aviolinplayer(andaresidentof theDarkLordKrotusworshippers’

hall), was one of the first participants. He was a competitive type, anddeterminedtomakemoremoneythananyoneelseplayingthegame.Forhisfirstmove,hechosethereddoorandenteredthecube-shapedroom.Once inside,heclicked themouse. It registered3.5cents.Heclickedagain;

4.1cents;athirdclickregisteredonecent.Afterhesampledafewmoreoftherewardsinthisroom,hisinterestshiftedtothegreendoor.Heclickedthemouseeagerlyandwentin.Herehewasrewardedwith3.7centsforhisfirstclick;heclickedagainand

received 5.8 cents; he received 6.5 cents the third time.At the bottom of thescreenhisearningsbegan togrow.Thegreen roomseemedbetter than the redroom—but what about the blue room? He clicked to go through that lastunexploreddoor.Threeclicksfellintherangeoffourcents.Forgetit.Hehurriedbacktothegreendoor(theroompayingaboutfivecentsaclick)andspenttheremainder of his 100 clicks there, increasing his payoff. At the end, Albertinquiredabouthisscore.Kimsmiledasshetoldhimitwasoneofthebestsofar.

ALBERT HAD CONFIRMED something that we suspected about human behavior:givenasimplesetupandacleargoal(inthiscase,tomakemoney),allofusarequiteadeptatpursuingthesourceofoursatisfaction.Ifyouweretoexpressthisexperiment in terms of dating, Albert had essentially sampled one date, triedanother,andevenhadaflingwithathird.Butafterhehadtriedtherest,hewent

backtothebest—andthat’swherehestayedfortheremainderofthegame.Buttobefrank,Alberthaditprettyeasy.Evenwhilehewasrunningaround

withother“dates,”thepreviousoneswaitedpatientlyforhimtoreturntotheirarms.Butsuppose that theotherdates,afteraperiodofneglect,began to turntheirbacksonhim?Supposethathisoptionsbegantoclosedown?WouldAlbertletthemgo?Orwouldhetrytohangontoallhisoptionsforaslongaspossible?In fact,wouldhe sacrifice someofhisguaranteedpayoffs for theprivilegeofkeepingtheseotheroptionsalive?Tofindout,wechanged thegame.This time,anydoor leftunvisitedfor12

clickswoulddisappearforever.

SAM, A RESIDENT of the hackers’ hall, was our first participant in the“disappearing” condition. He chose the blue door to begin with; and afterenteringit,heclickedthreetimes.Hisearningsbeganbuildingatthebottomofthe screen, but this wasn’t the only activity that caught his eye. With eachadditionalclick,theotherdoorsdiminishedbyone-twelfth,signifyingthatifnotattended to, they would vanish. Eight more clicks and they would disappearforever.Samwasn’tabouttolet thathappen.Swinginghiscursoraround,heclicked

onthereddoor,broughtituptoitsfullsize,andclickedthreetimesinsidethered room. But now he noticed the green door—it was four clicks fromdisappearing.Onceagain,hemovedhiscursor,thistimerestoringthegreendoortoitsfullsize.The green door appeared to be delivering the highest payout. So should he

staythere?(Rememberthateachroomhadarangeofpayouts.SoSamcouldnotbe completely convinced that the green door was actually the best. The bluemighthavebeenbetter,orperhaps the red,ormaybeneither.)Witha frenziedlookinhiseye,Samswunghiscursoracrossthescreen.Heclickedthereddoorandwatchedthebluedoorcontinuetoshrink.Afterafewclicksinthered,hejumpedovertotheblue.Butbynowthegreenwasbeginningtogetdangerouslysmall—andsohewasbacktherenext.Before long, Samwas racing from one option to another, his body leaning

tenselyintothegame.InmymindIpicturedatypicallyharriedparent,rushingkidsfromoneactivitytothenext.Isthisanefficientwaytoliveourlives—especiallywhenanotherdoorortwo

is added everyweek? I can’t tell you the answer for certain in terms of yourpersonallife,butinourexperimentswesawclearlythatrunningfrompillartopost was not only stressful but uneconomical. In fact, in their frenzy to keepdoorsfromshutting,ourparticipantsendedupmakingsubstantiallylessmoney

(about15percentless)thantheparticipantswhodidn’thavetodealwithclosingdoors.Thetruthisthattheycouldhavemademoremoneybypickingaroom—any room—andmerely staying there for the whole experiment! (Think aboutthatintermsofyourlifeorcareer.)WhenJiwoongandItiltedtheexperimentsagainstkeepingoptionsopen,the

resultswerestillthesame.Forinstance,wemadeeachclickopeningadoorcostthreecents,sothatthecostwasnotjustthelossofaclick(anopportunitycost)but also a direct financial loss. Therewas no difference in response from ourparticipants. They still had the same irrational excitement about keeping theiroptionsopen.Thenwetoldtheparticipantstheexactmonetaryoutcomestheycouldexpect

fromeachroom.Theresultswerestillthesame.Theystillcouldnotstandtoseea door close. Also, we allowed some participants to experience hundreds ofpractice trials before the actual experiment.Certainly,we thought, theywouldsee thewisdomofnot pursuing the closing doors. Butwewerewrong.Oncetheysawtheiroptionsshrinking,ourMITstudents—supposedlyamongthebestand brightest of youngpeople—could not stay focused. Pecking like barnyardhensateverydoor,theysoughttomakemoremoney,andendedupmakingfarless.In the end, we tried another sort of experiment, one that smacked of

reincarnation.Inthiscondition,adoorwouldstilldisappearifitwasnotvisitedwithin12clicks.Butitwasn’tgoneforever.Rather,asingleclickcouldbringitbackto life. Inotherwords,youcouldneglectadoorwithoutanyloss.Wouldthiskeepourparticipantsfromclickingonitanyhow?No.Tooursurprise,theycontinued to waste their clicks on the “reincarnating” door, even though itsdisappearance had no real consequences and could always be easily reversed.They just couldn’t tolerate the idea of the loss, and so they didwhateverwasnecessarytopreventtheirdoorsfromclosing.

HOWCANWEunshackleourselvesfromthisirrationalimpulsetochaseworthlessoptions?In1941thephilosopherErichFrommwroteabookcalledEscapefromFreedom. In amodern democracy, he said, people are beset not by a lack ofopportunity, but by a dizzying abundance of it. In ourmodern society this isemphatically so.Weare continually reminded thatwecando anything andbeanythingwewant to be. The problem is in living up to this dream.Wemustdevelopourselves in everywaypossible;must taste every aspectof life;mustmakesurethatof the1,000thingstoseebeforedying,wehavenotstoppedatnumber999.But thencomesaproblem—arewespreadingourselves too thin?ThetemptationFrommwasdescribing,Ibelieve,iswhatwesawaswewatched

ourparticipantsracingfromonedoortoanother.Running from door to door is a strange enough human activity. But even

strangerisourcompulsiontochaseafterdoorsoflittleworth—opportunitiesthatarenearlydead,orthatholdlittleinterestforus.MystudentDana,forinstance,hadalreadyconcludedthatoneofhersuitorswasmostlikelyalostcause.Thenwhy did she jeopardize her relationship with the other man by continuing tonourish the wilting relationship with the less appealing romantic partner?Similarly,howmany timeshavewebought somethingonsalenotbecausewereallyneeded itbutbecauseby theendof thesaleallof those itemswouldbegone,andwecouldneverhaveitatthatpriceagain?

THEOTHERSIDEofthistragedydevelopswhenwefailtorealizethatsomethingsreallyaredisappearingdoors,andneedourimmediateattention.Wemayworkmorehoursatourjobs,forinstance,withoutrealizingthatthechildhoodofoursonsanddaughtersisslippingaway.Sometimesthesedoorsclosetooslowlyforustoseethemvanishing.Oneofmyfriendstoldme,forinstance,thatthesinglebest year of hismarriagewaswhenhewas living inNewYork, hiswifewasliving in Boston, and they met only on weekends. Before they had thisarrangement—when they lived together in Boston—they would spend theirweekends catching up onwork rather than enjoying each other. But once thearrangementchanged,andtheyknewthattheyhadonlytheweekendstogether,their shared time became limited and had a clear end (the time of the returntrain).Sinceitwasclearthattheclockwasticking,theydedicatedtheweekendstoenjoyingeachotherratherthandoingtheirwork.I’mnotadvocatinggivingupworkandstayinghomeforthesakeofspending

allyour timewithyour children,ormoving to adifferent city just to improveyourweekendswithyourspouse(althoughitmightprovidesomebenefits).Butwouldn’t it be nice to have a built-in alarm, to warn us when the doors areclosingonourmostimportantoptions?

SOWHATCANwedo?Inourexperiments,weprovedthatrunninghelter-skeltertokeepdoorsfromclosingisafool’sgame.Itwillnotonlywearoutouremotionsbutalsowearoutourwallets.Whatweneedistoconsciouslystartclosingsomeof our doors. Small doors, of course, are rather easy to close.We can easilystrike names off our holiday card lists or omit the tae kwon do from ourdaughter’sstringofactivities.Butthebiggerdoors(orthosethatseembigger)arehardertoclose.Doorsthat

justmightleadtoanewcareerortoabetterjobmightbehardtoclose.Doorsthat are tied to our dreams are also hard to close. So are relationships with

certainpeople—eveniftheyseemtobegoingnowhere.Wehaveanirrationalcompulsiontokeepdoorsopen.It’sjustthewaywe’re

wired. But that doesn’t mean we shouldn’t try to close them. Think about afictionalepisode:RhettButlerleavingScarlettO’HarainGonewiththeWind,inthe scenewhenScarlett clings tohimandbegshim,“Where shall Igo?WhatshallIdo?”Rhett,afterenduringtoomuchfromScarlett,andfinallyhavinghisfillof it,says,“Frankly,mydear,Idon’tgiveadamn.”It’snotbychancethatthislinehasbeenvotedthemostmemorableincinematographichistory.It’stheemphaticclosingofadoor thatgives itwidespreadappeal.And it shouldbearemindertoallofusthatwehavedoors—littleandbigones—whichweoughttoshut.We need to drop out of committees that are a waste of our time and stop

sendingholidaycardstopeoplewhohavemovedontootherlivesandfriends.Weneedtodeterminewhetherwereallyhavetimetowatchbasketballandplaybothgolfandsquashandkeepourfamilytogether;perhapsweshouldputsomeofthesesportsbehindus.Weoughttoshutthembecausetheydrawenergyandcommitment away from the doors that should be left open—andbecause theydriveuscrazy.

SUPPOSEYOU’VECLOSEDsomanyofyourdoorsthatyouhavejusttwoleft.IwishI could say that your choices are easier now, but often they are not. In fact,choosing between two things that are similarly attractive is one of the mostdifficultdecisionswecanmake.This isasituationnot justofkeepingoptionsopen for too long, but of being indecisive to the point of paying for ourindecisionintheend.Letmeusethefollowingstorytoexplain.Ahungry donkey approaches a barn one day looking for hay and discovers

twohaystacksofidenticalsizeatthetwooppositesidesofthebarn.Thedonkeystandsinthemiddleofthebarnbetweenthetwohaystacks,notknowingwhichtoselect.Hoursgoby,buthestillcan’tmakeuphismind.Unabletodecide,thedonkeyeventuallydiesofstarvation.*This story is hypothetical, of course, and casts unfair aspersions on the

intelligenceofdonkeys.AbetterexamplemightbetheU.S.Congress.Congressfrequently gridlocks itself, not necessarily with regard to the big picture ofparticular legislation—the restoration of the nation’s aging highways,immigration,improvingfederalprotectionofendangeredspecies,etc.—butwithregardtothedetails.Often,toareasonableperson,thepartylinesontheseissuesare the equivalent of the two bales of hay. Despite this, or because of it,Congressisfrequentlyleftstuckinthemiddle.Wouldn’taquickdecisionhavebeenbetterforeverybody?

Here’s another example. One of my friends spent three months selecting adigital camera from two nearly identical models. When he finally made hisselection,Iaskedhimhowmanyphotoopportunitieshadhemissed,howmuchofhisvaluabletimehehadspentmakingtheselection,andhowmuchhewouldhavepaidtohavedigitalpicturesofhisfamilyandfriendsdocumentingthelastthreemonths.Morethanthepriceofthecamera,hesaid.Hassomethinglikethiseverhappenedtoyou?What my friend (and also the donkey and Congress) failed to do when

focusing on the similarities andminor differences between two things was totake into account the consequences of not deciding. The donkey failed toconsider starving, Congress failed to consider the lives lost while it debatedhighway legislation, andmy friend failed to consider all the great pictures hewas missing, not to mention the time he was spending at Best Buy. Moreimportant, they all failed to take into consideration the relatively minordifferencesthatwouldhavecomewitheitheroneofthedecisions.My friend would have been equally happy with either camera; the donkey

couldhaveeateneitherbaleofhay; and themembersofCongress couldhavegone home crowing over their accomplishments, regardless of the slightdifferenceinbills.Inotherwords,theyallshouldhaveconsideredthedecisionaneasyone.Theycouldhaveevenflippedacoin(figuratively,inthecaseofthedonkey)andgottenonwith their lives.Butwedon’tact thatway,becausewejustcan’tclosethosedoors.

ALTHOUGHCHOOSINGBETWEENtwoverysimilaroptionsshouldbesimple,infactit is not. I fell victim to this very sameproblema fewyears ago,when Iwasconsideringwhether to stay atMIT ormove to Stanford (I choseMIT in theend).Confrontedwith these twooptions, I spent severalweeks comparing thetwo schools closely and found that they were about the same in their overallattractivenesstome.SowhatdidIdo?Atthisstageofmyproblem,IdecidedIneeded some more information and research on the ground. So I carefullyexamined both schools. Imet people at each place and asked them how theyliked it. I checked out neighborhoods and possible schools for our kids. SumiandIponderedhowthetwooptionswouldfitinwiththekindoflifewewantedforourselves.Before long, Iwasgettingsoengrossed in thisdecision thatmyacademicresearchandproductivitybegantosuffer.Ironically,asIsearchedforthebestplacetodomywork,myresearchwasbeingneglected.Sinceyouhaveprobablyinvestedsomemoneytopurchasemywisdominthis

book (not to mention time, and the other activities you have given up in theprocess), I shouldprobablynot readilyadmit that Iwoundup like thedonkey,

tryingtodiscriminatebetweentwoverysimilarbalesofhay.ButIdid.In theend,andwithallmyforeknowledgeof thedifficulty in thisdecision-

makingprocess,Iwasjustaspredictablyirrationalaseveryoneelse.

Chapter10TheEffectofExpectations

WhytheMindGetsWhatItExpects

Supposeyou’reafanofthePhiladelphiaEaglesandyou’rewatchingafootballgamewithafriendwho,sadly,grewupinNewYorkCityandisarabidfanoftheGiants.Youdon’treallyunderstandwhyyoueverbecamefriends,butafterspendinga semester in thesamedormroomyoustart likinghim,even thoughyouthinkhe’sfootball-challenged.TheEagles have possession and are down by five pointswith no time-outs

left.It’sthefourthquarter,andsixsecondsareleftontheclock.Theballisonthe12-yardline.Fourwidereceiverslineupforthefinalplay.Thecenterhikestheballtothequarterbackwhodropsbackinthepocket.Asthereceiverssprinttowardtheendzone,thequarterbackthrowsahighpassjustasthetimerunsout.AnEagleswidereceivernear thecornerof theendzonedivesfor theballandmakesaspectacularcatch.TherefereesignalsatouchdownandalltheEaglesplayersrunontothefield

incelebration.Butwait.Didthereceivergetbothofhisfeetin?Itlookscloseonthe Jumbotron; so thebooth calls down for a review.You turn to your friend:“Look at that! What a great catch! He was totally in. Why are they evenreviewingit?”Yourfriendscowls.“Thatwascompletelyout!Ican’tbelievetherefdidn’tseeit!Youmustbecrazytothinkthatwasin!”Whatjusthappened?WasyourfriendtheGiantsfanjustexperiencingwishful

thinking?Washedeceivinghimself?Worse,washelying?Orhadhisloyaltytohisteam—andhisanticipationofitswin—completely,truly,anddeeplycloudedhisjudgment?Iwas thinking about that one evening, as I strolled throughCambridge and

overtoMIT’sWalkerMemorialBuilding.Howcouldtwofriends—twohonestguys—seeonesoaringpass in twodifferentways?Infact,howcouldany twoparties look at precisely the same event and interpret it as supporting theiropposing points of view? How could Democrats and Republicans look at asingle schoolchild who is unable to read, and take such bitterly differentpositionson the same issue?Howcould a couple embroiled in a fight see thecausesoftheirargumentsodifferently?A friend of mine who had spent time in Belfast, Ireland, as a foreign

correspondent,oncedescribedameetinghehadarrangedwithmembersof theIRA.During the interview,newscame that thegovernorof theMazeprison,awinding row of cell blocks that held many IRA operatives, had beenassassinated. The IRA members standing around my friend, quiteunderstandably,receivedthenewswithsatisfaction—asavictoryfortheircause.TheBritish,ofcourse,didn’tseeitinthosetermsatall.TheheadlinesinLondonthenextdayboiledwithangerandcallsforretribution.Infact,theBritishsawtheeventasproofthatdiscussionswiththeIRAwouldleadnowhereandthattheIRA should be crushed. I am an Israeli, and no stranger to such cycles ofviolence.Violenceisnotrare.Ithappenssofrequentlythatwerarelystoptoaskourselves why.Why does it happen? Is it an outcome of history, or race, orpolitics—or is there something fundamentally irrational in us that encouragesconflict,thatcausesustolookatthesameeventand,dependingonourpointofview,seeitintotallydifferentterms?LeonardLee(aprofessoratColumbia),ShaneFrederick(aprofessoratMIT),

andIdidn’thaveanyanswers to theseprofoundquestions.But inasearchforthe root of this human condition, we decided to set up a series of simpleexperimentstoexplorehowpreviouslyheldimpressionscancloudourpointofview.Wecameupwithasimpletest—oneinwhichwewouldnotusereligion,politics,orevensportsastheindicator.Wewoulduseglassesofbeer.

YOU REACH THE entrance toWalker by climbing a set of broad steps betweentoweringGreek columns.Once inside (and after turning right), you enter tworooms with carpeting that predates the advent of electric light, furniture tomatch,andasmellthathastheunmistakenpromiseofalcohol,packsofpeanuts,andgood company.Welcome to theMuddyCharles—oneofMIT’s twopubs,and the location for a set of studies that Leonard, Shane, and I would beconductingoverthefollowingweeks.Thepurposeofourexperimentswouldbetodeterminewhetherpeople’sexpectationsinfluencetheirviewsofsubsequentevents—more specifically,whetherbarpatrons’ expectations for a certainkindofbeerwouldshapetheirperceptionofitstaste.

Let me explain this further. One of the beers that would be served to thepatronsoftheMuddyCharleswouldbeBudweiser.Thesecondwouldbewhatwe fondly calledMIT Brew.What’sMIT Brew? Basically Budweiser, plus a“secret ingredient”—two drops of balsamic vinegar for each ounce of beer.(Some of the MIT students objected to our calling Budweiser “beer,” so insubsequent studies, we used Sam Adams—a substance more readilyacknowledgedbyBostoniansas“beer.”)Ataboutseventhatevening,Jeffrey,asecond-yearPhDstudentincomputer

science,wasluckyenoughtodropbytheMuddyCharles.“CanIofferyoutwosmall, free samples of beer?” askedLeonard, approaching him.Withoutmuchhesitation, Jeffrey agreed, and Leonard led him over to a table that held twopitchers of the foamy stuff, one labeledA and the otherB. Jeffrey sampled amouthfulofoneofthem,swishingitaroundthoughtfully,andthensampledtheother. “Which one would you like a large glass of?” asked Leonard. Jeffreythoughtitover.Withafreeglassintheoffing,hewantedtobesurehewouldbespendinghisnearfuturewiththerightmaltyfriend.JeffreychosebeerBastheclearwinner,andjoinedhisfriends(whowerein

deep conversation over the cannon that a group ofMIT students had recently“borrowed”fromtheCaltechcampus).UnbeknownsttoJeffrey,thetwobeershehadpreviewedwereBudweiserandtheMITBrew—andtheoneheselectedwasthevinegar-lacedMITBrew.Afewminuteslater,Mina,avisitingstudentfromEstonia,droppedin.“Likea

freebeer?”askedLeonard.Her replywasa smileandanodof thehead.Thistime,Leonardofferedmore information.BeerA,heexplained,wasastandardcommercial beer, whereas beer B had been doctored with a few drops ofbalsamic vinegar.Mina tasted the two beers.After finishing the samples (andwrinkling her nose at the vinegar-laced brewB) she gave the nod to beer A.Leonard poured her a large glass of the commercial brew and Mina happilyjoinedherfriendsatthepub.MinaandJeffreywereonlytwoofhundredsofstudentswhoparticipatedin

thisexperiment.Buttheirreactionwastypical:withoutforeknowledgeaboutthevinegar,most of them chose the vinegaryMITBrew.Butwhen they knew inadvancethattheMITBrewhadbeenlacedwithbalsamicvinegar,theirreactionwascompletelydifferent.Atthefirsttasteoftheadulteratedsuds,theywrinkledtheir noses and requested the standard beer instead. Themoral, as youmightexpect,isthatifyoutellpeopleupfrontthatsomethingmightbedistasteful,theodds are good that they will end up agreeing with you—not because theirexperiencetellsthemsobutbecauseoftheirexpectations.If, at thispoint in thebook,youareconsidering theestablishmentofanew

brewing company, especially one that specializes in adding some balsamicvinegar to beer, consider the following points: (1) If people read the label, orknewabouttheingredient,theywouldmostlikelyhateyourbeer.(2)Balsamicvinegarisactuallyprettyexpensive—soevenifitmakesbeertastebetter,itmaynotbeworththeinvestment.Justbrewabetterbeerinstead.

BEERWASJUST thestartofourexperiments.TheMBAstudentsatMIT’sSloanSchool also drink a lot of coffee. So oneweek, ElieOfek (a professor at theHarvardBusinessSchool),MarcoBertini (a professor at theLondonBusinessSchool),andIopenedanimpromptucoffeeshop,atwhichweofferedstudentsafreecupofcoffeeiftheywouldanswerafewquestionsaboutourbrew.Alinequicklyformed.Wehandedourparticipantstheircupsofcoffeeandthenpointedthem to a table set with coffee additives—milk, cream, half-and-half, whitesugar, and brown sugar. We also set out some unusual condiments—cloves,nutmeg, orange peel, anise, sweet paprika, and cardamom—for our coffeedrinkerstoaddtotheircupsastheypleased.After addingwhat theywanted (andnoneofouroddcondimentswere ever

used) and tasting the coffee, the participants filled out a survey form. Theyindicatedhowmuchtheylikedthecoffee,whethertheywouldlikeitservedinthecafeteriainthefuture,andthemaximumpricetheywouldbewillingtopayforthisparticularbrew.Wekepthandingoutcoffeeforthenextfewdays,butfromtimetotimewe

changedthecontainersinwhichtheoddcondimentsweredisplayed.Sometimesweplacedtheminbeautifulglass-and-metalcontainers,setonabrushedmetaltraywithsmallsilverspoonsandnicelyprintedlabels.AtothertimesweplacedthesameoddcondimentsinwhiteStyrofoamcups.Thelabelswerehandwrittenin a red felt-tip pen. We went further and not only cut the Styrofoam cupsshorter,butgavethemjagged,hand-cutedges.Whatwere the results?No, the fancy containers didn’t persuade any of the

coffee drinkers to add the odd condiments (I guesswewon’t be seeing sweetpaprikaincoffeeanytimesoon).Buttheinterestingthingwasthatwhentheoddcondimentswereofferedinthefancycontainers,thecoffeedrinkersweremuchmorelikelytotellusthattheylikedthecoffeealot,thattheywouldbewillingtopaywellforit,andthattheywouldrecommendthatweshouldstartservingthisnewblend in thecafeteria.When thecoffeeambience lookedupscale, inotherwords,thecoffeetastedupscaleaswell.

WHENWEBELIEVEbeforehandthatsomethingwillbegood,therefore,itgenerallywillbegood—andwhenwethinkitwillbebad,itwillbad.Buthowdeepare

these influences?Do they just change our beliefs, or do they also change thephysiology of the experience itself? In other words, can previous knowledgeactuallymodify theneural activityunderlying the taste itself, so thatwhenweexpectsomethingtotastegood(orbad),itwillactuallytastethatway?Totestthispossibility,Leonard,Shane,andIconductedthebeerexperiments

again,butwithanimportanttwist.WehadalreadytestedourMITBrewintwoways—by telling our participants about the presence of vinegar in the beerbeforetheytastedthebrew,andbynottellingthemanythingatallaboutit.Butsupposeweinitiallydidn’t tell themabout thevinegar, thenhadthemtaste thebeer, then revealed the presence of the vinegar, and then asked for theirreactions. Would the placement of the knowledge—coming just after theexperience—evoke a different response from what we received when theparticipantsgottheknowledgebeforetheexperience?Foramoment,let’sswitchfrombeertoanotherexample.Supposeyouheard

thataparticularsportscarwasfantasticallyexcitingtodrive,tookoneforatestdrive, and then gave your impressions of the car.Would your impressions bedifferent from thoseofpeoplewhodidn’t knowanything about the sports car,took the test drive, then heard the car was hot, and then wrote down theirimpressions?Inotherwords,doesitmatterifknowledgecomesbeforeoraftertheexperience?And if so,which typeof input ismore important—knowledgebefore theexperience,oran inputof informationafteranexperiencehas takenplace?Thesignificanceofthisquestionisthatifknowledgemerelyinformsusofa

state of affairs, then it shouldn’t matter whether our participants received theinformationbeforeorafter tastingthebeer: inotherwords, ifwetold themupfront that therewas vinegar in the beer, this should affect their review of thebeer.And ifwe told them afterward, that should similarly affect their review.Afterall,theybothgotthesamebadnewsaboutthevinegar-lacedbeer.Thisiswhatweshouldexpectifknowledgemerelyinformsus.On theother hand, if tellingourparticipants about thevinegar at theoutset

actuallyreshapestheirsensoryperceptionstoalignwiththisknowledge,thentheparticipants who know about the vinegar up front should have a markedlydifferentopinionofthebeerfromthosewhoswiggedaglassofit,andthenweretold. Think of it this way. If knowledge actually modifies the taste, then theparticipantswhoconsumedthebeerbeforetheygotthenewsaboutthevinegar,tasted the beer in the sameway as those in the “blind” condition (who knewnothingaboutthevinegar).Theylearnedaboutthevinegaronlyaftertheirtastewasestablished,atwhichpoint,ifexpectationschangeourexperience,itwastoolatefortheknowledgetoaffectthesensoryperceptions.

So,didthestudentswhoweretoldaboutthevinegaraftertastingthebeerlikeitaslittleasthestudentswholearnedaboutthevinegarbeforetastingthebeer?Ordidtheylikeitasmuchasthestudentswhoneverlearnedaboutthevinegar?Whatdoyouthink?Asitturnedout,thestudentswhofoundoutaboutthevinegarafterdrinking

thebeerlikedthebeermuchbetterthanthosewhoweretoldaboutthevinegarupfront.Infact,thosewhoweretoldafterwardaboutthevinegarlikedthebeerjustasmuchasthosewhoweren’tawarethattherewasanyvinegarinthebeeratall.What does this suggest? Let me give you another example. Suppose Aunt

Darcy is having a garage sale, trying to get rid of many things she collectedduringher longlife.Acarpullsup,somepeoplegetout,andbefore longtheyaregatheredaroundoneof theoil paintingsproppedupagainst thewall.Yes,you agree with them, it does look like a fine example of early Americanprimitivism.ButdoyoutellthemthatAuntDarcycopieditfromaphotographjustafewyearsearlier?Myinclination, since Iamanhonest,uprightperson,wouldbe to tell them.

But should you tell them before or after they finish admiring the painting?Accordingtoourbeerstudies,youandAuntDarcywouldbebetteroffkeepingtheinformationunderwrapsuntilaftertheexamination.I’mnotsayingthatthiswould entice the visitors to pay thousands of dollars for the painting (eventhough our beer drinkers preferred our vinegar-laced beer asmuchwhen theyweretoldafterdrinkingitaswhentheywerenottoldatall),butitmightgetyouahigherpriceforAuntDarcy’swork.Bytheway,wealsotriedamoreextremeversionofthisexperiment.Wetold

oneoftwogroupsinadvanceaboutthevinegar(the“before”condition)andtoldthe second group about the vinegar after they had finished the sampling (the“after”condition).Oncethetastingwasdone,ratherthanofferthemalargeglassof their choice,we insteadgave thema large cupof unadulteratedbeer, somevinegar, a dropper, and the recipe for theMIT Brew (two drops of balsamicvinegar per ounce of beer). We wanted to see if people would freely addbalsamicvinegartotheirbeer;ifso,howmuchtheywoulduse;andhowtheseoutcomeswould depend onwhether the participants tasted the beer before orafterknowingaboutthevinegar.What happened? Telling the participants about the vinegar after rather than

before they tasted thebeerdoubled thenumberofparticipantswhodecided toaddvinegar to theirbeer.For theparticipants in the“after”condition, thebeerwithvinegardidn’ttastetoobadthefirsttimearound(theyapparentlyreasoned),andsotheydidn’tmindgivingitanothertry.*

ASYOUSEE,expectationscaninfluencenearlyeveryaspectofourlife.Imaginethatyouneedtohireacatererforyourdaughter’swedding.Josephine’sCateringboastsaboutits“deliciousAsian-stylegingerchicken”andits“flavorfulGreeksalad with kalamata olives and feta cheese.” Another caterer, CulinarySensations, offers a “succulent organic breast of chicken roasted to perfectionand drizzled with a merlot demi-glace, resting in a bed of herbed Israelicouscous”anda“mélangeofthefreshestromacherrytomatoesandcrispfieldgreens,pairedwithawarmcircleofchèvreinafruityraspberryvinagrette.”Although there isnoway toknowwhetherCulinarySensations’ food isany

betterthanJosephine’s,thesheerdepthofthedescriptionmayleadustoexpectgreaterthingsfromthesimpletomatoandgoatcheesesalad.This,accordingly,increasesthechancethatwe(andourguests,ifwegivethemthedescriptionofthedish)willraveoverit.This principle, so useful to caterers, is available to everyone. We can add

small things that soundexoticand fashionable toourcooking (chipotle-mangosauces seem all the rage right now, or try buffalo instead of beef ). Theseingredients might not make the dish any better in a blind taste test; but bychangingourexpectations,theycaneffectivelyinfluencethetastewhenwehavethispre-knowledge.Thesetechniquesareespeciallyusefulwhenyouareinvitingpeoplefordinner

—orpersuadingchildrentotrynewdishes.Bythesametoken,itmighthelpthetaste of the meal if you omit the fact that a certain cake is made from acommercialmixorthatyouusedgenericratherthanbrand-nameorangejuiceinacocktail,or,especiallyforchildren,thatJell-Ocomesfromcowhooves.Iamnot endorsing the morality of such actions, just pointing to the expectedoutcomes.Finally,don’tunderestimate thepowerofpresentation.There’sa reason that

learningtopresentfoodartfullyontheplateisasimportantinculinaryschoolaslearning to grill and fry. Even when you buy take-out, try removing theStyrofoampackagingandplacingthefoodonsomenicedishesandgarnishingit(especiallyifyouhavecompany);thiscanmakeallthedifference.One more piece of advice: If you want to enhance the experience of your

guests,investinanicesetofwineglasses.Moreover,ifyou’rereallyseriousaboutyourwine,youmaywanttogoallout

and purchase the glasses that are specific to burgundies, chardonnays,champagne, etc. Each type of glass is supposed to provide the appropriateenvironment, which should bring out the best in these wines (even thoughcontrolledstudiesfindthattheshapeoftheglassmakesnodifferenceatallinanobjectiveblindtastetest, thatdoesn’tstoppeoplefromperceivingasignificant

differencewhen they are handed the “correct glass”).Moreover, if you forgetthat the shape of the glass really has no effect on the taste of the wine, youyourselfmaybeabletobetterenjoythewineyouconsumeintheappropriatelyshapedfancyglasses.Expectations,ofcourse,arenotlimitedtofood.Whenyouinvitepeopletoa

movie,youcanincreasetheirenjoymentbymentioningthatitgotgreatreviews.This is also essential for building the reputation of a brand or product. That’swhatmarketingisallabout—providinginformationthatwillheightensomeone’santicipated and real pleasure.But do expectations created bymarketing reallychangeourenjoyment?I’msureyourememberthefamous“PepsiChallenge”adsontelevision(orat

least you may have heard of them). The ads consisted of people chosen atrandom, tastingCoke and Pepsi and remarking aboutwhich they liked better.Theseads,createdbyPepsi,announcedthatpeoplepreferredPepsitoCoke.Atthesametime,theadsforCokeproclaimedthatpeoplepreferredCoketoPepsi.Howcouldthatbe?Werethetwocompaniesfudgingtheirstatistics?The answer is in the different ways the two companies evaluated their

products. Coke’s market research was said to be based on consumers’preferenceswhentheycouldseewhattheyweredrinking,includingthefamousred trademark, while Pepsi ran its challenge using blind tasting and standardplasticcupsmarkedMandQ.CoulditbethatPepsitastedbetterinablindtastetestbutthatCoketastedbetterinanon-blind(sighted)test?To better understand the puzzle of Coke versus Pepsi, a terrific group of

neuroscientists—Sam McClure, Jian Li, Damon Tomlin, Kim Cypert, LatanéMontague,andReadMontague—conductedtheirownblindandnon-blindtastetest of Coke and Pepsi. The modern twist on this test was supplied by afunctionalmagneticresonanceimaging(fMRI)machine.Withthismachine,theresearchers could monitor the activity of the participants’ brains while theyconsumedthedrinks.Tastingdrinkswhileone is inanfMRI isnotsimple,by theway,becausea

personwhosebrain is being scannedmust lieperfectly still.Toovercome thisproblem,Samandhiscolleaguesputalongplastictubeintothemouthofeachparticipant, and fromadistance injected the appropriatedrink (PepsiorCoke)through the tube into their mouths. As the participants received a drink, theywere also presented with visual information indicating either that Coke wascoming,thatPepsiwascoming,orthatanunknowndrinkwascoming.Thiswaytheresearcherscouldobservethebrainactivationoftheparticipantswhiletheyconsumed Coke and Pepsi, both when they knew which beverage they weredrinkingandwhentheydidnot.

Whatweretheresults?InlinewiththeCokeandPepsi“challenges,”itturnedout that the brain activation of the participants was different depending onwhether the name of the drink was revealed or not. This is what happened:Whenever aperson received a squirt ofCokeorPepsi, the center of thebrainassociated with strong feelings of emotional connection—called theventromedial prefrontal cortex, VMPFC—was stimulated. But when theparticipantsknewtheyweregoingtogetasquirtofCoke,somethingadditionalhappened.Thistime,thefrontalareaofthebrain—thedorsolateralaspectoftheprefrontalcortex,DLPFC,anareainvolvedinhigherhumanbrainfunctionslikeworkingmemory,associations,andhigher-ordercognitionsandideas—wasalsoactivated.IthappenedwithPepsi—butevenmoresowithCoke(and,naturally,theresponsewasstrongerinpeoplewhohadastrongerpreferenceforCoke).Thereactionofthebraintothebasichedonicvalueofthedrinks(essentially

sugar) turned out to be similar for the two drinks.But the advantage ofCokeover Pepsiwas due to Cokes’s brand—which activated the higher-order brainmechanisms. These associations, then, and not the chemical properties of thedrink,gaveCokeanadvantageinthemarketplace.Itisalsointerestingtoconsiderthewaysinwhichthefrontalpartofthebrain

isconnectedtothepleasurecenter.Thereisadopaminelinkbywhichthefrontpartofthebrainprojectsandactivatesthepleasurecenters.ThisisprobablywhyCokewaslikedmorewhenthebrandwasknown—theassociationsweremorepowerful, allowing the part of the brain that represents these associations toenhanceactivityinthebrain’spleasurecenter.Thisshouldbegoodnewstoanyadagency,of course, because itmeans that thebright red can, swirling script,and the myriad messages that have come down to consumers over the years(suchas“Thingsgobetterwith . . .”) areasmuch responsible forour loveofCokeasthebrownbubblystuffitself.

EXPECTATIONS ALSO SHAPE stereotypes. A stereotype, after all, is a way ofcategorizinginformation,inthehopeofpredictingexperiences.Thebraincannotstart from scratch at every new situation. It must build on what it has seenbefore. For that reason, stereotypes are not intrinsically malevolent. Theyprovide shortcuts in our never-ending attempt to make sense of complicatedsurroundings.This iswhywehave the expectation that an elderly personwillneedhelpusingacomputerorthatastudentatHarvardwillbeintelligent.*Butbecauseastereotypeprovidesuswithspecificexpectationsaboutmembersofagroup,itcanalsounfavorablyinfluencebothourperceptionsandourbehavior.Research on stereotypes shows not only that we react differently when we

haveastereotypeofacertaingroupofpeople,butalsothatstereotypedpeople

themselvesreactdifferentlywhentheyareawareofthelabelthattheyareforcedto wear (in psychological parlance, they are “primed” with this label). OnestereotypeofAsian-Americans,forinstance,isthattheyareespeciallygiftedinmathematicsandscience.Acommonstereotypeoffemalesisthattheyareweakinmathematics.ThismeansthatAsian-Americanwomencouldbeinfluencedbybothnotions.Infact, theyare.Inaremarkableexperiment,MargaretShih,ToddPittinsky,

and Nalini Ambady asked Asian-American women to take an objective mathexam. But first they divided the women into two groups. The women in onegroup were asked questions related to their gender. For example, they wereasked about their opinions and preferences regarding coed dorms, therebyprimingtheirthoughtsforgender-relatedissues.Thewomeninthesecondgroupwere asked questions related to their race. These questions referred to thelanguages they knew, the languages they spoke at home, and their family’shistory in the United States, thereby priming the women’s thoughts for race-relatedissues.The performance of the two groups differed in a way that matched the

stereotypes of both women and Asian-Americans. Those who had beenreminded that they were women performed worse than those who had beenremindedthattheywereAsian-American.Theseresultsshowthatevenourownbehaviorcanbeinfluencedbyourstereotypes,andthatactivationofstereotypescan depend on our current state of mind and how we view ourselves at themoment.Perhaps evenmore astoundingly, stereotypes canalso affect thebehaviorof

peoplewhoarenotevenpartofastereotypedgroup.Inonenotablestudy,JohnBargh,MarkChen, andLaraBurrows had participants complete a scrambled-sentence task, rearranging theorderofwords to form sentences (wediscussedthistypeoftaskinChapter4).Forsomeoftheparticipants,thetaskwasbasedonwords suchasaggressive,rude,annoying,and intrude. For others, the taskwasbasedonwordssuchashonor,considerate,polite,andsensitive.Thegoalof these two lists was to prime the participants to think about politeness orrudenessas a resultof constructing sentences from thesewords (this is averycommontechniqueinsocialpsychology,anditworksamazinglywell).After the participants completed the scrambled-sentence task, they went to

another laboratory toparticipate inwhatwaspurportedlya second task.Whentheyarrivedatthesecondlaboratory,theyfoundtheexperimenterapparentlyinthemidstof trying toexplain the task toanuncomprehendingparticipantwhowasjustnotgettingit(thissupposedparticipantwasinfactnotarealparticipantbutaconfederateworkingfortheexperimenter).Howlongdoyouthinkittook

the real participants to interrupt the conversation and askwhat they shoulddonext?Theamountofwaitingdependedonwhattypeofwordshadbeeninvolvedin

thescrambled-sentencetask.Thosewhohadworkedwiththesetofpolitewordspatiently waited for about 9.3 minutes before they interrupted, whereas thosewhohadworkedwiththesetofrudewordswaitedonlyabout5.5minutesbeforeinterrupting.Asecondexperimenttestedthesamegeneralideabyprimingtheconceptof

the elderly, using words such as Florida, bingo, and ancient. After theparticipantsinthisexperimentcompletedthescrambled-sentencetask,theylefttheroom,thinkingthattheyhadfinishedtheexperiment—butinfactthecruxofthestudywasjustbeginning.Whattrulyinterestedtheresearcherswashowlongitwouldtaketheparticipantstowalkdownthehallwayastheyleftthebuilding.Sure enough, the participants in the experimental group were affected by the“elderly” words: their walking speed was considerably slower than that of acontrolgroupwhohadnotbeenprimed.Andremember,theprimedparticipantswerenot themselveselderlypeoplebeing remindedof their frailty—theywereundergraduatestudentsatNYU.

ALL THESE EXPERIMENTS teach us that expectations are more than the mereanticipationofaboostfromafizzyCoke.Expectationsenableustomakesenseofaconversationinanoisyroom,despitethelossofawordhereandthere,andlikewise,tobeabletoreadtextmessagesonourcellphones,despitethefactthatsomeofthewordsarescrambled.Andalthoughexpectationscanmakeuslookfoolishfromtimetotime,theyarealsoverypowerfulanduseful.Sowhataboutour football fansand thegame-winningpass?Althoughboth

friends were watching the same game, they were doing so through markedlydifferent lenses. One saw the pass as in bounds. The other saw it as out. Insports,suchargumentsarenotparticularlydamaging—infact,theycanbefun.The problem is that these same biased processes can influence how weexperienceotheraspectsofourworld.Thesebiasedprocessesareinfactamajorsource of escalation in almost every conflict, whether Israeli-Palestinian,American-Iraqi,Serbian-Croatian,orIndian-Pakistani.In all these conflicts, individuals from both sides can read similar history

booksandevenhavethesamefactstaughttothem,yetitisveryunusualtofindindividualswhowould agree aboutwho started the conflict,who is to blame,whoshouldmakethenextconcession,etc.Insuchmatters,ourinvestmentinourbeliefsismuchstrongerthananyaffiliationtosportteams,andsoweholdontothese beliefs tenaciously. Thus the likelihood of agreement about “the facts”

becomessmallerandsmalleraspersonalinvestmentintheproblemgrows.Thisisclearlydisturbing.Weliketothinkthatsittingatthesametabletogetherwillhelpushammeroutourdifferencesandthatconcessionswillsoonfollow.Buthistory has shown us that this is an unlikely outcome; and nowwe know thereasonforthiscatastrophicfailure.Butthere’sreasonforhope.Inourexperiments,tastingbeerwithoutknowing

about the vinegar, or learning about the vinegar after the beer was tasted,allowedthetrueflavortocomeout.Thesameapproachshouldbeusedtosettlearguments:Theperspectiveofeachsideispresentedwithouttheaffiliation—thefactsarerevealed,butnotwhichpartytookwhichactions.Thistypeof“blind”conditionmighthelpusbetterrecognizethetruth.Whenstrippingawayourpreconceptionsandourpreviousknowledge isnot

possible, perhaps we can at least acknowledge that we are all biased. If weacknowledgethatwearetrappedwithinourperspective,whichpartiallyblindsustothetruth,wemaybeabletoaccepttheideathatconflictsgenerallyrequirea neutral third party—who has not been taintedwith our expectations—to setdowntherulesandregulations.Ofcourse,acceptingthewordofathirdpartyisnoteasyandnotalwayspossible;butwhenitispossible,itcanyieldsubstantialbenefits.Andforthatreasonalone,wemustcontinuetotry.

ReflectionsonExpectations:MusicandFoodImaginewalkingintoatruckstopoffadesertedstretchofInterstate95atnineo’clockintheevening.You’vebeendrivingforsixhours.Youaretiredandstillhavealongdriveaheadofyou.Youneedabitetoeatandwanttobeoutofthecarforabit,soyouwalkintowhatappearstobearestaurantofsorts.Ithastheusualcracked-vinyl-coveredboothsandfluorescentlighting.Thecoffee-stainedtabletops leave you a bitwary. Still, you think, “Fine, no one can screw up ahamburgerthatbadly.”Youreachforthemenu,convenientlystashedbehindanempty napkin dispenser, only to discover this is no ordinary greasy spoon.Insteadofhamburgersandchickensandwiches,you’reastonishedtoseethatthemenuoffersfoiegrasautorchon,trufflepâtéwithfriséeandfennelmarmalade,gougèreswithduckconfit,quailàlacrapaudine,andsoon.ItemslikethiswouldbenosurpriseinevenasmallManhattanrestaurant,of

course. And it is possible that the chef got tired ofManhattan,moved to themiddleofnowhere,andnowcooksforwhoeverhappensthrough.Soisthereakey difference between ordering gougères with duck confit inManhattan andordering it at an isolated truck stop on I-95? If you encountered such French

delicaciesatthetruckstop,wouldyoubebraveenoughtotrythem?Supposethepriceswere not listed on themenu.Whatwould you bewilling to pay for anappetizer or an entrée?And if you ate it,would you enjoy it asmuch as youmightifyouwereeatingthesamefoodinManhattan?On the basis ofwhatwe learned fromChapter 10, the answers are simple.

Ambience and expectations do add a great deal to our enjoyment.Youwouldexpectlessinsuchanenvironment,andasaconsequenceyouwouldenjoytheexperience at the truck stop less, even if you had the identical foie gras autorchoninbothplaces.Likewise,ifyouknewthatpâtéislargelymadeofrun-of-the-millgooseliverandbutter*ratherthansuperspecialingredients,youwouldenjoyitmuchless.AFEWYEARSagothefolksattheWashingtonPostwerecuriousaboutthesamebasictopicanddecidedtorunanexperiment.11Insteadoffood,theyusedmusic.Theexperimentalquestionwasthis:canoutstandingartshinethroughafilterofmundaneanddingyexpectation?Journalist GeneWeingarten asked Joshua Bell, generally considered one of

thebestviolinistsintheworld,toposeasastreetperformerandplaysomeofthefinestmusicevercomposed*ataMetrostationinWashington,D.C.,duringthemorning rush hour. Would people notice that this guy was better than mostbuskers?Wouldtheystoptolisten?Wouldtheythrowadollarortwohisway?Wouldyou?Ifyouwerelike98percentofthepeoplewhopassedthroughL’EnfantPlaza

Stationthatmorning,youwouldhavehurriedby,obliviousoftheperformance.Only27outof1,097(2.5percent)putmoneyintoBell’sopenStradivariusviolincase and only 7 (0.5 percent) stopped to listen for more than a minute. Bellplayedforalittlelessthananhourandmadeabout$32,whichisprobablynotbad for your basic street performer, but no doubt humbling to aman used tomakingfar,farmoreforoneminuteofplaying.Weingarten interviewed a number of peoplewhopassed through the station

that morning. Of the people who stopped, one recognized Bell from aperformancethenightbefore.Anotherwasaseriousviolinisthimself.AnotherwasaMetroworkerwho,afteryearsoflisteningtoordinary,albeitoccasionallytalented,buskers,discernedthatBellwasbetterthanaverage.Asidefromthesefew—and disturbingly to classical music fans, and Bell’s fans in particular—peopledidnotstoptolisten.Manydidn’tevenlookatBell.Wheninterviewed,passersbysaideither that theydidn’tnotice themusicatall,or that itsoundedlike a slightly better than average street performer playing everyday classicalmusic. No one expected a world-class musician to be playing technicallydazzling pieces in a Metro station. Accordingly, and for the most part, they

didn’thearone.Sometime later I met Joshua Bell and asked him about this experience. In

particular,Iwantedtoknowhowhefeltaboutbeingoverlookedandignoredbyso many people. He responded that he was really not all that surprised, andadmittedthatexpectationisanimportantpartofthewayweexperiencemusic.Belltoldmethatittakesanappropriatesettingtohelppeopleappreciatealiveclassical music performance—a listener needs to be sitting in a comfortable,fauxvelvet seat, and surroundedby theacousticsof a concerthall.Andwhenpeopleadornthemselvesinsilk,perfume,andcashmere,theyseemtoappreciatethecostlyperformancemuchmore.“What if we did the opposite experiment?” I asked. “What if we put a

mediocre player in Carnegie Hall with the Berlin Philharmonic? Theexpectationswouldbeveryhighbutthequalitywouldnot.Wouldpeoplediscernthedifferenceandwouldtheirpleasurebequashed?”Bellthoughtforamoment.“In this case,” he said, “the expectationswould triumphover the experience.”Furthermore, he said he could think of a few people who were not greatviolinistsbutreceivedwildapplausebecausetheywereintherightenvironment.In the end, I wasn’t convinced by Bell’s nonchalance about his Metro

performance.Afterall,timehealsallwounds,andoneofthewaystimeworksinourfavoristohelpuseitherforgetormisrememberthepastinawaythatmakesusfeelbetteraboutourselves.Besides,notbeingsurprisedthatpeopleweretoobusy to notice his performance must have helped Bell avoid the violinist’sversionoftheoldquestion:“Ifatreefallsintheforest,andnooneisaroundtohearit,doesitmakeasound?”Thefollowingday,sittingintheMontereyauditorium,Ihadtheopportunity

to listen to JoshuaBell playBach’s famous “Chaconne”—the samewonderfulpiece that he had played for his commuter audience. I closed my eyes andimaginedthat,insteadoflisteningtoagreatviolinist,Iwashearingamediocrefifteen-year-oldkidplayaStradivarius.I’mnoconnoisseur,butIswearIcouldhear a fewoff-key patches, and some squeaks of the strings suddenly becameaudible.PerhapsthesqueakswerepartofBach’scomposition,justaninevitablepartofplayingastringedinstrument,ormaybetheywerearesultofplayinginanauditoriumrather thanaproperconcerthall. Icouldeasily imaginehowanuntrained listener suchasmyselfmightattribute these sounds tomistakesofamediocre player, especially if the player is standing in a bustling train stationduringrushhour.Attheendofhisperformance,Bellgotalongstandingovation.ThoughIhad

enjoyedtheperformance,Iwonderedhowmuchtheovationwasarewardforhisperformance and how much was due to the audience’s expectations. I’m not

questioning the level ofBell’s (or anyone’s) talent.The point is thatwe don’treally understand the role expectations play in the way we experience andevaluateart,literature,drama,architecture,food,wine—anything,really.ITHINKTHATtheroleofexpectationsmayhavebeencapturedbestbyoneofmyfavorite authors. In Jerome K. Jerome’s 1889 comic novella Three Men in aBoat,thenarratorandhistwotravelingcompanionsareatapartyataninn.Thediscussionhappenstoturntocomicsongs.Twoyoungmen,outsiderswholackthearistocraticmannersoftheotherpartygoers,assurethemthatasongbytherenownedGermancomicHerrSlossennBoschenisthefunniestofall,andthatHerrBoschenhappenstobestayingattheverysameinn.Perhapshemightbepersuadedtoplayoneofhissongsforthem?HerrBoschen is quite glad to play for them, and since only the two young

menunderstandGerman,thougheveryoneelsepretendstounderstandit,therestof the audience take their cues from them.As the twoyoungmen shriekwithlaughter,sodothey.Somemembersoftheaudiencegoastepfurtherandfromtime to time laughon theirown,pretending tohaveunderstoodabitof subtlehumormissedbytheothers.Inreality,itturnsoutthatHerrBoschenisarenownedtragedianandisdoing

his best to deliver a dramatic, emotionally laden song—while the two youngmenlaugheveryfewnotesinordertofooltherestoftheguestsintobelievingthat such is the styleofGermancomedy.Confused,HerrBoschenpresseson.Butwhenhefinishessinging,heleapsupfromthepianoandpoursastreamofGermanobscenitiesoverhislisteners.Ignorant of German and Germany’s musical conventions, the audience

members do the next best thing and follow the purported expertise of the twooutsiders, laugh on cue from them, and believe that the whole performance,includingBoschen’stempertantrum,isuproariouslyfunny.Overalltheaudienceenjoystheperformanceagreatdeal.Jerome’sstoryisexaggerated,butintruth,thisishowmostofusnavigatethe

world.Acrossmanydomainsoflife,expectationsplayahugeroleinthewayweendupexperiencingthings.ThinkabouttheMonaLisa.Whyisthisportraitsobeautiful, and why is the woman’s smile mysterious? Can you discern thetechniqueandtalentittookforLeonardodaVincitocreateit?Formostofusthepaintingisbeautiful,andthesmilemysterious,becausewearetolditisso.Intheabsenceofexpertiseorperfect information,we look for social cues tohelpusfigureouthowmuchweare,orshouldbe,impressed,andourexpectationstakecareoftherest.THEBRILLIANTSATIRISTAlexanderPopeoncewrote:“Blessedishewhoexpects

nothing,forheshallneverbedisappointed.”Tome,itseemsthatPope’sadviceis the best way to live an objective life. Clearly, it is also very helpful ineliminating the effects of negative expectations. But what about positiveexpectations? If I listen to JoshuaBellwithno expectations, the experience isnotgoingtobenearlyassatisfyingorpleasurableasifIlistentohimandsaytomyself,“Mygod,howluckyIamtobelisteningtoJoshuaBellplayliveinfrontof me.” My knowledge that Bell is one of the best players in the worldcontributesimmeasurablytomypleasure.As it turns out, positive expectations allow us to enjoy things more and

improveourperceptionoftheworldaroundus.Thedangerofexpectingnothingisthat,intheend,itmightbeallwe’llget.

Chapter11ThePowerofPrice

Whya50-CentAspirinCanDoWhataPennyAspirinCan’t

Ifyouwerelivingin1950andhadchestpain,yourcardiologistmightwellhavesuggested a procedure for angina pectoris called internal mammary arteryligation.Inthisoperation,thepatientisanesthetized,thechestisopenedatthesternum, and the internal mammary artery is tied off. Voilà! Pressure to thepericardiophrenicarteriesisraised,bloodflowtothemyocardiumisimproved,andeveryonegoeshomehappy.12Thiswasanapparentlysuccessfuloperation,andithadbeenapopularonefor

theprevious20years.But oneday in1955, a cardiologist inSeattle,LeonardCobb, and a few colleagues became suspicious. Was it really an effectiveprocedure?Diditreallywork?Cobbdecidedtotrytoprovetheefficacyoftheprocedure in a very bold way: he would perform the operation on half hispatients, and fake the procedure on the other half. Then he would see whichgroupfeltbetter,andwhosehealthactually improved. Inotherwords,after25years of filleting patients like fish, heart surgeons would finally get ascientifically controlled surgical trial to seehoweffective theprocedure reallywas.Tocarryoutthistest,Dr.Cobbperformedthetraditionalprocedureonsome

of the patients, and placebo surgery on the others. The real surgery meantopeningthepatientupandtyinguptheinternalmammaryartery.Intheplaceboprocedure,thesurgeonmerelycutintothepatient’sfleshwithascalpel,leavingtwoincisions.Nothingelsewasdone.The results were startling. Both the patients who did have their mammary

arteries constricted and thosewho didn’t reported immediate relief from theirchest pain. In both groups, the relief lasted about three months—and thencomplaintsaboutchestpainreturned.Meanwhile,electrocardiogramsshowednodifferencebetween thosewhohadundergone therealoperationand thosewhogot the placebooperation. In otherwords, the traditional procedure seemed toprovide some short-term relief—but so did the placebo. In the end, neitherprocedureprovidedsignificantlong-termrelief.More recentlyadifferentmedicalprocedurewassubmitted toa similar test,

withsurprisinglysimilarresults.Asearlyas1993,J.B.Moseley,anorthopedicsurgeon, had increasing doubts about the use of arthroscopic surgery for aparticular arthritic affliction of the knee. Did the procedure really work?Recruiting 180 patients with osteoarthritis from the veterans’ hospital inHouston,Texas,Dr.Moseleyandhiscolleaguesdividedthemintothreegroups.One group got the standard treatment: anesthetic, three incisions, scopes

inserted, cartilage removed, correctionof soft-tissueproblems, and10 litersofsaline washed through the knee. The second group got anesthesia, threeincisions,scopesinserted,and10litersofsaline,butnocartilagewasremoved.Thethirdgroup—theplacebogroup—lookedfromtheoutsideliketheothertwotreatments(anesthesia,incisions,etc.);andtheproceduretookthesameamountoftime;butnoinstrumentswereinsertedintotheknee.Inotherwords,thiswassimulatedsurgery.13For two years following the surgeries, all three groups (which consisted of

volunteers, as in any other placebo experiment)were tested for a lessening oftheirpain,andfortheamountoftimeittookthemtowalkandclimbstairs.Howdid they do?The groups that had the full surgery and the arthroscopic lavageweredelighted,andsaidtheywouldrecommendthesurgerytotheirfamiliesandfriends.Butstrangely—andherewasthebombshell—theplacebogroupalsogotrelief frompain and improvements inwalking—to the sameextent, in fact, asthosewho had the actual operations.Reacting to this startling conclusion,Dr.NeldaWray,oneof theauthorsof theMoseleystudy,noted,“Thefact that theeffectiveness of arthroscopic lavage and debridement in patients withosteoarthritis of the knee is no greater than that of placebo surgerymakes usquestionwhetherthe$1billionspentontheseproceduresmightbeputtobetteruse.”If you assume that a firestormmust have followed this report, you’re right.

When the study appeared on July 11, 2002, as the lead article in the NewEnglandJournalofMedicine, some doctors screamed foul and questioned themethodandresultsofthestudy.Inresponse,Dr.Moseleyarguedthathisstudyhad been carefully designed and carried out. “Surgeons . . . who routinely

perform arthroscopy are undoubtedly embarrassed at the prospect that theplaceboeffect—notsurgicalskill—isresponsibleforpatient improvementafterthesurgeries theyperform.Asyoumight imagine, thesesurgeonsaregoing togreatlengthstotrytodiscreditourstudy.”Regardless of the extent towhich youbelieve the results of this study, it is

clear that we should be more suspicious about arthroscopic surgery for thisparticular condition, and at the same time increase the burden of proof formedicalproceduresingeneral.

INTHEPREVIOUSchapterwesawthatexpectationschange thewayweperceiveand appreciate experiences. Exploring the placebo effect in this chapter,we’llseenotonly thatbeliefsandexpectationsaffecthowweperceiveand interpretsights, tastes,andothersensoryphenomena,butalso thatourexpectationscanaffectusbyalteringoursubjectiveandevenobjectiveexperiences—sometimesprofoundlyso.Most important, I want to probe an aspect of placebos that is not yet fully

understood. It is the role that price plays in this phenomenon. Does a priceymedicinemake us feel better than a cheapmedicine?Can it actuallymake usphysiologicallybetter thanacheaperbrand?Whataboutexpensiveprocedures,and new-generation apparatuses, such as digital pacemakers and high-techstents?Doestheirpriceinfluencetheirefficacy?Andifso,doesthismeanthatthebillforhealthcareinAmericawillcontinuetosoar?Well, let’sstartat thebeginning.

PLACEBO COMES FROM theLatin for “I shall please.”The termwas used in thefourteenthcenturytorefertoshammournerswhowerehiredtowailandsobforthedeceased at funerals.By1785 it appeared in theNewMedicalDictionary,attachedtomarginalpracticesofmedicine.One of the earliest recorded examples of the placebo effect in medical

literature dates from 1794. An Italian physician named Gerbi made an odddiscovery:whenherubbedthesecretionsofacertaintypeofwormonanachingtooth,thepainwentawayforayear.Gerbiwentontotreathundredsofpatientswiththewormsecretions,keepingmeticulousrecordsoftheirreactions.Ofhispatients,68percentreportedthattheirpain,too,wentawayforayear.Wedon’tknowthefullstoryofGerbiandhiswormsecretions,butwehaveaprettygoodidea that the secretions really had nothing to do with curing toothaches. ThepointisthatGerbibelievedtheyhelped—andsodidamajorityofhispatients.Of course, Gerbi’s worm secretion wasn’t the only placebo in the market.

Beforerecenttimes,almostallmedicineswereplacebos.Eyeofthetoad,wing

ofthebat,driedfoxlungs,mercury,mineralwater,cocaine,anelectriccurrent:thesewere all touted as suitable cures forvarious ailments.WhenLincoln laydyingacrossthestreetfromFord’sTheater,itissaidthathisphysicianappliedabit of “mummypaint” to thewounds.Egyptianmummy, ground to a powder,wasbelievedtobearemedyforepilepsy,abscesses,rashes,fractures,paralysis,migraine, ulcers, and many other things. As late as 1908, “genuine Egyptianmummy”couldbeorderedthroughtheE.Merckcatalog—andit’sprobablystillinusesomewheretoday.14Mummy powder wasn’t the most macabre of medicines, though. One

seventeenth-centuryrecipefora“cureall”medicationadvised:“Takethefreshcorpseofared-haired,uninjured,unblemishedman,24yearsoldandkillednomore than one day before, preferably by hanging, breaking on the wheel orimpaling. . . . Leave it one day and one night in the light of the sun and themoon,thencutintoshredsorroughstrips.Sprinkleonalittlepowderofmyrrhandaloes,topreventitfrombeingtoobitter.”Wemay thinkwe’re different now.Butwe’re not. Placebos stillwork their

magiconus.Foryears,surgeonscutremnantsofscartissueoutoftheabdomen,forinstance,imaginingthatthisprocedureaddressedchronicabdominalpain—untilresearchersfakedtheprocedureincontrolledstudiesandpatientsreportedequalrelief.15Encainide,flecainide,andmexiletinewerewidelyprescribedoff-label drugs for irregular heartbeat—and were later found to cause cardiacarrest.16When researchers tested the effect of the six leading antidepressants,theynotedthat75percentoftheeffectwasduplicatedinplacebocontrols.17Thesame was true of brain surgery for Parkinson’s disease.18 When physiciansdrilled holes in the skulls of several patients without performing the fullprocedure,totestitsefficacy,thepatientswhoreceivedtheshamsurgeryhadthesameoutcomeas thosewhoreceivedthefullprocedure.Andofcourse thelistgoesonandon.One could defend these modern procedures and compounds by noting that

they were developed with the best intentions. This is true. But so were theapplicationsofEgyptianmummy,toagreatextent.Andsometimes,themummypowderworked just as well as (or at least noworse than) whatever else wasused.Thetruthisthatplacebosrunonthepowerofsuggestion.Theyareeffective

becausepeople believe in them.You see your doctor andyou feel better.Youpopapillandyoufeelbetter.Andifyourdoctorisahighlyacclaimedspecialist,oryourprescriptionisforanewwonderdrugofsomekind,youfeelevenbetter.Buthowdoessuggestioninfluenceus?

INGENERAL,TWOmechanismsshape theexpectations thatmakeplaceboswork.One is belief—our confidence or faith in the drug, the procedure, or thecaregiver.Sometimesjustthefactthatadoctorornurseispayingattentiontousand reassuring us not only makes us feel better but also triggers our internalhealing processes. Even a doctor’s enthusiasm for a particular treatment orproceduremaypredisposeustowardapositiveoutcome.The second mechanism is conditioning. Like Pavlov’s famous dogs (that

learned to salivate at the ring of a bell), the body builds up expectancy afterrepeatedexperiencesandreleasesvariouschemicalstoprepareusforthefuture.Supposeyou’veorderedpizzanightafternight.Whenthedeliverymanpressesthedoorbell,yourdigestive juices start flowingevenbeforeyoucan smell thepie.Orsupposethatyouaresnuggleduponthecouchwithyourlovedone.Asyou’re sitting there staring into a crackling fire, the prospect of sex releasesendorphins,preparingyouforwhat is tocomenext,andsendingyoursenseofwell-beingintothestratosphere.Inthecaseofpain,expectationcanunleashhormonesandneurotransmitters,

suchasendorphinsandopiates,thatnotonlyblockagonybutproduceexuberanthighs(endorphinstriggerthesamereceptorsasmorphine).Ivividlyrecalllyingintheburnwardinterriblepain.AssoonasIsawthenurseapproaching,withaneedle almost dripping with painkiller, what relief!My brain began secretingpain-dullingopioids,evenbeforetheneedlebrokemyskin.Thus familiarity may or may not breed contempt, but it definitely breeds

expectations. Branding, packaging, and the reassurance of the caregiver canmakeusfeelbetter.Butwhataboutprice?Canthepriceofadrugalsoaffectourresponsetoit?

ONTHEBASIS of price alone, it is easy to imagine that a $4,000 couchwill bemorecomfortablethana$400couch;thatapairofdesignerjeanswillbebetterstitched and more comfortable than a pair fromWal-Mart; that a high-gradeelectricsanderwillworkbetterthanalow-gradesander;andthattheroastduckattheImperialDynasty(for$19.95)issubstantiallybetterthantheroastduckatWong’sNoodle Shop (for $10.95).But can such implied difference in qualityinfluence theactualexperience,andcansuch influencealsoapply toobjectiveexperiencessuchasourreactionstopharmaceuticals?For instance, would a cheaper painkiller be less effective than a more

expensiveone?Wouldyourwintercoldfeelworse ifyou tookadiscountcoldmedicine than ifyou tookanexpensiveone?Wouldyour asthma respond lesswell to a generic drug than to the latest brand-name on the market? In otherwords,aredrugslikeChinesefood,sofas,bluejeans,andtools?Canweassume

thathighpricemeanshigherquality,anddoourexpectations translate into theobjectiveefficacyoftheproduct?This is a particularly important question.The fact is that you can get away

withcheaperChinesefoodandlessexpensivejeans.Withsomeself-control,wecanusuallysteerourselvesawayfromthemostexpensivebrands.Butwillyoureallylookforbargainswhenitcomestoyourhealth?Puttingthecommoncoldasideforthemoment,aremanyofusgoingtopinchpennieswhenourlivesareatrisk?No—wewantthebest,forourselves,ourchildren,andourlovedones.Ifwewantthebestforourselves,doesanexpensivedrugmakeusfeelbetter

thanacheaperdrug?Doescost reallymakeadifference inhowwe feel? Inaseriesof experiments a fewyears ago, that’swhatRebeccaWaber (agraduatestudentatMIT),BabaShiv(aprofessoratStanford),ZivCarmon,andIdecidedtofindout.

IMAGINETHATYOU’RE takingpart inanexperiment to test theefficacyofanewpainkillercalledVeladone-Rx.(Theactualexperimentinvolvedabout100adultBostonians,butfornow,we’llletyoutaketheirplace.)YouarriveattheMITMediaLabinthemorning.TayaLeary,ayoungwoman

wearinga crispbusiness suit (this is in starkcontrast to theusual attireof thestudentsandfacultyatMIT),greetsyouwarmly,withahintofaRussianaccent.A photo ID identifies Taya as a representative of Vel Pharmaceuticals. SheinvitesyoutospendamomentreadingabrochureaboutVeladone-Rx.Glancingaround,younotethattheroomlookslikeamedicaloffice:stalecopiesofTimeandNewsweek are scatteredaround;brochures forVeladone-Rxare spreadouton the table; and nearby is a cup of pens, with the drug’s handsome logo.“Veladone is an exciting new medication in the opioid family,” you read.“Clinical studies show that over 92 percent of patients receiving Veladone indouble-blind controlled studies reported significant pain relief within only 10minutes, and that pain relief lastedup to eighthours.”Andhowmuchdoes itcost?Accordingtothebrochure,$2.50forasingledose.Onceyoufinishreadingthebrochure,TayacallsinRebeccaWaberandleaves

the room. Rebecca, wearing the white coat of a lab technician, with astethoscope hanging from her neck, asks you a set of questions about yourmedical condition and your family’smedical history. She listens to your heartandmeasures your blood pressure. Then she hooks you up to a complicated-lookingmachine.Theelectrodesrunningfromthemachine,greasedwithagreenelectrode gel, encircle your wrists. This is an electrical shock generator, sheexplains,anditishowwewilltestyourperceptionandtoleranceofpain.With her hand on the switch, Rebecca sends a series of electrical shocks

through the wires and into the electrodes. The initial shocks are merelyannoying.Then theybecomepainful,more painful, and finally so painful thatyour eyes fly open and your heart begins to race. She records your reactions.Now she starts delivering a new set of electrical shocks. This time sheadministersasetofchargesthatfluctuaterandomlyinintensity:someareverypainfulandsomemerelyirritating.Followingeachone,youareaskedtorecord,using the computer in front of you, the amount of pain you felt. You use themouse to click on a line that ranges from “no pain at all” to “theworst painimaginable”(thisiscalleda“visualpainanalog”).When thispartof the tortureends,you lookup.Rebecca is standingbefore

youwithaVeladonecapsuleinonehandandacupofwaterintheother.“Itwilltakeabout15minutes for thedrug to reach itsmaximaleffect,”shesays.Yougulpitdown,andthenmovetoachairinthecorner,whereyoulookattheoldcopiesofTimeandNewsweekuntilthepilltakeseffect.Fifteenminutes laterRebecca, smearing the electrodeswith the same green

electrodegel,cheerfullyasks,“Readyforthenextstep?”Yousaynervously,“AsreadyasIcanbe.”You’rehookeduptothemachineagain,andtheshocksbegin.Asbefore,yourecordtheintensityofthepainaftereachshock.Butthistimeit’sdifferent.ItmustbetheVeladone-Rx!Thepaindoesn’tfeelnearlyasbad.YouleavewithaprettyhighopinionofVeladone. Infact,youhope tosee it in theneighborhooddrugstorebeforelong.Indeed, that’s what most of our participants found. Almost all of them

reported less pain when they experienced the electrical shocks under theinfluence ofVeladone.Very interesting—considering thatVeladonewas just acapsuleofvitaminC.

FROMTHISEXPERIMENT,wesaw thatourcapsuledidhaveaplaceboeffect.ButsupposewepricedtheVeladonedifferently.Supposewediscountedthepriceofa capsule ofVeladone-Rx from$2.50 to just 10 cents.Would our participantsreactdifferently?In our next test,we changed the brochure, scratching out the original price

($2.50perpill)andinsertinganewdiscountpriceof10cents.Didthischangeourparticipants’reaction? Indeed. At $2.50 almost all our participants experienced pain relieffromthepill.Butwhenthepricewasdroppedto10cents,onlyhalfofthemdid.Moreover, it turnsoutthatthisrelationshipbetweenpriceandplaceboeffect

wasnotthesameforallparticipants,andtheeffectwasparticularlypronouncedforpeoplewhohadmoreexperiencewithrecentpain.Inotherwords,forpeoplewhohadexperiencedmorepain,andthusdependedmoreonpainmedications,

therelationshipwasmorepronounced:theygotevenlessbenefitwhenthepricewasdiscounted.Whenitcomestomedicines,then,welearnedthatyougetwhatyoupayfor.Pricecanchangetheexperience.

INCIDENTALLY,WEGOTcorroboratingresultsinanothertest,astudyweconductedonemiserably coldwinter at theUniversity of Iowa. In this casewe asked agroup of students to keep track of whether they used full-price or discountmedicinesfor theirseasonalcolds,andifso,howwell thoseremediesworked.Attheendofthesemester,13participantssaidthey’dpaidlistpriceand16hadboughtdiscountdrugs.Whichgroupfeltbetter?Ithinkyoucanguessbynow:the13whopaidthelistpricereportedsignificantlybettermedicaloutcomesthanthe16whoboughtthemedicationatadiscount.Andso,inover-the-countercoldmedication,whatyoupayisoftenwhatyouget.

FROMOUREXPERIMENTSwithour“pharmaceuticals”wesawhowpricesdrivetheplacebo effect. But do prices affect everyday consumer products as well?WefoundtheperfectsubjectinSoBeAdrenalineRush,abeveragethatpromisesto“elevateyourgame”andimpart“superiorfunctionality.”In our first experiment, we stationed ourselves at the entrance of the

university’s gym, offering SoBe. The first group of students paid the regularprice for thedrink.Asecondgroupalsopurchased thedrink,but for them thepricewasmarkeddowntoaboutone-thirdoftheregularprice.Afterthestudentsexercised,weaskedthemiftheyfeltmoreorlessfatiguedrelativetohowtheynormallyfeltaftertheirusualworkouts.BothgroupsofstudentswhodranktheSoBeindicatedthat theyweresomewhat lessfatiguedthanusual.Thatseemedplausible, especially considering the hefty shot of caffeine in each bottle ofSoBe.Butitwastheeffectoftheprice,nottheeffectofthecaffeine,thatwewere

after.Wouldhigher-pricedSoBereducefatiguebetterthanthediscountedSoBe?As you can imagine from the experiment with Veladone, it did. The studentswhodrankthehigher-pricedbeveragereportedlessfatiguethanthosewhohadthediscounteddrink.These results were interesting, but they were based on the participants’

impressions of their own state—their subjective reports. How could we testSoBemoredirectlyandobjectively?Wefoundaway:SoBeclaims toprovide“energy for yourmind.”Sowedecided to test that claimbyusing a series ofanagrams.It would work like this. Half of the students would buy their SoBe at full

price,andtheotherhalfwouldbuyitatadiscount. (Weactuallychargedtheir

student accounts, so in fact their parents were the ones paying for it.) Afterconsuming the drinks, the students would be asked to watch a movie for 10minutes(toallowtheeffectsofthebeveragetosinkin,weexplained).Thenwewouldgiveeachofthema15-wordpuzzle,with30minutestosolveasmanyofthe problems as they could. (For example, when given the set TUPPIL,participants had to rearrange it to PULPIT—or they would have to rearrangeFRIVEY,RENCOR,andSVALIEtoget...).Wehadalreadyestablishedabaseline,havinggiventheword-puzzletesttoa

groupofstudentswhohadnotdrunkSoBe.Thisgroupgotonaveragenineofthe15itemsright.WhathappenedwhenwegavethepuzzlestothestudentswhodrankSoBe?Thestudentswhohadboughtitatthefullpricealsogotonaverageaboutnineanswersright—thiswasnodifferentfromtheoutcomeforthosewhohadnodrinkatall.ButmoreinterestingweretheanswersfromthediscountedSoBegroup: theyaveraged6.5questionsright.Whatcanwegatherfromthis?Pricedoesmakeadifference,andinthiscasethedifferencewasagapofabout28percentinperformanceonthewordpuzzles.SoSoBedidn’tmakeanyonesmarter.Doesthismeanthattheproductitselfis

adud(at least in termsofsolvingwordpuzzles)?Toanswer thisquestion,wedevisedanothertest.Thefollowingmessagewasprintedonthecoverofthequizbooklet: “Drinks such as SoBe have been shown to improve mentalfunctioning,” we noted, “resulting in improved performance on tasks such assolvingpuzzles.”Wealsoaddedsomefictionalinformation,statingthatSoBe’sWebsitereferredtomorethan50scientificstudiessupportingitsclaims.Whathappened?Thegroupthathadthefull-pricedrinksstillperformedbetter

thanthosethathadthediscounteddrinks.Butthemessageonthequizbookletalsoexerted some influence.Both thediscountgroupand the full-pricegroup,havingabsorbedtheinformationandhavingbeenprimedtoexpectsuccess,didbetterthanthegroupswhosequizcoverdidn’thavethemessage.AndthistimetheSoBedidmakepeoplesmarter.Whenwehypedthedrinkbystatingthat50scientificstudiesfoundSoBetoimprovementalfunctioning,thosewhogotthedrink at the discount price improved their score (in answering additionalquestions)by0.6,butthosewhogotboththehypeandthefullpriceimprovedby3.3additionalquestions. Inotherwords, themessageon thebottle(and thequizcover)aswellasthepricewasarguablymorepowerfulthanthebeverageinside.

AREWEDOOMED,then,togetlowerbenefitseverytimewegetadiscount?Ifwerely on our irrational instincts, wewill. If we see a discounted item, wewillinstinctively assume that its quality is less than that of a full-price item—and

then in factwewillmake it so.What’s the remedy? Ifwe stop and rationallyconsider the product versus the price, will we be able to break free of theunconsciousurgetodiscountqualityalongwithprice?Wetriedthisinaseriesofexperiments,andfoundthatconsumerswhostopto

reflect about the relationship between price and quality are far less likely toassume that a discounted drink is less effective (and, consequently, they don’tperformaspoorlyonwordpuzzlesastheywouldiftheydidassumeit).Theseresultsnotonlysuggestaway toovercome the relationshipbetweenpriceandthe placebo effect but also suggest that the effect of discounts is largely anunconsciousreactiontolowerprices.

SOWE’VESEENhowpricingdrivestheefficacyofplacebo,painkillers,andenergydrinks.Buthere’sanother thought. Ifplaceboscanmakeus feelbetter, shouldwesimplysitbackandenjoy them?Orareplacebospatentlybad—shams thatshouldbediscarded,whethertheymakeusfeelgoodornot?Beforeyouanswerthisquestion,letmeraisetheante.Supposeyoufoundaplacebosubstanceoraplacebo procedure that not only made you feel better but actually made youphysicallybetter.Wouldyoustilluseit?Whatifyouwereaphysician?Wouldyouprescribemedicationsthatwereonlyplacebos?LetmetellyouastorythathelpsexplainwhatI’msuggesting.InAD800,PopeLeoIIIcrownedCharlemagneemperoroftheRomans,thus

establishing a direct link between church and state. From then on the HolyRomanemperors,followedbythekingsofEurope,wereimbuedwiththeglowofdivinity.Outofthiscamewhatwascalledthe“royaltouch”—thepracticeofhealing people. Throughout the Middle Ages, as one historian after anotherchronicled,thegreatkingswouldregularlypassthroughthecrowds,dispensingtheroyaltouch.CharlesII,whoruledEnglandfrom1660to1685,forinstance,wassaidtohavetouchedsome100,000peopleduringhisreign;andtherecordsevenincludethenamesofseveralAmericancolonists,whoreturnedtotheOldWorldfromtheNewWorldjusttocrosspathswithKingCharlesandbehealed.Did the royal touch really work? If no one had ever gotten better after

receivingtheroyaltouch,thepracticewouldobviouslyhavewitheredaway.Butthroughouthistory,theroyaltouchwassaidtohavecuredthousandsofpeople.Scrofula,adisfiguringandsociallyisolatingdiseaseoftenmistakenforleprosy,wasbelievedtobedispelledbytheroyaltouch.ShakespearewroteinMacbeth:“Strangelyvisitedpeople,Allswornandulcerous,pitifultotheeye.. .Putonwith holy prayers and ’tis spoken, the healing benediction.” The royal touchcontinueduntil the1820s,bywhich timemonarchswereno longerconsideredheaven-sent—and (wemight imagine)“new, improved!”advances inEgyptian

mummyointmentsmadetheroyaltouchobsolete.When people think about a placebo such as the royal touch, they usually

dismissitas“justpsychology.”But,thereisnothing“just”aboutthepowerofaplacebo,andinrealityitrepresentstheamazingwayourmindcontrolsourbody.Howthemindachievestheseamazingoutcomesisnotalwaysveryclear.*Someof the effect, to be sure, has to dowith reducing the level of stress, changinghormonalsecretions,changingtheimmunesystem,etc.Themoreweunderstandtheconnectionbetweenbrainandbody,themorethingsthatonceseemedclear-cutbecomeambiguous.Nowhereisthisasapparentaswiththeplacebo.Inreality,physiciansprovideplacebosallthetime.Forinstance,astudydone

in2003foundthatmorethanone-thirdofpatientswhoreceivedantibioticsforasorethroatwerelaterfoundtohaveviralinfections,forwhichanantibioticdoesabsolutely no good (and possibly contributes to the rising number of drug-resistantbacterialinfectionsthatthreatenusall19).Butdoyouthinkdoctorswillstophandingusantibioticswhenwehaveviralcolds?Evenwhendoctorsknowthat a cold is viral rather than bacterial (andmany colds are viral), they stillknowverywell that thepatientwantssomesortof relief;mostcommonly, thepatientexpectstowalkoutwithaprescription.Isitrightforthephysiciantofillthispsychicneed?The fact that physicians give placebos all the time does notmean that they

want to do this, and I suspect that the practice tends tomake them somewhatuncomfortable.They’vebeen trained to see themselves asmen andwomenofscience,peoplewhomustlooktothehighest technologiesofmodernmedicineforanswers.Theywanttothinkofthemselvesasrealhealers,notpractitionersof voodoo. So it can be extremely difficult for them to admit, even tothemselves, that their job may include promoting health through the placeboeffect. Now suppose that a doctor does allow, however grudgingly, that atreatment he knows to be a placebo helps some patients. Should heenthusiasticallyprescribeit?Afterall,thephysician’senthusiasmforatreatmentcanplayarealroleinitsefficacy.Here’s another question about our national commitment to health care.

America already spendsmore of its GDP per person on health care than anyotherWesternnation.Howdowedealwiththefactthatexpensivemedicine(the50-centaspirin)maymakepeoplefeelbetterthancheapermedicine(thepennyaspirin).Doweindulgepeople’sirrationality,therebyraisingthecostsofhealthcare?Or dowe insist that people get the cheapest generic drugs (andmedicalprocedures) on the market, regardless of the increased efficacy of the moreexpensivedrugs?Howdowestructurethecostandco-paymentoftreatmentstoget themostoutofmedications, andhowcanweprovidediscounteddrugs to

needypopulationswithoutgivingthemtreatmentsthatarelesseffective?Theseare central and complex issues for structuring our health care system. I don’thave the answers to these questions, but they are important for all of us tounderstand.Placebosposedilemmasformarketers,too.Theirprofessionrequiresthemto

createperceivedvalue.Hypingaproductbeyondwhatcanbeobjectivelyprovedis—dependingonthedegreeofhype—stretchingthetruthoroutrightlying.Butwe’ve seen that the perception of value, in medicine, soft drinks, drugstorecosmetics, or cars, can become real value. If people actually get moresatisfactionoutofaproductthathasbeenhyped,hasthemarketerdoneanythingworsethansellthesizzlealongwiththesteak?Aswestartthinkingmoreaboutplacebos and the blurry boundary between beliefs and reality, these questionsbecomemoredifficulttoanswer.

AS A SCIENTIST I value experiments that test our beliefs and the efficacy ofdifferent treatments.At the same time, it is also clear tome that experiments,particularly those involving medical placebos, raise many important ethicalquestions.Indeed,theexperimentinvolvingmammaryligationthatImentionedat the beginning of this chapter raised an ethical issue: there was an outcryagainstperformingshamoperationsonpatients.The idea of sacrificing the well-being and perhaps even the life of some

individuals inorder to learnwhether aparticularprocedure shouldbeusedonother people at some point in the future is indeed difficult to swallow.Visualizingapersongettingaplacebotreatmentforcancer,forexample,justsothat years later other peoplewill perhaps get better treatment seems a strangeanddifficulttrade-offtomake.Atthesametime,thetrade-offswemakebynotcarryingoutenoughplacebo

experiments are also hard to accept. And aswe have seen, they can result inhundreds or thousands of people undergoing useless (but risky) operations. IntheUnitedStatesveryfewsurgicalproceduresaretestedscientifically.Forthatreason,we don’t really knowwhethermany operations really offer a cure, orwhether, likemanyof their predecessors, they are effectivemerelybecauseoftheir placebo effect. Thus, we may find ourselves frequently submitting toproceduresandoperationsthatifmorecarefullystudied,wouldbeputaside.Letme sharewith youmyown story of a procedure that, inmy case,was highlytouted,butinrealitywasnothingmorethanalong,painfulexperience.Ihadbeeninthehospitalfortwolongmonthswhenmyoccupationaltherapist

came tomewithexcitingnews.Therewasa technologicalgarment forpeoplelikemecalledtheJobstsuit.Itwasskinlike,anditwouldaddpressuretowhat

littleskinIhadleft,sothatmyskinwouldhealbetter.Shetoldmethat itwasmadeatonefactoryinAmerica,andoneinIreland,fromwhereIwouldgetsuchasuit,tailoredexactlytomysize.ShetoldmeIwouldneedtoweartrousers,ashirt,gloves,andamaskonmyface.Sincethesuitfitexactly,theywouldpressagainstmy skin all the time, andwhen Imoved, the Jobst suitwould slightlymassage my skin, causing the redness and the hypergrowth of the scars todecrease.How excited I was! Shula, the physiotherapist, would tell me about how

wonderful theJobstwas.She toldme that itwasmade indifferentcolors,andimmediatelyIimaginedmyselfcoveredfromheadtotoeinatightblueskin,likeSpiderMan;butShulacautionedme that thecolorswereonlybrownforwhitepeopleandblackforblackpeople.ShetoldmethatpeopleusedtocallthepolicewhenapersonwearingtheJobstmaskwentintoabank,becausetheythoughtitwasabankrobber.Nowwhenyougetthemaskfromthefactory,thereisasignyouhavetoputonyourchest,explainingthesituation.Rather than deterring me, this new information made the suit seem even

better. Itmademe smile. I thought itwouldbenice towalk in the streets andactually be invisible.No onewould be able to see any part ofme exceptmymouthandmyeyes.Andnoonewouldbeabletoseemyscars.AsI imagined thissilkycover, I felt IcouldendureanypainuntilmyJobst

suitarrived.Weekswentby.Andthenitdidarrive.Shulacametohelpmeputitonforthefirsttime.Westartedwiththetrousers:Sheopenedthem,inalltheirbrownishglory,andstartedtoputthemonmylegs.Thefeelingwasn’tsilkylikesomething that would gently massage my scars. The material felt more likecanvasthatwouldtearmyscars.Iwasstillbynomeansdisillusioned.Iwantedtofeelhowitwouldbetobeimmersedcompletelyinthesuit.Afterafewminutesitbecameapparent thatIhadgainedsomeweightsince

thetimewhenthemeasurementsweretaken(theyusedtofeedme7,000caloriesand30eggsadaytohelpmybodyheal).TheJobstsuitdidn’tfitverywell.Still,Ihadwaitedalongtimeforit.Finally,withsomestretchingandalotofpatienceoneveryone’spart,Iwaseventuallycompletelydressed.Theshirtwiththelongsleevesputgreatpressureonmychest,shoulders,andarms.Themaskpressedhardallthetime.Thelongtrousersbeganatmytoesandwentallthewayuptomybellybutton.Andtherewerethegloves.Theonlyvisiblepartsofmewerethe ends of my toes, my eyes, my ears, and mymouth. Everything else wascoveredbythebrownJobst.Thepressure seemed tobecomestrongereveryminute.Theheat insidewas

intense.Myscarshadapoorbloodsupply,andtheheatmadethebloodrushtothem,makingthemredandmuchmoreitchy.Eventhesignwarningpeoplethat

Iwasnotabankrobberwasafailure.ThesignwasinEnglish,notHebrew,andsowasquiteworthless.My lovelydreamhad failedme. I struggledoutof thesuit. Newmeasurements were taken and sent to Ireland so that I could get abetter-fittingJobst.Thenextsuitprovidedamorecomfortablefit,butotherwiseitwasnotmuch

better. I sufferedwith this treatment formonths—itching,aching, struggling towearit,andtearingmydelicatenewskinwhiletryingtoputiton(andwhenthisnewthinskintears,ittakesalongwhiletoheal).AttheendIlearnedthatthissuit hadno real benefits, at least not forme.The areas ofmybody thatwerebettercoveredlookedandfeltnodifferentfromtheareasthatwerenotaswellcovered,andthesufferingthatwentalongwiththesuitturnedouttobeallthatitprovidedme.Yousee,whileitwouldbemorallyquestionabletomakepatientsintheburn

department takepart inanexperiment thatwasdesignedto test theefficacyofsuch suits (using different types of fabrics, different pressure levels, etc.), andevenmoredifficult toasksomeonetoparticipateinaplaceboexperiment, it isalsomorallydifficulttoinflictpainfultreatmentsonmanypatientsandformanyyears,withouthavingareallygoodreasontodoso.If this type of synthetic suit had been tested relative to othermethods, and

relativetoaplacebosuit,thatapproachmighthaveeliminatedpartofmydailymisery. It might also have stimulated research on new approaches—ones thatwould actuallywork.Mywasted suffering, and the suffering of other patientslikeme,istherealcostofnotdoingsuchexperiments.Shouldwe always test every procedure and carry out placebo experiments?

Themoraldilemmasinvolvedinmedicalandplaceboexperimentsarereal.Thepotentialbenefitsofsuchexperimentsshouldbeweighedagainsttheircosts,andasa consequencewecannot, and shouldnot, alwaysdoplacebo tests.Butmyfeelingisthatwearenotdoingnearlyasmanyofthemasweshould.

ReflectionsonPlacebos:Don’tTakeMineAway!A few years ago, awoman seated next tome on a flight toCalifornia took alongishwhitecylinderfromherbag,openedit,anddroppedaquarter-sizetabletinto her airplane cup of water. I watched, mesmerized, as yellowish bubblesfizzedandfoamedwildlyinthecup.Aftertheactivitysettled,thewomandrankthewholeconcoctionintwolargesips.Iwasverycuriousaboutthisand,asshelookedverypleasedwiththewhole

process, I askedherwhat shewas drinking.Shehandedme the longishwhite

tube.ItwasAirborne!Thedescriptiononthetubetrulyimpressedme.Thesetablets,itsaid,hadthe

power to boost the immune system and help fight the germs that surroundpassengersduringflights.IfItookitatthefirstsignofcoldsymptomsorbeforeenteringacrowded,potentiallygerm-infestedenvironment, Icouldprevent theawfulcolds that Iconstantly fought. Icouldnot imagineanythingbetter.And,unlikeanyothermedicationIhaveseen,thisonestatedclearlythatithadbeeninventedbyasecond-gradeteacher!Whobettertodesigncoldmedicationsthansomeonesurroundeddayinanddayoutbygerm-ladenchildren?Sinceteachersare continually catching colds from their students, this seemed like a naturalconnection.Besides,Ilovedthebubbling,foamingaction.Myseatmatecouldnotignoremyenthusiasm,sosheaskedmeifIwantedto

tryatablet.Ihappilyacceptedone,dissolveditinmyhalfcupofwater,watchedthefizzingandfoaming,thendranktheyellowishstuffinonegulp.Icouldseebeforeme the image ofmy own beloved second-grade teacher—Rachel—andmyfondnessforheraddedtotheexperience.Almostimmediately,Ifeltbetter.Icompletely avoided getting sick after that flight. Proof! Thus did Airbornebecomeastapleinmytravels.OverthenextfewmonthsIusedAirborneasthetubesuggested.SometimesI

drankitduringaflight,butmoreoftenIconsumeditaftertheflight.EachtimeIrepeatedtheritual,Iimmediatelyfeltbetteraboutmyselfandaboutmychancesoffightingofftheinsidiousairbornediseasessurroundingme.Iwas99percentsure that Airborne was a placebo, but the bubbles and the ritual were sowonderful that I just knew itwouldmakeme feel better.And it did!Besides,taking itmadememoreconfident inmyhealthand lessstressedaboutgettingsick—and,afterall,stressandanxietyareknowntolowerimmunity.A few years later, just as I was beginning my book tour and had to fly

constantly,IheardthetragicnewsthatVictoriaKnight-McDowell, thesecond-gradeteacherfromCaliforniawhoinventedAirborne,hadagreedtopayasumof $23.3million in a settlement for false advertising, in addition to refundingmoneytoconsumerswhobought theproduct.Themanufacturerhadtochangethestatementsandclaimsontheproductitself.Theformer“miraclecoldbuster”had been demoted to a simple dietary supplement made from 17 vitamins,minerals, and herbs. The old claim that Airborne “supports your immunesystem”remainedintactonthepackaging,butwasaccompaniedbyoneofthosepeskydaggers(†)indicatingfineprint.Youhavetosearchforit,buteventuallyyou find it hidden away in the back corner: “These statements have not beenevaluatedbytheFoodandDrugAdministration.Thisproductisnotintendedtodiagnose,treat,cure,orpreventanydiseases.”Howdepressing.*

So there I was, faced with at least three flights a week for the next fewmonths,andthemagicofmyAirbornewasrippedawayfromme.IfeltasifIhadlearnedthatapersonI’dconsideredagoodfriendformanyyearshadneverreally liked me and had been saying bad things about me behind my back.Maybe, I thought, if Iwent straight to the drugstore and got some of the oldcontainerswiththeexaggeratedandinflatedclaims,theymighthelprestorethemagical power of Airborne. But this seemed unlikely. I could not avoid theknowledge that my fizzy miracle was no such thing. It was just some dumbvitamin with neat Alka-Seltzer special effects. In the face of suchdisillusionment, I can no longer enjoy the wonderful placebo-immunity-enhancingeffectofyesteryear.Oh why, why did they do this to me? Why did they take my wonderful

placeboaway?

Chapter12TheCycleofDistrust

WhyWeDon’tBelieveWhatMarketersTellUs

I’m not sure about you, but I get a lot of spam e-mail. People are constantlyofferingmethechancetomakealotofmoneyorbuycheapsoftware.TheytellmeI’mtheonepersonthey’vealwayswantedtomeet.Theyoffertoenlargeorimprovedifferentpartsofmybody.IwasevenpresentedwiththeopportunitytogetanotherPh.D.—onethatwouldnotrequireanotherfiveyearsofhardlabor.Instead,theywouldcreditmeformylifeexperience.Sofar,thisistheonlyonethat I’ve tried out. But after I contacted the organization offering this degree,theydecidedtodropmefromtheirlistofinterestedprospectivestudents.Sadly,Ineverdidgetcreditformylifeexperience.Beyond spam, Iget a lotofotherproposals and requests. Iwasparticularly

curious about one that came from my local cable company. It promised onemonthoffreedigitalcable.SinceI’minterestedinanyoffer thathas thewordfreeinit(seeChapter3,“TheCostofZeroCost”),Idecidedtotakethisoneon.Icalledthecompany,andinamatterofdays,atechniciancametomyhouseandinstalledmyfreedigitalcable.Amonthlater,Ireceivedabillforthefreedigitalcable and found that it actually cost $60.When I called the customer servicedepartment, the nice fellow who took my call patiently explained that,unfortunately,Ihadproblemswithreadingcomprehension.Hepointedoutthatthetermsoftheagreementwereclearlyexplainedintheseven-pointfontatthebottomofthecompany’sad.AfterIpaidfortheregularanalogservice,thebox,theconnectionfee,andtheremote,itsaid,Iwould“getforfree”thedifferencebetweenthatamount($60)andthestandardamount($79)fordigitalcable.

Igenerallyconsidermyselfa fairly trustingperson,butwithall thedubiousoffers andnews about thebadbehavior of businesses, I feelmyself becominglesstrustingandmoresuspicious.ItseemsthatI’malwayslookingforthecatch,anditturnsoutthatI’mnotaloneinthisparanoidmindset.Someyearsago,twoveryperspicaciousresearchers,MarianFriestadandPeterWright,suggestedthatpeopleingeneralarestartingtounderstandthattheofferscompaniesputbeforeusareintheirbestinterestandnotours.Asaconsequence,we’vebecomemoredistrustful—notonlyofthosewhoaretryingtoswindleusbutofeveryone.

FreeMoneyAfter talking about our own experience of increasing disillusionment, AyeletGneezy (a professor at the University of California at San Diego), StephenSpiller(adoctoralstudentatDukeUniversity),andIdecidedtotrytomeasuretheextentofthepublic’ssuspicionofcompanies.Ourfirstquestionwashowtomeasuretheextentofdistrust.Wecould,ofcourse,askeachpersoninagroup,“How suspicious do you feel on a scale from 1 to 10, 1 being not at allsuspicious and 10 being very suspicious?” The problem with this type ofmeasurement is that it’sdifficult to tellexactlywhat5.7onsuchascale reallymeans.Woulditsuggest thatpeoplebelievedthat theamazingofferfromtheircablecompanywasreal?Orwould itmeanthat theywereskepticalenoughtoreadthefineprintfirst?Inaddition,alotofourresearchhasshownthatpeopleoftenhavewrong intuitionsabout theirownbehavior—theycan sayone thingbutdoanother.So,wedecided tomeasure a behavior thatwould tell uspeople’s degreeof

distrust,andourtoolofchoicewasafreemoneyexperiment.Onelovelyspringday,wesetupaboothatabigcommercialcenterinCambridge,Massachusetts,mannedbysomeundergraduatestudents.Aboveourboothwasalargesignthatread“FreeMoney.”Onthefrontoftheboothwasasmallersignthatindicatedhowmuchmoney

wewouldgivepeopleforfree.Sometimesthesignsaid$1,sometimes$5,andother times $10, $20, or even $50. The busy people who worked at thiscommercial center passed a sign saying “Free Money, $20” (or whicheverdenominationithappenedtobeatthetime)ontheirwaytolunchorastheywereleavingfor theday.Theyalsosawapileofbills inthegivendenominationonthetable.Howmanypeopledoyouthinkstoppedandtookusuponouroffer?Wedidn’texpectpeopletoslowdownandsimplypickoneofthebillsoffthe

table, takingus (orour sign) completely literally.We thought theywould firstaskifwewereserious.Onhearingussay,“Yes,weare,andyouarewelcometo

take a bill,”we assumed theywould take a bill and go on theirway.And lo,everysooftensomeonewouldwalkby theboothslowly, reading thesignandglancingatthestudents,whoreallydidnotlooklikecrooks.Here’showthescenariogenerallywent:

MAN: (warily approaching the booth and eyeing the $50 bills) Is this atrick?

STUDENT:(smiling)Absolutelynot.MAN:IstheresomethingIhavetosign?STUDENT:Nothingtosign.MAN:Theremustbeacatch.STUDENT:No.MAN:Isthisforreal?STUDENT:Yes.Helpyourself!Onetoacustomer.

Reassured, themanwould lookaroundandhelphimself toabill.Hewould

holditupforasecond,asifwaitingforsomethingtohappen.Then,hewouldturnaroundandbegintowalkslowlyaway.Hispacewouldeventuallypickup,andhewoulddisappeararoundacorner.Whenweoffered$1,only1percentof thosewhopassedourboothactually

stoppedtocheckitout.Whenweoffered$5,afewmoredid,andsoonupto$50.Butevenwhenweoffered$50,only19percentofpassersbystoppedandtookabill.Wewere surprisedandslightlydisappointedwith this low leveloftrust;19percentisnotahighlevelofsuccess,particularlywhenfreemoneyis(literally)onthetable.Itisimportanttorealizethatinthissetting,peopledidnotnecessarilyhaveto

believethatthemoneyweofferedwasentirelyfree.Theymighthaveexpectedtohavetodosomethinginreturn—answerashortsurvey,forexample.Butevenif they suspected as much, it might still be the case that the payment was aworthwhilereturnonaninvestmentofansweringafewquestions.Clearly,thevastmajoritybelievedthatthiswassomekindoftrick—somuch

so that it was not worthwhile to even ask. Occasionally, one of the studentswouldapproachsomeonewhohadclearlyseentheofferontheboothbutchosentoignoreit.Whenaskedwhytheychosenottoapproachthebooth,respondentssaidtheybelievedthatitwassomekindofscheme.(Afavoriteclaimmadebyeconomistsisthatthereareno$100billslyingonthesidewalk;iftherewere,theargumentgoes,someonewouldhavealreadypickedthemup.)Tous,thislookedlikeevidenceofdeepmistrust.

TheTragedyoftheCommonsTrust,likemoney,isacruciallubricantfortheeconomy.Whenpeopletrustotherpeople,amerchant,oracompany,theyaremorelikelytobuy,lend,andextendcredit.Intheolddays,businesswasconductedonagentleman’shandshake.Butwhen the handshake results in a swindle, trust disappears and all subsequenttransactions—whetherbetweencheatersorthegenuinelygood-hearted—becomemoredifficult.A good analogy for social distrust can be found in the “tragedy of the

commons.”ThisphrasecanbetracedbacktoOxfordprofessorWilliamForsterLloyd,whodescribedthephenomenoninhis1833bookonpopulation.HenotedthatinmedievalEngland,parisheshadcommonlandonwhicheachmemberofthecommunitycouldgrazealimitednumberofcattleandsheep.*Keepingthenumberofanimals lowallowedthegrass togrowbackataspeed thatkept itslevelmoreor less the same.This approachwas rather successfulwhenall thefarmersstuck to therule.Unfortunately, in theirselfishdesire to improve theirown financial situations, some of the farmers increased the number of theiranimalstoalevelthatthelandcouldnotsustain.Thisstrategywasverygood(atleastintheshortrun)fortheindividualfarmerswhohadmoreanimals,buteachadditionalcoworsheepresultedinlessgrassforalloftheanimals.Asthegrassdwindled, all the livestock on the commons became malnourished andunderproductive—aresultthathurteveryone,includingthegreedyfarmers.Today, psychologists, economists and environmentalists use the phrase “the

tragedyof thecommons” todescribe the samebasicprinciple:whenweuseacommonresourceataratethatisslowerthantherateatwhichitreplenishes,alliswell.However,ifafewindividualsgetgreedyandusemorethantheirshare,the system of consumption becomes unsustainable, and in the long term,everybodyloses.Inessence,thetragedyofthecommonsisabouttwocompetinghumaninterests.Ononehand,anindividualshouldcareaboutthesustainabilityofsharedresourcesinthelongtermbecauseeveryone,includingtheindividual,benefits from it. At the same time, in the short term, the individual benefitsimmediatelyfromtakingmorethanhisorherfairshare.(Socialscientistsrefertosuchbetrayersofsocialcontractsas“defectors.”)Ofcourse,ifweallcaredaboutthecommongoodorthoughtaboutthelong-

term consequences of our actions, we might not run into resource-sharingproblems.But because humanbeings tend to focus on short-termbenefits andourownimmediateneeds,suchtragediesofthecommonsoccurfrequently.Takethe wild salmon population, for example. While it is ideal for fishermen ingeneraltolimittheirowncatchessothatthesalmonpopulationcanbesustained,it’smoreprofitableforanindividualfishermantooverfishinagivenyear.Butif

toomanyfishermenevenslightlysurpass thesustainable limit, theoverall fishpopulation becomes depleted. (For this reason, salmon fishermen are nowconstrainedbylawtoalimitednumbereveryyear).Thecurrentenergycrisisisanotherexampleofthetragedyofthecommons.

Although there is a finite amount of fossil fuel in the world, some countries,industries, businesses, and individuals use farmore than others whilemakinglittleefforttominimizetheirimpactonthecommonpool.Evenpublicresourcessuchascleanair,land,trees,andwaterfallvictimtothisproblem.Intheabsenceof cooperation among all the players in protecting such resources, a smallnumberofmisbehavingentitiescanhaveadevastatingeffectoneveryone.

ThePublicGoodsGameThe following thought experimentoffers an interesting exampleof the

phenomenonof the tragedyof thecommons.ImaginethatIofferyouandthreeotherpeople$10each,whichisyourstokeep.ButIalsogiveyouanopportunitytomakemoremoney.Youcanputasmuchofyour$10asyouwantintothe“grouppot.”Oncealltheplayershaveprivatelydecidedhowmuchoftheirmoneytoputinthegrouppot,allthemoneydoublesandthenissplitevenlyamongthefourparticipants,regardlessofhowmuchmoneyeachindividualcontributed.Howmuchofyour$10wouldyouputintothegrouppot?Ifallfourofyouputin$10,thegrouppotwoulddoublefrom$40to$80,bedividedfourways,andeachofyouwouldtakeawayanice$20.Solet’ssayyouput inyour$10, thinking that theotherplayerswilldo

thesame.Oncethepotisdivided,however,youonlyget$15back,not$20.What happened? It turns out that one of the other players—let’s call him“Bernie”—decidedtocheat.Atthebeginningofthegame,Bernierealizedthathewouldmakethemostmoneyifhewithheldhis$10whileeveryoneelsecontributed to thecentralpot.SoBerniekepthis$10while theotherthreeplayersplacedtheir$10inthecentralpot,makingthetotal$30.Thisdoubledforatotalof$60,subsequentlysplitfourways(remember,Berniegetstheproceedsofthegrouppot,whetherornothecontributes),andeachof the threecontributorsget$15.Bernie,meanwhile,makesoutwith$25(hisoriginal$10,plus$15fromthesplit),morethananyotherplayer.Now, let’s say you get a chance to play the same game againwith the

sameplayers(Igiveyouallnew$10bills).Howwouldyouplaythistime?You don’t want to be too trusting because you know that Bernie might

defectagain.Soyouonlyputin$4.Itturnsoutthattheotherthreeplayersfeel the same way and make the same decision, making the total in thegroup’spot$12(Bernieagaindoesnotputinanymoney).Thepotdoublesto $24, which is split evenly among four people. Each of the threecontributingplayersgets$6(inadditiontothe$6theykeptforthemselves),whileBerniewindsupwith$16intotal.Now,your trusthasbeeneroded.Youplaya fewmoregames,butyou

don’t put in anyof yourmoney.Each timeyou endupwith the$10youstartedwith.You don’t lose anything, but since you don’t trust others tobehave inacooperativeway(andneitherdo theotherplayers),youdon’tgain anything either. In contrast, if you and the others had actedcooperatively,eachofyouwouldhavewoundupwithasmuchas$20pergame.Viewedthisway,thePublicGoodsGameillustrateshowwe,asasociety,

sharethepublicgoodoftrust.Whenweallcooperate,trustishighandthetotal value to society ismaximal.Butdistrust is infectious.Whenwe seepeople defect by lying in their advertisements, proposing scams, etc.,westartactingsimilarly;trustdeteriorates,andeverybodyloses,includingtheindividualswhoinitiallygainedfromtheirselfishacts.

Ifwestarttothinkabouttrustasapublicgood(likecleanairandwater),we

seethatwecanallbenefitfromhigherlevelsoftrustintermsofcommunicatingwith others, making financial transitions smoother, simplifying contracts, andmanyotherbusinessandsocialactivities.Withoutconstantsuspicion,wecangetmoreoutofourexchangeswithotherswhilespendinglesstimemakingsurethatothers will fulfill their promises to us. Yet as the tragedy of the commonsexemplifies, in theshort term it isbeneficial foreach individual toviolateandtakeadvantageoftheestablishedtrust.Isuspectthatmostpeopleandcompaniesmissorignorethefactthattrustis

an important public resource and that losing it can have long-term negativeconsequencesforeveryoneinvolved.Itdoesn’ttakemuchtoviolatetrust.Justafewbadplayersinthemarketcanspoilitforeveryoneelse.

ErosionofTrustoverTimeIn the picaresque film Little Big Man, the protagonist, a once-trusting butincreasingly cynical young Jack Crabb (played byDustin Hoffman), takes upwithaone-eyedsnake-oilsalesmannamedMerriweather,whopromiseshimthat“if you stick with Merriweather, you’ll wear silk.” Crabb and Merriweather

travel from town to town in the Old West, selling a miracle drug thatMerriweather promises can make the blind see and cripples walk, but that isreallyjustabrewconcoctedfromrattlesnakeheads.Ofcourse,peoplegetsickafterswallowingit,andthetownspeopletakerevengebytarringandfeatheringthe two tricksters. (In the real world of 1903, an analogous medicine calledRexallAmericanitisElixirwas“especiallyrecommendedfornervousdisorders,exhaustion, and all troubles arising from Americanitis.”20) Of course, old-fashionedtrustabuserslikeMerriweatherandthemakersofRexallAmericanitisElixirarebutmildoffendersrelativetothoseofthemodernage.Today,it’seasyforoneindividualtostartselling“wonderpills”thatpromise

to help you loseweight, keep or regrowyour hair, enhance your sex life, andenergizeyourworkday.Unsuspectingpeoplewhobuysuchconcoctionsgetallthebenefitsofplacebosand, in theprocess, loseplentyofmoney.Meanwhile,thedishonestpill-purveyorsgainsubstantiallywhilefurthererodingtheoverallleveloftrust(atleastforthosewhodidn’tbenefitfromtheplaceboeffect).Thiserosionnotonlymakesitharderforthenextwonderpillsalespersontopeddlegoods(whichbyitselfisagoodthing),butalsomakesitmoredifficultforustobelievethosewhotrulydeservetobetrusted.THERE’SANOTHERASPECTtothisproblem.Imaginethatyouareanhonestpersonandyouwanttoremainthatway.Howshouldyoubehaveinaworldwheremostpeopleareuntrustworthyandmostindividualsdon’ttrustothersanyway?For a concrete example, supposeyou’ve just joined anonlinedating site. If

you suspect that most people on the site slightly exaggerate their vital andbiographicalstatistics,you’reright!WhenGünterHitschandAliHortaçsu(bothprofessors at theUniversityofChicago)and I looked into theworldofonlinedating,wediscoveredthatmencaredmostlyaboutwomen’sweightandwomencaredmostlyaboutmen’sheightand income.Wealsodiscovered,perhapsnotsurprisingly, that the online women reported their weight to be substantiallybelowaverage,whilethemenclaimedtobetallerandricherthanaverage.Thissuggeststhatbothmenandwomenknowwhattheotherhalfislookingfor,andsotheycheatjustalittlebitwhendescribingtheirownattributes.Afellowwhois 5'9" and earns $60,000 annually typically gives himself an extra inch and$30,000 raise, describing himself as being 5'10" and making $90,000.Meanwhile,hispotentialpartnerremembersherweightincollegeand,witha5percentdiscount,becomes133pounds.Butwhathappensifyou’rea5'9"manandyoudecidetobehonestsinceyou

believehonestyisacriticalcomponentofagoodrelationship?You’regoingtobepenalizedbecausewomenreadingyour5'9"assume thatyour realheight is5'8"or5'7".By refusing tocheat,youhave substantially loweredyourmarket

value. So what do you do? You sigh, stuff your hands in your pockets, andrealizethatthere’salotstackedagainsthonesty.Giventheimportanceoffindingapartnerandhavingsurrenderedtothesadfactthateveryonecheatsalittle,youtoo,Isuspect,wouldgiveinanddecidetofudgethefactsjustalittlebit.Ofcourse,oncewebegin tocheat, even ifonlybya little,over time it can

become a habit.Consider, for example, the process ofwriting a résumé. I seemanyofmystudents’résuméswhentheyapplyforjobsorgraduateschoolandaskmefor lettersof recommendation. In theirdesire tostandoutandgrab theattention of the prospective employer, and because they think that everyoneexaggerates a bit, they do too.Accordingly, anyonewho’s ever taken intro tostatistics is suddenly “fluent in statistical analysis,” a part-time job spentinputting data for an experiment turns into “assisting in data analysis,” and atwo-monthinternshipinParisbecomes“fluentinFrench.”Infact,thesituationis so severe that when my research assistants show me their résumés, IsometimesfeelasthoughtheprojectswehaveworkedontogetherareactuallytheirsandthatI’vebeenassistingthem.

HowDeepIsYourMistrust?Following our “free money” experiment, Ayelet, Stephen, and I set up anexperimenttoseejusthowdeepthelevelofmistrustofcompaniesreallygoes.Specifically, we wanted to find out the degree to which people would doubtobviously truthful statements when these statements were associated with abrand.We started out by asking people whether they thought that completely

unambiguousstatementssuchas“thesunisyellow”and“acamelisbiggerthanadog”weretrueorfalse,and100percentoftheparticipantsagreedtheyweretrue.Thenwe asked another groupof people to evaluate the same statements,withtheaddedinformationthattheyweremadebyeitherProctor&Gamble,theDemocratic Party, or the Republican Party. Would giving these statements acorporateorpoliticalorigincolorourparticipants’ impressionsandwould theybemorelikelytosuspectthetruthfulnessofthesestatements?Thesadanswerwasyes.Whenwesuggestedthat,say,theDemocraticParty

had issued the statement that “the sun is yellow,” our participants weremorelikely toquestion it. (“Sure it’syellow,but italsohas redspotson thesurfaceand sometimes it looks white, so is it really just yellow?”) If the RepublicanParty or P&G issued the statement that “a camel is bigger than a dog,” theparticipantsagainwerelesscertainandhedgedtheirbets.(“Whatifthedogisabull mastiff and the camel is a newborn . . . ?”) By starting from a highly

suspicious point of view, owing to the origin of the statement, the level ofdistrustwas sohigh that it even influencedourparticipants’ ability to identifyobviouslycorrectstatements.*IN OUR NEXT experiment, we wondered whether this kind of mistrust couldchangetheactualexperiencesomeonewashavingwithaproduct.Tolookintothisquestion,we invitedUniversityofChicagostudents toour lab toevaluatethequalityofsomestereoequipment,askingthemtolistentoan“Azur”modelstereomadebyCambridgeAudio.Beforebeingsetlooseonthewoofersandtweeters,alltheparticipantsreada

brochure describing and reviewing all the different features of the stereoequipment.SomeoftheparticipantsreadabrochuresaidtobefromCambridgeAudio, and others read the same exact brochure, but this one indicated that itcamefromConsumerReports.Then,alloftheparticipantstookhalfanhourtolistentoacompositionbyJ. S. Bach and evaluate the stereo system.How powerfulwas the bass?Howclear was the treble? Were the controls easy to use? Were there any sounddistortions?Andfinally,howmuchwouldtheypayforthesystem?Asitturnedout,theparticipantslikedthestereomuchmoreiftheyweretold

thattheinformationtheyreadcamefromanunbiasedsourcesuchasConsumerReports.Theyalsosaidtheywouldpay,onaverage,about$407forthesystem,far more than the $282 offered by those who read the Cambridge Audiobrochure. Sadly, it appeared that mistrust in marketing information runs sodeeplythat itcolorsourentireperception—eveninthefaceoffirsthand,directexperience—causing us to enjoy the experiencemuch less than we otherwisewould. (And this happens with relatively trusted brands. Just imagine whatwouldhappenwithdistrustedones.)NOW,LET’SRETURNforamomenttomybadexperiencewiththecablecompany’sbait-and-switch.Ayelet,Stephen,andIdecidedtorunalittlestudyofourownwiththeadthatpromisedmeonemonthoffreedigitalcable.Weshowedittoafew hundred people and asked them how much they thought this free offerwould reallycost.Being somewhatnaïveandgulliblemyself, Iwasoriginallyexpectingthepricetoreallybefree(which,ofcourse,itwasnot),butitturnedout that very few people in our samplewere as naïve as I had been; the vastmajority expected the offer to cost them somewhere between $10 and $70. Itseemedthatmostpeoplehavelearnedovertimethattherereallyisnosuchthingas a free lunch (or free cable service), and they adjust their expectationsaccordingly(althoughtheyarestillannoyedwhentheyfindouttherealprice).But this is not the end of the bad news.We also split our sample into two

groups—onegroupthathadpriorexperiencewiththatparticularcableprovider

and one that had not—and compared the two groups’ cost estimates for theadvertisedfreeservice.Itturnedoutthattherewasalargegapbetweenthetwogroups: thosewho’dneverdonebusinesswith the “free cable” companywerejust as gullible as I was, while those who’d done business with the cablecompanyestimatedtherealcosttobemuchhigher.Whatwasthecauseforthisdifference?Youguessed it: thosewithpastexperiencehadbeenburnedbeforeand, as a consequence, revised their trust in anything that originated from thiscablecompany.

IsThereHope?I realizeall this soundsverypessimistic,but there isabrighter side.Afterall,humanbeingsareinherentlysocialandtrustinganimals,andwetendtobelieveinoneanothereveninthefaceofclearrationalreasonsnottodoso.Despitethedifficulties of overcoming broken trust, I think that it is possible to repair it,giventherightamountofinvestmentanddirection.ConsiderthearchetypalexampleofJohnson&Johnson’shandlingofthe1982

Tylenol tampering incident. In September 1982, seven people in the ChicagoareadiedafteringestingExtraStrengthTylenolcapsulesthatapharma-terroristhad adulterated with cyanide. From the beginning of the crisis, Johnson &Johnson’smanagersset thesafetyoftheconsumerastheir toppriorityanddideverything in their power to contain the tragedy, regardless ofwhere the faultlay. Johnson & Johnson quickly and voluntarily halted Tylenol production,withdrewallTylenolcapsuleproducts from themarket,urged the returnofallpreviously purchased Tylenol capsule products, and readily providedreplacementtablets.ThecompanyultimatelydestroyedmillionsofbottlesofTylenolatacostof

morethan$100million.Tylenol’smarketshare,whichhadaccountedformorethan a third of U.S. painkiller sales, dropped dramatically, and many expertspredicted the demise of the popular brand. However, after a brief period,Johnson&JohnsonreintroducedTylenolinanewtamper-resistanttriplesafety-sealed container, accompanied by a blitz of advertising and positive mediaattention.Tylenol’smarket share recovered to30percent oneyear later,whileJohnson&Johnson’ssharepricerecoveredwithintwomonths.21ThefactthattheTylenolscareremainstheoverlycitedparadigmofeffective

crisismanagementinbusinessisalmostdepressing.Afterall,theexampleisanoldone,andfewcompaniessincehavebehavedinsuchanexemplarymanner.Nevertheless, it did set a powerful example of how transparency and sacrificecanservetorestorepublictrustandhelpafirmsetitselfontherightpath.

Another promising way for companies to create trust is by proactivelyaddressingconsumers’complaints.Thisapproachispracticedbythecablegiant(yes,cablegiant)Comcast,whichhasbegunrespondingtocustomercomplaintsevenbeforetheyreachthecustomerservicedepartment.Thedirectorofdigitalcare, Frank Eliason, discovered that by searching the internet for the wordComcast(orsometimesComcrap),hecouldlocateunhappycustomerswhowereventingtothemselvesandtotheirfriends.Hethentookthenextstepandstartedcorresponding with the complainers about their problems before they becameformal complaints. (Other companies—including JetBlue, General Motors,Kodak,Dell,andDomino’sPizza—also trackcustomers’commentsonTwitterandelsewhere.)A more extreme version of this idea is for companies to make themselves

transparent andvulnerable.By settingupWeb siteswhere consumers can talkfreelywiththecompanyandoneanotheraboutproductsandservices,wartsandall, companies can expose themselves to large negative consequences if theyevermisbehave.This typeof transparency isasortofcommitmentdevice thatcompanies can use to force themselves to behave in a trustworthy way, evenwhen they are tempted todootherwise.And since in such apublicly exposedworlditishardertogetawaywithflagrantmis-behavior anyway, why not embrace more positive and trustworthy types ofbusinessprocesses?Somespecialcompaniesseetrustasapublicgood(likecleanairandwater),

andcustomersreturnthetrust.OnecompanyinwhichIpersonallyhavealotoffaithisTimberland,themakerofoutdoorclothing.IonceattendedatalkbyJeffSwartz, the CEO, in which he detailed many of the ways that Timberland istryingtoreduceCO2emissions,recycle,usesustainablematerials,andtreatitsemployeesfairly.At theendofJeff’s talk,anotherCEOaskedhim,“Whatarethereturnsontheseinvestments?”Jeffansweredthathehasbeentryingtofindaneconomicreturnfortheseactionsbutthathehadnotyetfounditinthedata.He further added that it would be nice if being environmentally and sociallyresponsiblewas also financially rewardingbut that hedidn’t really feel itwasnecessary.Hesimplywantedtomakesurethathiscompanyfollowedthemoralprincipleshewantedhiskidstoliveby.Afterhearingthis,IwentandboughtmyfirstpairofTimberlandshoes.

AMoralTaleAesop’staleof“TheBoyWhoCriedWolf”isapowerfulfableoflosttrust.Yourecall thestory:Aboyshepherd tendinga town’s livestockonedaydecides to

havea little fun.“Wolf!Wolf!”hecries,and immediately the townsmencomearmed, ready to defend their precious animals. They find that they’ve beenduped and return to the town. A few days later, the boy again cries, “Wolf!Wolf!” and again the townsmen come, armed, ready to defend the livestock.Again, there is no wolf. Finally, when a wolf really does come, the boy’sdesperatecriesforhelpfallondeafears.Thetownsmennolongertrusthimandleavehimtofendoffthewolfonhisown.Consequently,thelivestockfallpreytothewolf(insomeversionsofthestory,thewolfeatstheboyaswell).Let’s think about this tale in termsofmarkets.There are twomorals to the

story. The first is that people arewilling to forgive a bit of lying.Obviously,many corporations get away with lying in their advertisements and offers, atleasttemporarily.Butwhenmarketerspersistinpullingbait-and-switchtactics,mistrust bites back, sinking its sharp teeth not only into the thigh of theperpetratorbutalso,moregenerally,intoothersaswell.Whenmarketdefectorsspreadfalseclaims,moreandmoreofusincreaseourlevelofdistrust,andthisdistrust thengetsdiffused intoeverythingwehear.Wecastobvious truths intodoubt, and we suspect everything. The cable company that betrayedmy truststungitself,forsure,butitalsohurtitsindustrybycausingconsumerslikemetomistrust telecommunications companies in general. And that mistrust, like apebble dropped into a still pond, ripples throughout the telecommunicationsindustry; creating tiny waves that end up affecting business and society as awhole.But the second, more important moral—one that we are just beginning to

understand—is that trust,onceeroded, isveryhard torestore.Oneonlyhas tothinkabout thebankingcrisisof2008that left theU.S.economyin tears.Themultiplebailoutsandnewregulationsthatfolloweddidlittletohealthebrokentrust, and the behavior of Wall Street executives only ground salt into thewounds.Iamunsurewhytrustasanimportantpublicresourcewasignored,butit is clear to me that its loss will have long-term negative consequences foreveryoneinvolved,andthatrepairingthepublictrustwilltakeaverylongtime.Thanks to shortsightedness and individual greed, the public commons (in thiscase,intheformoffinancialsystems,government,andtheeconomyasawhole)havesufferedagreattragedy.Nevertheless,bycoming tounderstand trustasan important, tangiblepublic

resource to be protected and cared for, organizations could do a great deal torestoreit.Afewarebeginningtotakegreatcaretocreateandmaintaintrust,anddowhattheycantopreventitspossibledeteriorations.Intheend,IbelievethatcompaniesthatwanttobesuccessfulwillheedtheexampleofTimberlandandrealizethathonesty,transparency,conscientiousness,andfairdealingshouldbe

bedrock corporate principles. If we consumers reward their efforts by buyingfromthemmorefrequently,wemightovertimebeabletorebuildtrust—atleastintheselectfirmsthatreallydeserveit.

Chapter13TheContextofOurCharacter,PartI

WhyWeAreDishonest,andWhatWeCanDoaboutIt

In2004,thetotalcostofallrobberiesintheUnitedStateswas$525million,andtheaverage loss fromasingle robberywasabout$1,300.22Theseamountsarenot very high, when we consider how much police, judicial, and correctionsmuscleisputintothecaptureandconfinementofrobbers—letalonetheamountof newspaper and television coverage these kinds of crimes elicit. I’m notsuggestingthatwegoeasyoncareercriminals,ofcourse.Theyarethieves,andwemustprotectourselvesfromtheiracts.Butconsiderthis:everyyear,employees’theftandfraudattheworkplaceare

estimated at about $600 billion. That figure is dramatically higher than thecombinedfinancialcostofrobbery,burglary,larceny-theft,andautomobiletheft(totaling about $16 billion in 2004); it ismuchmore thanwhat all the careercriminalsintheUnitedStatescouldstealintheirlifetimes;andit’salsoalmosttwicethemarketcapitalizationofGeneralElectric.Butthere’smuchmore.Eachyear,accordingtoreportsbytheinsuranceindustry,individualsaddabogus$24billiontotheirclaimsofpropertylosses.TheIRS,meanwhile,estimatesalossof$350billionperyear, representing thegapbetweenwhat thefeds thinkpeopleshould pay in taxes and what they do pay. The retail industry has its ownheadache: it loses$16billionayear tocustomerswhobuyclothes,wear themwiththetagstuckedin,andreturnthesesecondhandclothesforafullrefund.Add to this sundry everyday examples of dishonesty—the congressman

accepting golfing junkets from his favorite lobbyist; the physician makingkickbackdealswith the laboratories that heuses; the corporate executivewho

backdateshisstockoptionstoboosthisfinalpay—andyouhaveahugeamountof unsavory economic activity, dramatically larger than that of the standardhouseholdcrooks.WhentheEnronscandaleruptedin2001(anditbecameapparentthatEnron,

as Fortune magazine’s “America’s Most Innovative Company” for sixconsecutiveyears,owedmuchofitssuccesstoinnovationsinaccounting),NinaMazar,OnAmir(aprofessorattheUniversityofCaliforniaatSanDiego),andIfoundourselvesdiscussingthesubjectofdishonestyoverlunch.Whyaresomecrimes, particularly white-collar crimes, judged less severely than others, wewondered—especiallysincetheirperpetratorscaninflictmorefinancialdamagebetweentheirteno’clocklatteandlunchthanastandard-issueburglarmightinalifetime?Aftersomediscussionwedecidedthattheremightbetwotypesofdishonesty.

Oneisthetypeofdishonestythatevokestheimageofapairofcrookscirclingagasstation.Astheycruiseby,theyconsiderhowmuchmoneyisinthetill,whomight be around to stop them, andwhat punishment theymay face if caught(includinghowmuchtimeofftheymightgetforgoodbehavior).Onthebasisofthiscost-benefitcalculation,theydecidewhethertorobtheplaceornot.Then there is the second type of dishonesty. This is the kind committed by

peoplewhogenerallyconsiderthemselveshonest—themenandwomen(pleasestand)whohave“borrowed”apenfromaconferencesite,takenanextrasplashofsodafromthesoftdrinkdispenser,exaggeratedthecostoftheirtelevisionontheirpropertylossreport,orfalselyreportedamealwithAuntEnidasabusinessexpense(well,shedidinquireabouthowworkwasgoing).Weknowthat thissecondkindofdishonestyexists,buthowprevalent is it?

Furthermore,ifweputagroupof“honest”peopleintoascientificallycontrolledexperiment and tempted them to cheat, would they?Would they compromisetheirintegrity?Justhowmuchwouldtheysteal?Wedecidedtofindout.

THEHARVARDBUSINESSSCHOOLholdsaplaceofdistinctioninAmericanlife.SetonthebanksoftheRiverCharlesinBoston,Massachusetts;housedinimposingcolonial-style architecture; anddrippingwith endowmentmoney, the school isfamous for creating America’s top business leaders. In the Fortune 500companies, in fact, about 20 percent of the top three positions are held bygraduatesoftheHarvardBusinessSchool.*Whatbetterplace,then,todoalittleexperimentontheissueofhonesty?*The study would be fairly simple. We would ask a group of Harvard

undergraduatesandMBAstudentstotakeatestconsistingof50multiple-choicequestions.Thequestionswouldbesimilartothoseonstandardizedtests(Whatis

thelongestriverintheworld?WhowroteMoby-Dick?Whatworddescribestheaverageofaseries?Who,inGreekmythology,wasthegoddessoflove?).Thestudentswouldhave15minutestoanswerthequestions.Attheendofthattime,theywouldbeaskedtotransfertheiranswersfromtheirworksheettoascoringsheet (called a bubble sheet), and submit both the worksheet and the bubblesheettoaproctoratthefrontoftheroom.Foreverycorrectanswer,theproctorwouldhandthem10cents.Simpleenough.Inanothersetupweaskedanewgroupofstudents to take thesamegeneral

test,butwithoneimportantchange.Thestudentsinthissectionwouldtakethetestandtransfertheirworktotheirscoringbubblesheet,asthepreviousgroupdid.Butthistimethebubblesheetwouldhavethecorrectanswerspre-marked.Foreachquestion,thebubbleindicatingthecorrectanswerwascoloredgray.IfthestudentsindicatedontheirworksheetthatthelongestriverintheworldistheMississippi,forinstance,oncetheyreceivedthebubblesheet,theywouldclearlysee from the markings that the right answer is the Nile. At that point, if theparticipantschosethewronganswerontheirworksheet,theycoulddecidetolieandmarkthecorrectansweronthebubblesheet.After they transferred their answers, they countedhowmanyquestions they

hadansweredcorrectly,wrotethatnumberatthetopoftheirbubblesheet,andhandedboththeworksheetandthebubblesheettotheproctoratthefrontoftheroom. The proctor looked at the number of questions they claimed to haveanswered correctly (the summary number theywrote at the top of the bubblesheet)andpaidthem10centspercorrectanswer.Would the students cheat—changing their wrong answers to the ones pre-

markedon thebubble sheet?Weweren’t sure, but in any case,wedecided totemptthenextgroupofstudentsevenmore.Inthisconditionthestudentswouldagaintakethetestandtransfertheiranswerstothepre-markedbubblesheet.Butthis timewewould instruct them to shred their original worksheet, and handonly the bubble sheet to the proctor. In other words, they would destroy allevidence of any possible malfeasance. Would they take the bait? Again, wedidn’tknow.In thefinalcondition,wewouldpush thegroup’s integrity to the limit.This

time theywouldbe instructed todestroynotonly theiroriginalworksheet,butthefinalpre-markedbubblesheetaswell.Moreover,theywouldn’tevenhavetoreport their earnings to the experimenter:When theywere finished shreddingtheirworkandanswersheets,theymerelyneededtowalkuptothefrontoftheroom—wherewe had placed a jar full of coins—withdraw their earnings, andsaunteroutthedoor.Ifonewaseverinclinedtocheat,thiswastheopportunitytopullofftheperfectcrime.

Yes, wewere tempting them.Weweremaking it easy to cheat.Would thecrèmedelacrèmeofAmerica’syouthtakethebait?We’dhavetosee.

ASTHEFIRSTgroupsettledintotheirseats,weexplainedtherulesandhandedoutthetests.Theyworkedfortheir15minutes,thencopiedtheiranswersontothebubblesheet,and turned in theirworksheetsandbubblesheets.Thesestudentswereourcontrolgroup.Since theyhadn’tbeengivenanyof theanswers, theyhadnoopportunityatalltocheat.Onaverage,theygot32.6ofthe50questionsright.Whatdoyoupredictthattheparticipantsinourotherexperimentalconditions

did?Giventhattheparticipantsinthecontrolconditionsolvedonaverage32.6questions correctly, how many questions do you think the participants in theotherthreeconditionsclaimedtohavesolvedcorrectly?

Condition1Control=32.6Condition2Self-check=_____Condition3Self-check+shredding=_____Condition4Self-check+shredding+moneyjar=_____

Whataboutthesecondgroup?Theytooansweredthequestions.Butthistime,when they transferred their answers to the bubble sheet, they could see thecorrectanswers.Wouldtheysweeptheirintegrityundertherugforanextra10cents per question? As it turned out, this group claimed to have solved onaverage 36.2 questions.Were they smarter than our control group? Doubtful.Instead,wehadcaughttheminabitofcheating(byabout3.6questions).Whataboutthethirdgroup?Thistimeweuppedtheante.Theynotonlygotto

seethecorrectanswersbutwerealsoaskedtoshredtheirworksheets.Didtheytake thebait?Yes, theycheated.Onaverage theyclaimed tohave solved35.9questions correctly—more than the participants in the control condition, butabout the sameas theparticipants in the secondgroup (thegroup that didnotshredtheirworksheets).Finallycamethestudentswhoweretoldtoshrednotonlytheirworksheetsbut

the bubble sheets as well—and then dip their hands into the money jar andwithdrawwhatever theydeserved.Likeangels theyshredded theirworksheets,stucktheirhandsintothemoneyjar,andwithdrewtheircoins.Theproblemwasthattheseangelshaddirtyfaces:theirclaimsaddeduptoanaverage36.1correctanswers—quiteabithigherthanthe32.6ofourcontrolgroup,butbasicallythesameastheothertwogroupswhohadtheopportunitytocheat.Whatdidwe learn from this experiment?The first conclusion, is thatwhen

giventheopportunity,manyhonestpeoplewillcheat.Infact,ratherthanfindingthatafewbadapplesweightedtheaverages,wediscoveredthatthemajorityofpeoplecheated,andthattheycheatedjustalittlebit.*AndbeforeyoublametherefinedairattheHarvardBusinessSchoolforthislevelofdishonesty,IshouldaddthatweconductedsimilarexperimentsatMIT,Princeton,UCLA,andYalewithsimilarresults.Thesecond,andmorecounterintuitive,resultwasevenmoreimpressive:once

temptedtocheat,theparticipantsdidn’tseemtobeasinfluencedbytheriskofbeingcaughtasonemightthink.Whenthestudentsweregiventheopportunityto cheat without being able to shred their papers, they increased their correctanswersfrom32.6to36.2.Butwhentheywereofferedthechancetoshredtheirpapers—hiding their littlecrimecompletely—theydidn’tpush theirdishonestyfarther.Theystillcheatedataboutthesamelevel.Thismeansthatevenwhenwehavenochanceofgettingcaught,westilldon’tbecomewildlydishonest.When the students could shred both their papers, dip their hand into the

moneyjar,andwalkaway,everyoneofthemcouldhaveclaimedaperfecttestscore,orcouldhavetakenmoremoney(thejarhadabout$100init).Butnoneof them did. Why? Something held them back—something inside them. Butwhatwasit?Whatishonesty,anyhow?

TO THAT QUESTION, Adam Smith, the great economic thinker, had a pleasantreply:“Nature,whensheformedmanforsociety,endowedhimwithanoriginaldesiretoplease,andanoriginalaversiontooffendhisbretheren.Shetaughthimto feel pleasure in their favourable, andpain in their unfavourable regard,” henoted.TothisSmithadded,“Thesuccessofmostpeople...almostalwaysdepends

uponthefavourandgoodopinionoftheirneighboursandequals;andwithoutatolerably regular conduct these can very seldom be obtained. The good oldproverb, therefore, that honesty is always the best policy, holds, in suchsituations,almostalwaysperfectlytrue.”That sounds like a plausible industrial-age explanation, as balanced and

harmonious as a set of balanceweights and perfectlymeshed gears.Howeveroptimistic this perspectivemight seem, Smith’s theory had a darker corollary:sincepeopleengage inacost-benefitanalysiswith regard tohonesty, theycanalso engage in a cost-benefit analysis to be dishonest. According to thisperspective, individualsarehonestonlyto theextent thatsuits them(includingtheirdesiretopleaseothers).Are decisions about honesty and dishonesty based on the same cost-benefit

analysis that we use to decide between cars, cheeses, and computers? I don’t

thinkso.Firstofall,canyouimagineafriendexplainingtoyouthecost-benefitanalysisthatwentintobuyinghisnewlaptop?Ofcourse.Butcanyouimagineyour friend sharingwith you a cost-benefit analysis of her decision to steal alaptop?Ofcoursenot—notunlessyour friend isaprofessional thief.Rather, Iagreewithothers(fromPlatodown)whosaythathonestyissomethingbigger—somethingthatisconsideredamoralvirtueinnearlyeverysociety.SigmundFreudexplainedit thisway.Hesaidthataswegrowupinsociety,

weinternalizethesocialvirtues.Thisinternalizationleadstothedevelopmentofthesuperego.Ingeneral,thesuperegoispleasedwhenwecomplywithsociety’sethics, and unhappywhenwe don’t. This iswhywe stop our car at fourAMwhenweseearedlight,evenifweknowthatnooneisaround;anditiswhywegetawarmfeelingwhenwereturnalostwallettoitsowner,evenifouridentityis never revealed. Such acts stimulate the reward centers of our brain—thenucleusaccumbensandthecaudatenucleus—andmakeuscontent.But if honesty is important to us (in a recent survey of nearly 36,000 high

schoolstudentsintheUnitedStates,98percentofthemsaiditwasimportanttobe honest), and if honesty makes us feel good, why are we so frequentlydishonest?This is my take. We care about honesty and we want to be honest. The

problemisthatourinternalhonestymonitorisactiveonlywhenwecontemplatebigtransgressions,likegrabbinganentireboxofpensfromtheconferencehall.Forthelittletransgressions,liketakingasinglepenortwopens,wedon’tevenconsider how these actionswould reflect on our honesty and so our superegostaysasleep.Without the superego’s help,monitoring, andmanaging of our honesty, the

onlydefensewehaveagainstthiskindoftransgressionisarationalcost-benefitanalysis.Butwho isgoing toconsciouslyweigh thebenefitsof takinga towelfromahotelroomversusthecostofbeingcaught?Whoisgoingtoconsiderthecostsandbenefitsofaddingafewreceiptstoataxstatement?Aswesawintheexperiment atHarvard, thecost-benefit analysis, and theprobabilityofgettingcaughtinparticular,doesnotseemtohavemuchinfluenceondishonesty.

THIS IS THE way the world turns. It’s almost impossible to open a newspaperwithoutseeinga reportofadishonestordeceptiveact.Wewatchas thecreditcardcompaniesbleedtheircustomerswithoutrageousinterestratehikes;astheairlinesplunge intobankruptcyand thencallon the federalgovernment togetthem—and their underfunded pension funds—out of trouble; and as schoolsdefendthepresenceofsodamachinesoncampus(andrakeinmillionsfromthesoft drinks firms) all the while knowing that sugary drinks make kids

hyperactiveandfat.Taxesareafestivaloferodingethics,astheinsightfulandtalented reporter David Cay Johnston of theNew York Times describes in hisbookPerfectlyLegal:TheCovertCampaign toRigOurTaxSystem toBenefittheSuperRich—andCheatEverybodyElse.Againstallofthis,society,intheformofthegovernment,hasbattledback,at

leasttosomeextent.TheSarbanes-OxleyActof2002(whichrequiresthechiefexecutivesofpubliccompaniestovouchforthefirms’auditsandaccounts)waspassed to make debacles like Enron’s a thing of the past. Congress has alsopassed restrictions on “earmarking” (specifically the pork-barrel spending thatpoliticians insert into larger federal bills). The Securities and ExchangeCommission even passed requirements for additional disclosure aboutexecutives’ pay and perks—so that when we see a stretch limo carrying aFortune500executive,weknowprettycertainlyhowmuchthecorporatechiefinsideisgettingpaid.But can external measures like these really plug all the holes and prevent

dishonesty?Somecriticssaytheycan’t.TaketheethicsreformsinCongress,forinstance.Thestatutesbanlobbyistsfromservingfreemealstocongressmenandtheiraidesat“widelyattended”functions.Sowhathavelobbyistsdone?Invitedcongressmen to luncheons with “limited” guest lists that circumvent the rule.Similarly,thenewethicslawsbanlobbyistsfromflyingcongressmenin“fixed-wing”aircraft.Sohey,howaboutaliftinahelicopter?ThemostamusingnewlawI’veheardaboutiscalledthe“toothpickrule.”It

states that although lobbyists can no longer provide sit-down meals tocongressmen,thelobbyistscanstillserveanything(presumablyhorsd’oeuvres)whichthelegislatorscaneatwhilestandingup,ploppingintotheirmouthsusingtheirfingersoratoothpick.Didthischangetheplansoftheseafoodindustry,whichhadorganizedasit-

downpastaandoysterdinnerforWashington’slegislators(called—youguessedit—“LettheWorldBeYourOyster”)?Notbymuch.Theseafoodlobbyistsdiddrop the pasta dish (too messy to fork up with a toothpick), but still fed thecongressmen well with freshly opened raw oysters (which the congressmenslurpeddownstandingup).23Sarbanes-Oxleyhasalsobeencalledineffectual.Somecriticssaythatit’srigid

and inflexible, but the loudest outcry is from those who call it ambiguous,inconsistent, inefficient, and outrageously expensive (especially for smallerfirms).“Ithasn’tcleanedupcorruption,”arguedWilliamA.Niskanen,chairmanoftheCatoInstitute;“ithasonlyforcedcompaniestojumpthroughhoops.”Somuchforenforcinghonestythroughexternalcontrols.Theymayworkin

somecases,butnotinothers.Couldtherebeabettercurefordishonesty?

BEFORE IEVEN attempt toanswer thatquestion, letmedescribeanexperimentweconductedthatspeaksvolumesonthesubject.AfewyearsagoNina,On,andIbroughtagroupofparticipants together ina labatUCLAandaskedthemtotakeasimplemathtest.Thetestconsistedof20simpleproblems,eachrequiringparticipantstofindtwonumbersthatwouldaddupto10(forasampleproblem,seethetablebelow).Theyhadfiveminutestosolveasmanyoftheproblemsastheycould,afterwhichtheywereenteredintoalottery.Iftheywonthelottery,theywouldreceivetendollarsforeachproblemtheysolvedcorrectly.AsinourexperimentattheHarvardBusinessSchool,someoftheparticipants

handedintheirpapersdirectlytotheexperimenter.Theywereourcontrolgroup.Theotherparticipantswrotedownonanothersheetthenumberofquestionstheysolved correctly, and then disposed of the originals. These participants,obviously, were the ones with the opportunity to cheat. So, given thisopportunity,did theseparticipantscheat?Asyoumayhave surmised, theydid(but,ofcourse,justbyabit).

Lookatyourwatch,notethetime,andstartsearchingfortwonumbersinthematrixbelowthatwilladduptoexactly10.

Howlongdidittakeyou?1.691.822.914.674.813.055.825.064.286.365.194.57

UptonowIhavenottoldyouanythingnew.Butthekeytothisexperiment

waswhatprecededit.Whentheparticipantsfirstcametothelab,weaskedsomeofthemtowritedownthenamesof10booksthattheyreadinhighschool.Theotherswere asked towrite down asmany of theTenCommandments as theycould recall.* After they finished this “memory” part of the experiment, weaskedthemtobeginworkingonthematrixtask.Thisexperimentalsetupmeantthatsomeoftheparticipantsweretemptedto

cheatafter recalling10books that theyread inhighschool,andsomeof themweretemptedafterrecallingtheTenCommandments.Whodoyouthinkcheatedmore?When cheating was not possible, our participants, on average, solved 3.1

problemscorrectly.*When cheatingwas possible, the group that recalled 10 books read in high

school achieved an average scoreof 4.1 questions solved (or 33percentmore

thanthosewhocouldnotcheat).But thebigquestioniswhathappenedto theothergroup—thestudentswho

firstwrotedowntheTenCommandments,thentookthetest,andthenrippeduptheirworksheets.This,assportscasterssay,wasthegrouptowatch.Wouldtheycheat—orwouldtheTenCommandmentshaveaneffectontheirintegrity?Theresult surprised even us: the students who had been asked to recall the TenCommandmentshadnotcheatedatall.Theyaveraged threecorrectanswers—thesamebasicscoreas thegroupthatcouldnotcheat,andoneless thanthosewhowereabletocheatbuthadrecalledthenamesofthebooks.AsIwalkedhomethateveningIbegantothinkaboutwhathadjusthappened.

Thegroupwholisted10bookscheated.Notalot,certainly—onlytothatpointwhere their internal reward mechanism (nucleus accumbens and superego)kickedinandrewardedthemforstopping.But what a miracle the Ten Commandments had wrought!We didn’t even

remind our participants what the Commandments were—we just asked eachparticipant to recall them (and almost none of the participants could recall all10).Wehopedtheexercisemightevoketheideaofhonestyamongthem.Andthiswas clearlywhat it did. So,wewondered,what lessons about decreasingdishonestycanwelearnfromthisexperiment?Ittookusafewweekstocometosomeconclusions.

FORONE,PERHAPSwecouldbringtheBiblebackintopubliclife.Ifweonlywanttoreducedishonesty,itmightnotbeabadidea.Thenagain,somepeoplemightobject, on the grounds that the Bible implies an endorsement of a particularreligion, or merely that it mixes religion in with the commercial and secularworld.But perhaps anoathof a different naturewouldwork.What especiallyimpressedmeabout theexperimentwith theTenCommandmentswas that thestudentswhocouldrememberonlyoneortwoCommandmentswereasaffectedby themas the studentswho remembered nearly all ten.This indicated that itwasnot theCommandments themselves thatencouragedhonesty,but themerecontemplationofamoralbenchmarkofsomekind.Ifthatwerethecase,thenwecouldalsousenonreligiousbenchmarkstoraise

thegenerallevelofhonesty.Forinstance,whatabouttheprofessionaloathsthatdoctors, lawyers, and others swear to—or used to swear to? Could thoseprofessionaloathsdothetrick?The word profession comes from the Latin professus, meaning “affirmed

publicly.”Professions started somewhere deep in the past in religion and thenspreadtomedicineandlaw.Individualswhohadmasteredesotericknowledge,itwassaid,notonlyhadamonopolyonthepracticeofthatknowledge,buthadan

obligationtousetheirpowerwiselyandhonestly.Theoath—spokenandoftenwritten—wasa reminder topractitioners to regulate theirownbehavior, and italsoprovidedasetofrulesthathadtobefollowedinfulfillingthedutiesoftheirprofession.Those oaths lasted a long time.But then, in the 1960s, a strongmovement

arose to deregulate professions. Professions were elitist organizations, it wasargued,andneededtobeturnedoutintothelightofday.ForthelegalprofessionthatmeantmorebriefswritteninplainEnglishprose,camerasinthecourtrooms,and advertising. Similar measures against elitism were applied to medicine,banking,andotherprofessionsaswell.Muchofthiscouldhavebeenbeneficial,butsomethingwaslostwhenprofessionsweredismantled.Strictprofessionalismwasreplacedbyflexibility,individualjudgment,thelawsofcommerce,andtheurge for wealth, and with it disappeared the bedrock of ethics and values onwhichtheprofessionshadbeenbuilt.AstudybythestatebarofCaliforniainthe1990s,forinstance,foundthata

preponderance of attorneys in California were sick of the decline in honor intheir work and “profoundly pessimistic” about the condition of the legalprofession. Two-thirds said that lawyers today “compromise theirprofessionalismas a result of economicpressure.”Nearly 80percent said thatthebar“failstoadequatelypunishunethicalattorneys.”Halfsaidtheywouldn’tbecomeattorneysiftheyhadittodooveragain.24A comparable study by the Maryland Judicial Task Force found similar

distress among lawyers in that state. According to Maryland’s lawyers, theirprofession had degenerated so badly that “they were often irritable, short-tempered, argumentative, and verbally abusive” or “detached, withdrawn,preoccupied, or distracted.”When lawyers inVirginiawere askedwhether theincreasing problems with professionalism were attributable to “a few badapples” or to a widespread trend, they overwhelmingly said this was awidespreadissue.25

Lawyers in Florida have been deemed theworst.26 In 2003 the Florida barreported that a “substantial minority” of lawyers were “money-grabbing, tooclever,tricky,sneaky,andnottrustworthy;whohadlittleregardforthetruthorfairness, willing to distort, manipulate, and conceal to win; arrogant,condescending,andabusive.”Theywerealso“pompousandobnoxious.”WhatmorecanIsay?Themedicalprofessionhasitscriticsaswell.Thecriticsmentiondoctorswho

dounnecessarysurgeriesandotherproceduresjusttoboostthebottomline:whoordertestsatlaboratoriesthataregivingthemkickbacks,andwholeantoward

medical tests on equipment that they just happen to own.Andwhat about theinfluenceof thepharmaceutical industry?A friendofmine saidhe satwaitingfor his doctor for an hour recently. During that time, he said, four (veryattractive) representatives of drug companies went freely into and out of theoffice,bringinglunch,freesamples,andothergiftswiththem.You could look at almost any professional group and see signs of similar

problems.HowabouttheAssociationofPetroleumGeologists,forinstance?TheimageIseeisIndianaJonestypes,withmoreinterestindiscussingJurassicshaleand deltaic deposits than in making a buck. But look deeper and you’ll findtrouble.“Thereisunethicalbehaviorgoingonatamuchlargerscalethanmostof us would care to think,” one member of the association wrote to hercolleagues.27What kind of dishonesty, for goodness’ sake, could be rife in the ranks of

petroleumgeologists,youask?Apparentlythingslikeusingbootleggedseismicanddigitaldata; stealingmapsandmaterials; andexaggerating thepromiseofcertainoildeposits,incaseswherealandsaleorinvestmentisbeingmade.“Themalfeasanceismostfrequentlyofshadesofgray,ratherthanblackandwhite,”onepetroleumgeologistremarked.But let’s remember that petroleum geologists are not alone. This decline in

professionalism is everywhere. If you need more proof, consider the debatewithin the field of professional ethicists,who are calledmore often than everbefore to testifyatpublichearingsand trials,where theymaybehiredbyonepartyoranothertoconsiderissuessuchastreatmentrenderedtoapatientandtherightsoftheunborn.Aretheytemptedtobendtotheoccasion?Apparentlyso.“Moral Expertise: A Problem in the Professional Ethics of ProfessionalEthicists”isthetitleofonearticleinanethicsjournal.28AsIsaid,thesignsoferosionareeverywhere.

WHATTODO?Supposethat,ratherthaninvokingtheTenCommandments,wegotinto the habit of signing our name to some secular statement—similar to aprofessionaloath—thatwouldremindusofourcommitmenttohonesty.Wouldasimpleoathmakeadifference,inthewaythatwesawtheTenCommandmentsmakeadifference?Weneededtofindout—henceournextexperiment.Once again we assembled our participants. In this study, the first group of

participants took our matrix math test and handed in their answers to theexperimenter in the frontof the room (whocountedhowmanyquestions theyansweredcorrectlyandpaidthemaccordingly).Thesecondgroupalsotookthetest,butthemembersofthisgroupweretoldtofoldtheiranswersheet,keepitintheirpossession,andtelltheexperimenterinthefrontoftheroomhowmanyof

theproblemstheygotright.Theexperimenterpaid themaccordingly,and theywereontheirway.The novel aspect of this experiment had to dowith the third group.Before

theseparticipantsbegan,eachwasaskedtosignthefollowingstatementontheanswersheet:“Iunderstand that thisstudyfallsunder theMIThonorsystem.”After signing this statement, they continuedwith the task.When the timehadelapsedtheypocketedtheiranswersheets,walkedtothefrontoftheroom,toldtheexperimenterhowmanyproblemstheyhadcorrectlysolved,andwerepaidaccordingly.Whatwere the results? In the control condition, inwhich cheatingwas not

possible,participantssolvedonaveragethreeproblems(outof20).Inthesecondcondition,inwhichtheparticipantscouldpockettheiranswers,theyclaimedtohave solved on average 5.5 problems. What was remarkable was the thirdsituation—inwhich theparticipantspocketed their answer sheets,buthadalsosigned the honor code statement. In this case they claimed to have solved, onaverage, three problems—exactly the same number as the control group. ThisoutcomewassimilartotheresultsweachievedwiththeTenCommandments—whenamoral reminder eliminated cheating altogether.The effect of signing astatement about an honor code is particularly amazing when we take intoaccountthatMITdoesn’tevenhaveanhonorcode.Sowelearnedthatpeoplecheatwhentheyhaveachancetodoso,but they

don’t cheat asmuch as they could.Moreover, once they begin thinking abouthonesty—whetherbyrecalling theTenCommandmentsorbysigningasimplestatement—theystopcheatingcompletely.Inotherwords,whenweareremovedfromanybenchmarksofethicalthought,wetendtostrayintodishonesty.Butifweareremindedofmoralityat themomentwearetempted,thenwearemuchmorelikelytobehonest.Atpresent,severalstatebarsandprofessionalorganizationsarescramblingto

shore up their professional ethics. Some are increasing courses in college andgraduate schools, andothers are requiringbrush-up ethics classes. In the legalprofession,JudgeDennisM.SweeneyoftheHowardCounty(Maryland)circuitpublishedhisownbook,GuidelinesforLawyerCourtroomConduct,inwhichhenoted,“Mostrules, like these,aresimplywhatourmotherswouldsayapoliteand well raised man or woman should do. Since, given their other importantresponsibilities, ourmothers (and yours) cannot be in every courtroom in theState,Ioffertheserules.”Will such generalmeasures work? Let’s remember that lawyers do take an

oathwhentheyareadmittedtothebar,asdoctorstakeanoathwhentheyentertheirprofession.Butoccasionalswearingofoathsandoccasionalstatementsof

adherence to rulesarenotenough.Fromourexperiments, it isclear thatoathsand rulesmust be recalled at, or just before, themoment of temptation.Also,whatismore,timeisworkingagainstusaswetrytocurbthisproblem.IsaidinChapter4thatwhensocialnormscollidewithmarketnorms,thesocialnormsgoawayandthemarketnormsstay.Eveniftheanalogyisnotexact,honestyoffersa related lesson: once professional ethics (the social norms) have declined,gettingthembackwon’tbeeasy.

THISDOESN’TMEANthatweshouldn’ttry.Whyishonestysoimportant?Foronething,let’snotforgetthattheUnitedStatesholdsapositionofeconomicpowerintheworldtodaypartlybecauseitis(oratleastisperceivedtobe)oneoftheworld’smosthonestnations,intermsofitsstandardsofcorporategovernance.In2002,theUnitedStatesrankedtwentiethintheworldintermsofintegrity,

accordingtoonesurvey(Denmark,Finland,andNewZealandwerefirst;Haiti,Iraq,Myanmar,andSomaliawere last,atnumber163).On thisbasis, IwouldsuspectthatpeopledoingbusinesswiththeUnitedStatesgenerallyfeeltheycanget a fair deal. But the fact of the matter is that the United States rankedfourteenth in 2000, before the wave of corporate scandals made the businesspagesinAmericannewspaperslooklikeapoliceblotter.29Wearegoingdowntheslipperyslope,inotherwords,notupit,andthiscanhavetremendouslong-termcosts.AdamSmithremindedus thathonestyreally is thebestpolicy,especially in

business.Togetaglimpseattheothersideofthatrealization—atthedownside,inasocietywithouttrust—youcantakealookatseveralcountries.InChina,thewordofonepersoninoneregionrarelycarriestoanotherregion.LatinAmericaisfulloffamily-runcartelsthathandoutloanstorelatives(andthenfailtocutoffcreditwhenthedebtorbeginstodefault).Iranisanotherexampleofanationstrickenbydistrust.AnIranianstudentatMITtoldmethatbusinesstherelacksaplatformoftrust.Becauseofthis,noonepaysinadvance,nooneofferscredit,andnooneiswillingtotakerisks.Peoplemusthirewithintheirfamilies,wheresome level of trust still exists. Would you like to live in such a world? Becareful,becausewithouthonestywemightgettherefasterthanyou’dimagine.What can we do to keep our country honest? We can read the Bible, the

Koran, or whatever reflects our values, perhaps. We can revive professionalstandards.We can sign our names to promises thatwewill actwith integrity.Another path is to first recognize that whenwe get into situations where ourpersonal financial benefit stands in opposition to ourmoral standards, we areableto“bend”reality,seetheworldintermscompatiblewithourselfishinterest,andbecomedishonest.Whatistheanswer,then?Ifwerecognizethisweakness,

wecantrytoavoidsuchsituationsfromtheoutset.Wecanprohibitphysiciansfrom ordering tests that would benefit them financially; we can prohibitaccountantsandauditorsfromfunctioningasconsultantstothesamecompanies;wecanbarmembersofCongressfromsettingtheirownsalaries,andsoon.But this isnot theendof the issueofdishonesty. In thenextchapter, Iwill

offersomeothersuggestionsaboutdishonesty,andsomeotherinsightsintohowwestrugglewithit.

ReflectionsonDishonestyandToiletPaperAbout a year after Predictably Irrational was first published, I received aninteresting e-mail from a woman who used elements from our honor codeexperiment to design her own test, which effectively solved an importantprobleminvolvingstolentoiletpaper.

DearProfessorAriely,I found your experiments on cheating particularly interesting (e.g., the

nonexistent“MIThonorcode”and“The10Commandments”)andactuallymodeledanexperimentofmyownonyours.I live inahousenear theUCBerkeley campus. I share thehousewith

manyhousemates;noneofuskneweachotherbeforemovingin.Moreover,abunchofnewstudentsmovedintothehouseforthesummermonthslastyear. This living arrangement led to a number of problems—namely, thestealingoftoiletpaper.EverySunday,ahousekeeperrestockseachtoiletwiththreefreshrollsof

toiletpaper.Last summer,however, Inoticed thatbyMondayevening,allthe toilet paper would be gone. This is not unlike a “tragedy of thecommons”* situation, and it has become clear that certain housemateswerehoardingthetoiletpaperfortheirprivateuse.Itriedtothinkofwaystostop thehoarding. Ididnotwant toconfrontanyone,becausemygoalwastokeeptheTPfromdisappearing,nottoalienatepeople.With your experiment in mind, I put a note in the upstairs bathroom

askinghousematesnottotaketoiletpaperoutsidetherestroomforpersonaluse.A couple of hours later, one fresh roll of toilet paper magically

reappeared in the bathroomwhere I hadplaced the note. This had neverhappened before. The experiment worked! I checked the downstairsrestroom,whereIhadnotleftanote—norollstobefound.Twodayslater,anotherfreshrolloftoiletpaperreappearedintheupstairsbathroom.

I was quite pleased that my note helped put an end to thehoarding/stealing.Thank you for the inspiration! Behavioral economics is certainly

applicabletodailylife!Regards,

RhondaI must confess that when I thought about the implications of the honor-

reminderexperimentsforday-to-daylife,issuesaroundtoiletpaperdidn’tcometomind.ButIamhappythatRhondamadetheconnectionandappliedittoherownsituation.Iamalsoquitepleasedthatsheplacedthenoteinonebathroombutnottheother—niceexperimentalcontrol!

Appendix:Chapter13TheTenCommandments*

Catholic-I,theLord,amyourGod.Youshallnothaveothergodsbesidesme.Jewish-IamtheLordyourGodwhohastakenyououtofthelandofEgypt.Protestant-Youshallhavenoothergodsbutme.

Catholic-YoushallnottakethenameoftheLord,yourGod,invain.Jewish-Youshallhavenoothergodsbutme.Protestant-Youshallnotmakeuntoyouanygravenimages.

Catholic-RemembertokeepholytheLord’sDay.Jewish-YoushallnottakethenameoftheLordyourGodinvain.Protestant-YoushallnottakethenameoftheLordyourGodinvain.

Catholic-Honoryourfatherandyourmother.Jewish-YoushallremembertheSabbathandkeepitHoly.Protestant-YoushallremembertheSabbathandkeepitHoly.

Catholic-Youshallnotkill.Jewish-Honoryourmotherandfather.Protestant-Honoryourmotherandfather.

Catholic-Youshallnotcommitadultery.Jewish-Youshallnotmurder.Protestant-Youshallnotmurder.

Catholic-Youshallnotsteal.Jewish-Youshallnotcommitadultery.

Protestant-Youshallnotcommitadultery.

Catholic-Youshallnotbearfalsewitness.Jewish-Youshallnotsteal.Protestant-Youshallnotsteal.

Catholic-Youshallnotcovetyourneighbor’swife.Jewish-Youshallnotbearfalsewitness.Protestant-Youshallnotbearfalsewitness.

Catholic-Youshallnotcovetyourneighbor’sgoods.Jewish-Youshallnotcovetanythingthatbelongstoyourneighbor.Protestant-Youshallnotcovetanythingthatbelongstoyourneighbor.

Chapter14TheContextofOurCharacter,PartII

WhyDealingwithCashMakesUsMoreHonest

Many of the dormitories atMIT have common areas, where sit a variety ofrefrigeratorsthatcanbeusedbythestudentsinthenearbyrooms.Onemorningatabouteleven,whenmostofthestudentswereinclass,Islippedintothedormsand,floorbyfloor,wenthuntingforallthesharedrefrigeratorsthatIcouldfind.WhenIdetectedacommunalfridge,I inchedtowardit.Glancingcautiously

around, I opened the door, slipped in a six-pack ofCoke, andwalked brisklyaway.Atasafedistance,IpausedandjotteddownthetimeandthelocationofthefridgewhereIhadleftmyCokes.OverthenextfewdaysIreturnedtocheckonmyCokecans.Ikeptadiary

detailinghowmanyof them remained in the fridge.Asyoumight expect, thehalf-life ofCoke in a college dorm isn’t very long.All of them had vanishedwithin72hours.ButIdidn’talwaysleaveCokesbehind.Insomeofthefridges,I left aplatecontaining sixone-dollarbills.Would themoneydisappear fasterthantheCokes?BeforeIanswerthatquestion,letmeaskyouone.Supposeyourspousecalls

youatwork.Yourdaughterneedsaredpencil forschool thenextday.“Couldyoubringonehome?”Howcomfortablewouldyoubetakingaredpencilfromwork for your daughter? Very uncomfortable? Somewhat uncomfortable?Completelycomfortable?Letmeaskyouanotherquestion.Suppose thereareno redpencilsatwork,

butyoucanbuyonedownstairsforadime.Andthepettycashboxinyourofficehasbeenleftopen,andnooneisaround.Wouldyoutake10centsfromthepettycashboxtobuytheredpencil?Supposeyoudidn’thaveanychangeandneeded

the10cents.Wouldyoufeelcomfortabletakingit?WouldthatbeOK?I don’t know about you, but while I’d find taking a red pencil from work

relatively easy, I’d have a very hard time taking the cash. (Luckily forme, Ihaven’thadtofacethisissue,sincemydaughterisnotinschoolyet.)Asitturnsout,thestudentsatMITalsofeltdifferentlyabouttakingcash.AsI

mentioned,thecansofCokequicklydisappeared;within72hourseveryoneofthemwasgone.Butwhatadifferentstorywiththemoney!Theplatesofdollarbills remained untouched for 72 hours, until I removed them from therefrigerators.Sowhat’sgoingonhere?Whenwelookattheworldaroundus,muchofthedishonestyweseeinvolves

cheating that is one step removed from cash. Companies cheat with theiraccounting practices; executives cheat by using backdated stock options;lobbyistscheatbyunderwritingpartiesforpoliticians;drugcompaniescheatbysendingdoctorsandtheirwivesoffonposhvacations.Tobesure,thesepeopledon’tcheatwithcoldcash(exceptoccasionally).Andthat’smypoint:cheatingisaloteasierwhenit’sastepremovedfrommoney.Do you think that the architects of Enron’s collapse—Kenneth Lay, Jeffrey

Skilling,andAndrewFastow—wouldhavestolenmoneyfromthepursesofoldwomen?Certainly,theytookmillionsofdollarsinpensionmoniesfromalotofoldwomen.Butdoyouthinktheywouldhavehitawomanwithablackjackandpulledthecashfromherfingers?Youmaydisagree,butmyinclinationistosayno.Sowhatpermitsustocheatwhencheatinginvolvesnonmonetaryobjects,and

what restrains us whenwe are dealingwithmoney?How does that irrationalimpulsework?

BECAUSEWEAREsoadeptatrationalizingourpettydishonesty,it’softenhardtogetaclearpictureofhownonmonetaryobjectsinfluenceourcheating.Intakingapencil,forexample,wemightreasonthatofficesuppliesarepartofouroverallcompensation,or that liftingapencilor two iswhateveryonedoes.WemightsaythattakingacanofCokefromacommunalrefrigeratorfromtimetotimeisall right, because, after all,we’ve all had cansofCoke taken fromus.MaybeLay, Skilling, and Fastow thought that cooking the books at Enron was OK,since it was a temporary measure that could be corrected when businessimproved.Whoknows?Toget at the truenatureofdishonesty, then,weneeded todevelopa clever

experiment,oneinwhichtheobjectinquestionwouldallowfewexcuses.Nina,On,andIthoughtaboutit.Supposeweusedsymboliccurrency,suchastokens.

Theywerenotcash,butneitherweretheyobjectswithahistory,likeaCokeorapencil.Woulditgiveusinsightintothecheatingprocess?Weweren’tsure,butitseemedreasonable;andso,afewyearsago,wegaveitatry.Thisiswhathappened.AsthestudentsatoneoftheMITcafeteriasfinished

theirlunches,weinterruptedthemtoaskwhethertheywouldliketoparticipatein a five-minute experiment. All they had to do, we explained, was solve 20simplemathproblems(findingtwonumbersthataddedupto10).Andforthistheywouldget50centspercorrectanswer.The experiment began similarly in each case, but ended in one of three

differentways.Whentheparticipantsinthefirstgroupfinishedtheirtests,theytook theirworksheetsup to theexperimenter,who tallied theircorrectanswersandpaidthem50centsforeach.Theparticipantsinthesecondgroupweretoldtotearuptheirworksheets,stuffthescrapsintotheirpocketsorbackpacks,andsimply tell the experimenter their score in exchange for payment. So far thisexperimentwassimilartothetestsofhonestydescribedinthepreviouschapter.Buttheparticipantsinthelastgrouphadsomethingsignificantlydifferentin

theirinstructions.Wetoldthem,aswehadtoldthepreviousgroup,totearuptheworksheets and simply tell the experimenter how many questions they hadanswered correctly. But this time, the experimenter wouldn’t be giving themcash. Rather, shewould give them a token for each question they claimed tohavesolved.Thestudentswould thenwalk12 feetacross the room toanotherexperimenter,whowouldexchangeeachtokenfor50cents.Do you see what we were doing?Would the insertion of a token into the

transaction—a piece of valueless, nonmonetary currency—affect the students’honesty?Wouldthetokenmakethestudentslesshonestintallyingtheiranswersthanthestudentswhoreceivedcashimmediately?Ifso,byhowmuch?Evenweweresurprisedbytheresults:Theparticipantsinthefirstgroup(who

hadnowaytocheat)solvedanaverageof3.5questionscorrectly(theywereourcontrolgroup).Theparticipantsinthesecondgroup,whotoreuptheirworksheets,claimedto

have correctly solved an average of 6.2 questions. Since we can assume thatthesestudentsdidnotbecomesmartermerelybytearinguptheirworksheets,wecan attribute the 2.7 additional questions they claimed to have solved tocheating.Butintermsofbrazendishonesty,theparticipantsinthethirdgrouptookthe

cake.Theywerenosmarter than theprevious twogroups,but theyclaimed tohavesolvedanaverageof9.4problems—5.9more than thecontrolgroupand3.2morethanthegroupthatmerelyrippeduptheworksheets.Thismeansthatwhengivenachancetocheatunderordinarycircumstances,

thestudentscheated,onaverage,by2.7questions.Butwhentheyweregiventhesamechancetocheatwithnonmonetarycurrency,theircheatingincreasedto5.9—more thandoubling inmagnitude.Whatadifference there is incheating formoneyversuscheatingforsomethingthatisastepawayfromcash!Ifthatsurprisesyou,considerthis.Ofthe2,000participantsinourstudiesof

honesty (described in the previous chapter), only four ever claimed to havesolvedalltheproblems.Inotherwords,therateof“totalcheating”wasfourin2,000.*Butintheexperimentinwhichweinsertednonmonetarycurrency(thetoken),

24ofthestudy’s450participantscheated“alltheway.”Howmanyofthese24extreme cheaterswere in the conditionwithmoney versus the conditionwithtokens?Theywereallinthetokencondition(24of150studentscheated“alltheway” in this condition; this is equivalent to about 320per 2,000 participants).This means that not only did the tokens “release” people from some of theirmoralconstraints,butforquiteafewof them, theextentof thereleasewassocompletethattheycheatedasmuchaswaspossible.Thislevelofcheatingisclearlybad,butitcouldhavebeenworse.Let’snot

forget that the tokens in our experimentswere transformed into cashwithin amatterofseconds.Whatwould therateofdishonestyhavebeen if the transferfromanonmonetary token to cash tooka fewdays,weeks,ormonths (as, forinstance, in a stock option)?Would even more people cheat, and to a largerextent?

WEHAVELEARNEDthatgivenachance,peoplecheat.Butwhat’sreallyoddisthatmostofusdon’tseethiscoming.Whenweaskedstudentsinanotherexperimenttopredictifpeoplewouldcheatmorefortokensthanforcash,thestudentssaidno, the amount of cheating would be the same. After all, they explained, thetokensrepresentedrealmoney—andthetokenswereexchangedwithinsecondsforactualcash.Andso,theypredicted,ourparticipantswouldtreatthetokensasrealcash.Buthowwrong theywere!Theydidn’t seehow fastwecan rationalizeour

dishonestywhenitisonestepawayfromcash.Ofcourse,theirblindnessisoursas well. Perhaps it’s why so much cheating goes on. Perhaps it’s why JeffSkilling, Bernie Ebbers, and the entire roster of executives who have beenprosecuted in recentyears let themselves, and their companies, slidedown theslope.All of us are vulnerable to this weakness, of course. Think about all the

insurancefraud thatgoeson. It isestimated thatwhenconsumersreport lossesontheirhomesandcars,theycreativelystretchtheirclaimsbyabout10percent.

(Of course, as soon as you report an exaggerated loss, the insurance companyraisesitsrates,sothesituationbecomestitfortat).Againitisnotthecasethattherearemanyclaimsthatarecompletelyflagrant,butinsteadmanypeoplewhohavelost,say,a27-inchtelevisionsetreportthelossofa32-inchset;thosewhohave losta32-inchset report the lossofa36-inchset,andsoon.Thesesamepeoplewouldbeunlikelytostealmoneydirectlyfromtheinsurancecompanies(astemptingasthatmightsometimesbe),butreportingwhattheynolongerhave—andincreasingitssizeandvaluebyjustalittlebit—makesthemoralburdeneasiertobear.There are other interesting practices. Have you ever heard the term

“wardrobing”?Wardrobingisbuyinganitemofclothing,wearingitforawhile,and then returning it in such a state that the store has to accept it but can nolongerresellit.Byengaginginwardrobing,consumersarenotdirectlystealingmoney from the company; instead, it is a danceof buying and returning,withmanyuncleartransactionsinvolved.Butthereisatleastoneclearconsequence—the clothing industry estimates that its annual losses from wardrobing areabout $16 billion (about the same amount as the estimated annual loss fromhomeburglariesandautomobiletheftcombined).Andhowaboutexpensereports?Whenpeopleareonbusinesstrips,theyare

expected toknowwhat therulesare,butexpensereports tooareonestep,andsometimesevenafewsteps,removedfromcash.Inonestudy,NinaandIfoundthat not all expenses are alike in terms of people’s ability to justify them asbusinessexpenses.Forexample,buyingamugforfivedollarsforanattractivestrangerwasclearlyoutofbounds,butbuyingthesamestrangeraneight-dollardrink in abarwasvery easy to justify.Thedifferencewasnot the cost of theitem, or the fear of getting caught, but people’s ability to justify the item tothemselvesasalegitimateuseoftheirexpenseaccount.A few more investigations into expense accounts turned up similar

rationalizations. Inonestudy,wefoundthatwhenpeoplegivereceipts to theiradministrative assistants to submit, they are then one additional step removedfromthedishonestact,andhencemorelikelytoslipinquestionablereceipts.Inanother study, we found that businesspeople who live in NewYork aremorelikelytoconsideragiftfortheirkidasabusinessexpenseiftheypurchaseditatthe San Francisco airport (or someplace else far from home) than if they hadpurchased it at theNewYork airport, or on theirway home from the airport.None of this makes logical sense, but when the medium of exchange isnonmonetary,ourabilitytorationalizeincreasesbyleapsandbounds.

IHADMYownexperiencewithdishonestyafewyearsago.Someonebrokeinto

mySkypeaccount(verycoolonlinetelephonesoftware)andchargedmyPayPalaccount(anonlinepaymentsystem)afewhundreddollarsfortheservice.I don’t think the person who did this was a hardened criminal. From a

criminal’sperspective,breakingintomyaccountwouldmostlikelybeawasteoftimeandtalentbecauseifthispersonwassufficientlysmarttohackintoSkype,hecouldprobablyhavehackedintoAmazon,Dell,ormaybeevenacreditcardaccount, and gottenmuchmore value for his time.Rather, I imagine that thispersonwasasmartkidwhohadmanagedtohackintomyaccountandwhotookadvantage of this “free” communication by calling anyonewhowould talk tohimuntil Imanaged to regain controlofmyaccount.Hemayhaveeven seenthisasatechiechallenge—ormaybeheisastudenttowhomIoncegaveabadgradeandwhodecidedtotweakmynoseforit.Wouldthiskidhavetakencashfrommywallet,evenifheknewforsurethat

no one would ever catch him? Maybe, but I imagine that the answer is no.Instead,IsuspectthatthereweresomeaspectsofSkypeandofhowmyaccountwassetupthat“helped”thispersonengageinthisactivityandnotfeelmorallyreprehensible: First, he stole calling time, not money. Next, he did not gainanything tangible from the transaction.Third, he stole fromSkype rather thandirectly fromme. Fourth, he might have imagined that at the end of the daySkype, not I, would cover the cost. Fifth, the cost of the calls was chargedautomaticallytomeviaPayPal.Soherewehadanotherstepintheprocess—andanother level of fuzziness in termsofwhowould eventuallypay for the calls.(Justincaseyouarewondering,IhavesincecanceledthisdirectlinktoPayPal.)Was thispersonstealing fromme?Sure,but thereweresomany things that

madethetheftfuzzythatIreallydon’tthinkhethoughtofhimselfasadishonestguy. No cash was taken, right? And was anyone really hurt? This kind ofthinking is worrisome. If my problem with Skype was indeed due to thenonmonetarynatureofthetransactionsonSkype,thiswouldmeanthatthereismuchmoreatriskhere,includingawiderangeofonlineservices,andperhapseven credit anddebit cards.All these electronic transactions,withnophysicalexchange ofmoney fromhand to hand,mightmake it easier for people to bedishonest—without everquestioningor fully acknowledging the immoralityoftheiractions.

THERE’S ANOTHER, SINISTER impression that I took out of our studies. In ourexperiments,theparticipantsweresmart,caring,honorableindividuals,whoforthemostparthadaclearlimittotheamountofcheatingtheywouldundertake,evenwithnonmonetarycurrency like the tokens.Foralmostallof them, therewas a point at which their conscience called for them to stop, and they did.

Accordingly, the dishonesty thatwe saw in our experimentswas probably thelower boundary of human dishonesty: the level of dishonesty practiced byindividualswhowanttobeethicalandwhowanttoseethemselvesasethical—theso-calledgoodpeople.The scary thought is that if we did the experiments with nonmonetary

currencies that were not as immediately convertible intomoney as tokens, orwith individualswhocared lessabout theirhonesty,orwithbehavior thatwasnotsopubliclyobservable,wewouldmostlikelyhavefoundevenhigherlevelsof dishonesty. In other words, the level of deception we observed here isprobably an underestimation of the level of deceptionwewould find across avarietyofcircumstancesandindividuals.Nowsuppose thatyouhaveacompanyoradivisionofacompanyledbya

Gordon Gekko character who declares that “greed is good.” And suppose heused nonmonetarymeans of encouraging dishonesty.Can you see how such aswashbucklercouldchangethemind-setofpeoplewhoinprinciplewanttobehonestandwant tosee themselvesashonest,butalsowant toholdon to theirjobs and get ahead in the world? It is under just such circumstances thatnonmonetary currencies can lead us astray.They let us bypass our conscienceandfreelyexplorethebenefitsofdishonesty.Thisviewofhumannatureisworrisome.Wecanhopetosurroundourselves

withgood,moralpeople,butwehavetoberealistic.Evengoodpeoplearenotimmune to being partially blinded by their ownminds. This blindness allowsthem to take actions that bypass their own moral standards on the road tofinancialrewards.Inessence,motivationcanplaytricksonuswhetherornotwearegood,moralpeople.AstheauthorandjournalistUptonSinclaironcenoted,“Itisdifficulttogeta

man to understand something when his salary depends upon his notunderstanding it.” We can now add the following thought: it is even moredifficult to get a man to understand something when he is dealing withnonmonetarycurrencies.

THE PROBLEMS OF dishonesty, by the way, don’t apply just to individuals. Inrecentyearswehave seenbusiness ingeneral succumb toa lower standardofhonesty. I’mnot talkingaboutbigactsofdishonesty, like thoseperpetratedbyEnron andWorldcom. I mean the small acts of dishonesty that are similar toswipingCokes out of the refrigerator.There are companies out there, in otherwords,thataren’tstealingcashoffourplates,sotospeak,butarestealingthingsonestepremovedfromcash.Thereareplentyofexamples.Recently,oneofmyfriends,whohadcarefully

saveduphisfrequent-flyermilesforavacation,wenttotheairlinewhoissuedall thesemiles.Hewas told that all the dates hewantedwere blacked out. Inotherwords,althoughhehadsavedup25,000frequent-flyermiles,hecouldn’tusethem(andhetriedmanydates).But,therepresentativesaid,ifhewantedtouse50,000miles,theremightbesomeseats.Shechecked.Sure,therewereseatseverywhere.To be sure, there was probably some small print in the frequently-flyer

brochureexplainingthatthiswasOK.Buttomyfriend,the25,000mileshehadearnedrepresentedalotofmoney.Let’ssayitwas$450.Wouldthisairlinehavemuggedhimforthatamountofcash?Wouldtheairlinehaveswipeditfromhisbankaccount?No.Butbecauseitwasonestepremoved,theairlinestoleitfromhimintheformofrequiring25,000additionalmiles.For another example, look at what banks are doing with credit card rates.

Considerwhat is called two-cycle billing. There are several variations of thistrick,but thebasic idea is that themomentyoudon’tpayyourbill in full, thecreditissuerwillnotonlychargeahighinterestrateonnewpurchases,butwillactuallyreachintothepastandchargeinterestonpastpurchasesaswell.Whenthe Senate banking committee looked into this recently, it heard plenty oftestimonythatcertainlymadethebanks lookdishonest.For instance,amaninOhiowhocharged$3,200tohiscardsoonfoundhisdebttobe$10,700becauseofpenalties,fees,andinterest.Thesewerenotboiler-roomoperatorscharginghighinterestratesandfees,but

some of the biggest and presumablymost reputable banks inAmerica—thosewhose advertising campaigns wouldmake you believe that you and the bankwere“family.”Wouldafamilymemberstealyourwallet?No.Butthesebanks,withatransactionsomewhatremovedfromcash,apparentlywould.Onceyouviewdishonestythroughthislens, it isclearthatyoucan’topena

newspaperinthemorningwithoutseeingnewexamplestoadd.

ANDSOWEreturntoouroriginalobservation:isn’tcashstrange?Whenwedealwithmoney,weareprimedtothinkaboutouractionsasifwehadjustsignedanhonorcode.Ifyoulookatadollarbill,infact,itseemstohavebeendesignedtoconjureupacontract:THEUNITEDSTATESOFAMERICA,itsaysinprominenttype,with a shadow beneath that makes it seem three-dimensional. And there isGeorgeWashingtonhimself(andweallknowthathecouldnevertellalie).Andthen,ontheback,itgetsevenmoreserious:INGODWETRUST,itsays.Andthenwe’vegotthatweirdpyramid,andontop,thatunblinkingeye!Andit’slookingrightatus!Inadditiontoallthissymbolism,thesanctityofmoneycouldalsobeaidedbythefact thatmoneyisaclearunitofexchange.It’shardtosaythata

dimeisnotadime,orabuckisn’tabuck.Butlookatthelatitudewehavewithnonmonetaryexchanges.There’salways

aconvenientrationale.Wecantakeapencilfromwork,aCokefromthefridge—wecanevenbackdateourstockoptions—andfindastorytoexplainitall.Wecanbedishonestwithoutthinkingofourselvesasdishonest.Wecanstealwhileourconscienceisapparentlyfastasleep.Howcanwefix this?Wecould labeleachitemin thesupplycabinetwitha

price,forinstance,orusewordingthatexplainsstocksandstockoptionsclearlyintermsoftheirmonetaryvalue.Butinthelargercontext,weneedtowakeuptotheconnectionbetweennonmonetarycurrencyandourtendencytocheat.Weneedtorecognizethatoncecashisastepaway,wewillcheatbyafactorbiggerthanwecouldeverimagine.Weneedtowakeuptothis—individuallyandasanation,anddoitsoon.Why?Foronething,thedaysofcasharecomingtoaclose.Cashisadragon

the profits of banks—theywant to get rid of it.On the other hand, electronicinstruments are very profitable. Profits from credit cards in the United Statesrosefrom$9billionin1996toarecord$27billionin2004.By2010,bankinganalystssay,therewillbe$50billioninnewelectronictransactions,nearlytwicethe number processed under the Visa and MasterCard brands in 2004.30 Thequestion, therefore, is howwecan control our tendency to cheatwhenwe arebroughttooursensesonlybythesightofcash—andwhatwecandonowthatcashisgoingaway.Willie Sutton allegedly said that he robbed banks because that’s where the

moneywas.By that logic hemight bewriting the fine print for a credit cardcompany today or penciling in blackout dates for an airline. It might not bewherethecashis,butit’scertainlywhereyouwillfindthemoney.

Chapter15BeerandFreeLunches

WhatIsBehavioralEconomics,andWhereAretheFreeLunches?

TheCarolinaBreweryisahipbaronFranklinStreet,themainstreetoutsidetheUniversity of North Carolina at Chapel Hill. A beautiful street with brickbuildings andold trees, it hasmany restaurants, bars, andcoffee shops—morethanonewouldexpecttofindinasmalltown.AsyouopenthedoorstotheCarolinaBrewery,youseeanoldbuildingwith

highceilingsandexposedbeams,andafewlargestainlesssteelbeercontainersthatpromiseagoodtime.Therearesemiprivatetablesscatteredaround.Thisisafavoriteplaceforstudentsaswellasforanoldercrowdtoenjoygoodbeerandfood.SoonafterIjoinedMIT,JonathanLevav(aprofessoratColumbia)andIwere

mullingoverthekindsofquestionsonemightconjureupinsuchapleasantpub.First,doesthesequentialprocessoftakingorders(askingeachpersoninturntostate his or her order) influence the choices that the people sitting around thetable ultimately make? In other words, are the patrons influenced by theselections of the others around them? Second, if this is the case, does itencourage conformity or nonconformity? In other words, would the patronssittingaroundatableintentionallychoosebeersthatweredifferentfromorthesameasthechoicesofthoseorderingbeforethem?Finally,wewantedtoknowwhetherbeinginfluencedbyothers’choiceswouldmakepeoplebetterorworseoff,intermsofhowmuchtheyenjoyedtheirbeer.

THROUGHOUT THIS BOOK, I have described experiments that I hoped would be

surprisingandilluminating.Iftheywere,itwaslargelybecausetheyrefutedthecommon assumption that we are all fundamentally rational. Time and again Ihave provided examples that are contrary to Shakespeare’s depiction of us in“Whatapieceofworkisaman.”Infact,theseexamplesshowthatwearenotnoble in reason, not infinite in faculty, and rather weak in apprehension.(Frankly,IthinkShakespeareknewthatverywell,andthisspeechofHamlet’sisnotwithoutirony.)Inthisfinalchapter,Iwillpresentanexperimentthatoffersonemoreexample

ofourpredictableirrationality.ThenIwillfurtherdescribethegeneraleconomicperspectiveonhumanbehavior,contrastitwithbehavioraleconomics,anddrawsomeconclusions.Letmebeginwiththeexperiment.

TOGETTOthebottomofthesudsybarrelofquestionsthatwethoughtofattheCarolina Brewery, Jonathan and I decided to plunge in—metaphorically, ofcourse.WestartedbyaskingthemanageroftheCarolinaBrewerytoletusservefreesamplesofbeertothecustomers—aslongaswepaidforthebeerourselves.(Imagine how difficult it was, later, to convince the MIT accountants that a$1,400 bill for beer is a legitimate research expense.)Themanager of the barwas happy to comply. After all, he would sell us the beer and his customerswould receive a free sample,whichwould presumably increase their desire toreturntothebrewery.Handing us our aprons, he established his one and only condition: that we

approach thepeopleandget theirorders for sampleswithinoneminuteof thetimetheysatdown.Ifwecouldn’tmakeitintime,wewouldindicatethistotheregularwaitersandtheywouldapproachthetableandtaketheorders.Thiswasreasonable.Themanagerdidn’tknowhowefficientwecouldbeaswaiters,andhedidn’twanttodelaytheservicebytoomuch.Westartedworking.I approached a group as soon as they sat down. They seemed to be

undergraduatecouplesonadoubledate.Bothguyswerewearingwhat lookedlike their best slacks, and the girls had on enoughmakeup tomake ElizabethTaylor look unadorned in comparison. I greeted them, announced that thebrewerywasofferingfreebeersamples,andthenproceededtodescribethefourbeers:

(1)CopperlineAmberAle:Amedium-bodiedredalewithawell-balancedhopandmaltcharacterandatraditionalalefruitiness.

(2)FranklinStreetLager:ABohemianpilsner-stylegoldenlagerbrewedwithasoftmaltinessandacrisphoppyfinish.

(3)IndiaPaleAle:Awell-hoppedrobustaleoriginallybrewedtowithstand

thelongoceanjourneyfromEnglandaroundtheCapeofGoodHopetoIndia.Itisdry-hoppedwithcascadehopsforafragrantfloralfinish.

(4)SummerWheatAle:Bavarian-styleale,brewedwith50percentwheatasalight,spritzy,refreshingsummerdrink.ItisgentlyhoppedandhasauniquearomareminiscentofbananaandclovefromanauthenticGermanyeaststrain.

Whichwouldyouchoose?

□CopperlineAmberAle□FranklinStreetLager□IndiaPaleAle□SummerWheatAle

Afterdescribingthebeers,Inoddedatoneoftheguys—theblond-hairedguy—and asked for his selection; he chose the India Pale Ale. The girl with themore elaborate hairdo was next; she chose the Franklin Street Lager. Then Iturnedtotheothergirl.SheoptedfortheCopperlineAmberAle.Herboyfriend,who was last, selected the Summer Wheat Ale. With their orders in hand, Irushedtothebar,whereBob—thetall,handsomebartender,aseniorincomputerscience—stoodsmiling.Awarethatwewereinahurry,hefilledmyorderbeforeanyoftheothers.Ithentookthetraywiththefourtwo-ouncesamplesbacktothedouble-daters’tableandplacedtheirbeersinfrontofthem.Alongwiththeirsamples,Ihandedeachofthemashortsurvey,printedonthe

brewery’s stationery. In this surveywe asked the respondents howmuch theyliked their beer andwhether they had regretted choosing that particular brew.After I collected their surveys, I continued to observe the four people from adistancetoseewhetheranyofthemtookasipofanyoneelse’sbeer.Asitturnedout,noneofthemsharedasample.Jonathan and I repeated this procedure with 49 more tables. Then we

continued,butforthenext50tableswechangedtheprocedure.Thistime,afterwereadthedescriptionsofthebeers,wehandedtheparticipantsasmallmenuwith the names of the four beers and asked each of them towrite down theirpreferredbeer, rather thansimplysay itout loud. Insodoing,we transformedorderingfromapubliceventintoaprivateone.Thismeantthateachparticipantwouldnothearwhat theothers—including,perhaps,someonetheyweretryinghardtoimpress—orderedandsocouldnotbeinfluencedbyit.Whathappened?Wefoundthatwhenpeopleorderoutloudinsequence,they

choosedifferentlyfromwhentheyorderinprivate.Whenorderingsequentially

(publicly),theyordermoretypesofbeerpertable—inessenceoptingforvariety.AbasicwaytounderstandthisisbythinkingabouttheSummerWheatAle.Thisbrew was not very attractive to most people. But when the other beers were“taken,” our participants felt that they had to choose something different—perhapstoshowthattheyhadamindoftheirownandweren’ttryingtocopytheothers—andsotheychoseadifferentbeer,onethattheymaynothaveinitiallywanted,butonethatconveyedtheirindividuality.What about their enjoyment of the beer? It stands to reason that if people

choose beer that nobody has chosen just to convey uniqueness, they willprobablyendupwithabeerthattheydon’treallywantorlike.Andindeedthiswas the case.Overall, thosewhomade their choices out loud, in the standardwaythatfoodisorderedatrestaurants,werenotashappywiththeirselectionsasthose who made their choices privately, without taking others’ opinions intoconsideration. There was, however, one very important exception: the firstpersontoorderbeerinthegroupthatmadeitsdecisionsoutloudwasdefactointhesameconditionasthepeoplewhoexpressedtheiropinionprivately,sinceheorshewasunencumbered,inchoosing,byotherpeople’schoices.Accordingly,we found that the first person to order beer in the sequential group was thehappiestofhisorhergroupandjustashappyasthosewhochosetheirbeersinprivate.

BYTHEWAY,afunnythinghappenedwhenwerantheexperimentintheCarolinaBrewery:Dressedinmywaiter’soutfit,Iapproachedoneofthetablesandbegantoreadthemenutothecouplethere.Suddenly,IrealizedthatthemanwasRich,agraduatestudentincomputerscience,someonewithwhomIhadworkedonaproject related to computational vision three or four years earlier.Because theexperimenthadtobeconductedinthesamewayeachtime,thiswasnotagoodtimeformetochatwithhim,soIputonapokerfaceandlaunchedintoamatter-of-fact description of the beers.After I finished, I nodded toRich and asked,“WhatcanIgetyou?”Insteadofgivingmehisorder,heaskedhowIwasdoing.“Verywell,thankyou,”Isaid.“WhichofthebeerscanIgetyou?”Heandhiscompanionbothselectedbeers,andthenRichtookanotherstabat

conversation:“Dan,didyoueverfinishyourPhD?”“Yes,” I said, “I finished about a year ago.Excuseme; Iwill be right back

withyourbeers.”AsIwalkedto thebar tofill theirorder, I realizedthatRichmusthavethoughtthatthiswasmyprofessionandthatadegreeinsocialsciencewouldonlygetsomeoneajobasabeerserver.WhenIgotbacktothetablewiththesamples,Richandhiscompanion—whowashiswife—tastedthebeersandansweredtheshortquestionnaire.ThenRichtriedagain.Hetoldmethathehad

recentlyreadoneofmypapersandlikeditalot.Itwasagoodpaper,andIlikedit, too,butI thinkhewasjust tryingtomakemefeelbetteraboutmyjobasabeerserver.

ANOTHERSTUDY,CONDUCTEDlateratDukewithwinesamplesandMBAstudents,allowed us tomeasure some of the participants’ personality traits—somethingthemanagerof theCarolinaBreweryhadnotbeen thrilledabout.Thatopenedthe door for us to find out what might be contributing to this interestingphenomenon.Whatwe foundwasacorrelationbetween the tendency toorderalcoholicbeveragesthatweredifferentfromwhatotherpeopleatthetablehadchosen and a personality trait called “need for uniqueness.” In essence,individuals more concerned with portraying their own uniqueness were morelikelytoselectanalcoholicbeveragenotyetorderedattheirtableinanefforttodemonstratethattheywereinfactoneofakind.Whattheseresultsshowisthatpeoplearesometimeswillingtosacrificethe

pleasuretheygetfromaparticularconsumptionexperienceinordertoprojectacertainimagetoothers.Whenpeopleorderfoodanddrinks,theyseemtohavetwo goals: to orderwhat theywill enjoymost and to portray themselves in apositive light in theeyesof their friends.Theproblem is thatonce theyorder,say, the food, theymay be stuckwith a dish they don’t like—a situation theyoften regret. In essence, people, particularly those with a high need foruniqueness,maysacrificepersonalutilityinordertogainreputationalutility.Althoughtheseresultswereclear,wesuspectedthatinothercultures—where

theneedforuniqueness isnotconsideredapositive trait—peoplewhoorderedaloud in public would try to portray a sense of belonging to the group andexpress more conformity in their choices. In a study we conducted in HongKong,wefound that thiswas indeed thecase. InHongKong, individualsalsoselectedfoodthattheydidnotlikeasmuchwhentheyselecteditinpublicratherthaninprivate,buttheseparticipantsweremorelikelytoselectthesameitemasthepeopleorderingbeforethem—againmakingaregrettablemistake,thoughadifferenttypeofmistake,whenorderingfood.

FROMWHATIhavetoldyousofaraboutthisexperiment,youcanseethatabitofsimplelifeadvice—afreelunch—comesoutofthisresearch.First,whenyougotoarestaurant,it’sagoodideatoplanyourorderbeforethewaiterapproachesyou,andsticktoit.Beingswayedbywhatotherpeoplechoosemightleadyoutochooseaworsealternative.Ifyou’reafraidthatyoumightbeswayedanyway,ausefulstrategyistoannounceyourordertothetablebeforethewaitercomes.Thisway,youhavestakedaclaimtoyourorder,andit’slesslikelythattheother

people around the table will think you are not unique, even if someone elseordersthesamedishbeforeyougetyourchance.Butofcoursethebestoptionistoorderfirst.Perhaps restaurant owners should ask their customers to write out orders

privately(orquietlygivetheirorderstothewaiters),sothatnocustomerwillbeinfluencedbytheordersofhisorhercompanions.Wepayalotofmoneyforthepleasureofdiningout.Gettingpeople toorderanonymously ismost likely thecheapest and simplest way to increase the enjoyment derived from theseexperiences.Butthere’sabiggerlessonthatIwouldliketodrawfromthisexperiment—

and in fact from all that I have said in the preceding chapters. Standardeconomics assumes that we are rational—that we know all the pertinentinformationaboutourdecisions,thatwecancalculatethevalueofthedifferentoptions we face, and that we are cognitively unhindered in weighing theramificationsofeachpotentialchoice.The result is that we are presumed to be making logical and sensible

decisions.Andevenifwemakeawrongdecisionfromtimetotime,thestandardeconomics perspective suggests that we will quickly learn from our mistakeseither on our own orwith the help of “market forces.” On the basis of theseassumptions, economists draw far-reaching conclusions about everything fromshoppingtrendstolawtopublicpolicy.But,astheresultspresentedinthisbook(andothers)show,weareallfarless

rational in our decision making than standard economic theory assumes. Ourirrationalbehaviors areneither randomnor senseless—theyare systematic andpredictable.Weallmakethesametypesofmistakesoverandover,becauseofthe basicwiring of our brains. Sowouldn’t itmake sense tomodify standardeconomicsandmoveawayfromnaivepsychology,whichoftenfailsthetestsofreason,introspection,and—mostimportant—empiricalscrutiny?Wouldn’t economicsmakea lotmore sense if itwerebasedonhowpeople

actually behave, instead of how they should behave? As I said in theIntroduction,thatsimpleideaisthebasisofbehavioraleconomics,anemergingfield focused on the (quite intuitive) idea that people do not always behaverationallyandthattheyoftenmakemistakesintheirdecisions.In many ways, the standard economic and Shakespearean views are more

optimisticabouthumannature,sincetheyassumethatourcapacityforreasoningis limitless. By the same token the behavioral economics view, whichacknowledgeshumandeficiencies, ismoredepressing,because itdemonstratesthe many ways in which we fall short of our ideals. Indeed, it can be ratherdepressing to realize that we all continually make irrational decisions in our

personal,professional,andsociallives.Butthereisasilverlining:thefactthatwemakemistakesalsomeansthattherearewaystoimproveourdecisions—andthereforethatthereareopportunitiesfor“freelunches.”

ONE OF THE main differences between standard and behavioral economicsinvolves this concept of “free lunches.” According to the assumptions ofstandardeconomics,allhumandecisionsarerationalandinformed,motivatedbyan accurate concept of theworth of all goods and services and the amount ofhappiness (utility) all decisions are likely to produce. Under this set ofassumptions, everyone in the marketplace is trying to maximize profit andstrivingtooptimizehisexperiences.Asaconsequence,economictheoryassertsthat therearenofreelunches—if therewereany,someonewouldhavealreadyfoundthemandextractedalltheirvalue.Behavioraleconomists,ontheotherhand,believethatpeoplearesusceptible

to irrelevant influences from their immediate environment (which we callcontext effects), irrelevant emotions, shortsightedness, and other forms ofirrationality (see any chapter in this book or any research paper in behavioraleconomics for more examples). What good news can accompany thisrealization?Thegoodnewsisthatthesemistakesalsoprovideopportunitiesforimprovement.Ifweallmakesystematicmistakesinourdecisions,thenwhynotdevelopnewstrategies,tools,andmethodstohelpusmakebetterdecisionsandimproveouroverallwell-being?That’sexactlythemeaningoffreelunchesfromtheperspectiveofbehavioraleconomics—theideathattherearetools,methods,andpoliciesthatcanhelpallofusmakebetterdecisionsandasaconsequenceachievewhatwedesire.For example, the question why Americans are not saving enough for

retirementismeaninglessfromtheperspectiveofstandardeconomics.Ifweareallmaking good, informeddecisions in every aspect of our lives, thenwe arealso saving the exact amount thatwewant to save.Wemight not savemuchbecause we don’t care about the future, because we are looking forward toexperiencingpovertyat retirement,becauseweexpectourkids to takecareofus, or because we are hoping to win the lottery—there are many possiblereasons.Themainpointisthatfromthestandardeconomicperspective,wearesavingexactlytherightamountinaccordancewithourpreferences.Butfromtheperspectiveofbehavioraleconomics,whichdoesnotassumethat

people are rational, the idea that we are not saving enough is perfectlyreasonable. In fact, research in behavioral economics points tomany possiblereasonswhypeoplearenotsavingenoughforretirement.Peopleprocrastinate.Peoplehaveahardtimeunderstandingtherealcostofnotsavingaswellasthe

benefitsofsaving.(Byhowmuchwouldyourlifebebetterinthefutureifyouweretodepositanadditional$1,000inyourretirementaccounteverymonthforthenext20years?)Being“houserich”helpspeoplebelievethattheyareindeedrich.Itiseasytocreateconsumptionhabitsandhardtogivethemup.Andtherearemany,manymorereasons.Thepotential for free lunches from theperspectiveofbehavioraleconomics

lies in new methods, mechanisms, and other interventions that would helppeople achieve more of what they truly want. For example, the new andinnovativecreditcardthatIdescribedinChapter7,onself-control,couldhelppeople exercise more self-control within the domain of spending. Anotherexampleof thisapproachisamechanismcalled“savemore tomorrow,”whichDickThalerandShlomoBenartziproposedandtestedafewyearsago.Here’s how “save more tomorrow” works. When new employees join a

company,inadditiontotheregulardecisionstheyareaskedtomakeaboutwhatpercentageof theirpaycheckto invest in theircompany’sretirementplan, theyarealsoaskedwhatpercentageoftheirfuturesalaryraisestheywouldbewillingtoinvestintheretirementplan.Itisdifficulttosacrificeconsumptiontodayforsaving in the distant future, but it is psychologically easier to sacrificeconsumption in the future, andeveneasier togiveupapercentageof a salaryincreasethatonedoesnotyethave.WhentheplanwasimplementedinThalerandBenartzi’stest,theemployees

joinedandagreedtohavetheircontribution,asapercentage,increasewiththeirfuture salary raises.What was the outcome? Over the next few years, as theemployeesreceivedraises,thesavingratesincreasedfromabout3.5percenttoaround13.5percent—againfortheemployees,theirfamilies,andthecompany,whichbynowhadmoresatisfiedandlessworriedemployees.This is the basic idea of free lunches—providing benefits for all the parties

involved. Note that these free lunches don’t have to be without cost(implementing the self-control credit cardor “savemore tomorrow” inevitablyinvolvesacost).Aslongasthesemechanismsprovidemorebenefitsthancosts,we should consider them to be free lunches—mechanisms that provide netbenefitstoallparties.

IFIWEREtodistillonemainlessonfromtheresearchdescribedinthisbook,itisthatwearepawns inagamewhose forceswe largely fail tocomprehend.Weusually think of ourselves as sitting in the driver’s seat, with ultimate controlover the decisions we make and the direction our life takes; but, alas, thisperception has more to do with our desires—with how we want to viewourselves—thanwithreality.

Eachofthechaptersinthisbookdescribesaforce(emotions,relativity,socialnorms,etc.)thatinfluencesourbehavior.Andwhiletheseinfluencesexertalotofpoweroverourbehavior,ournatural tendency is tovastlyunderestimateorcompletelyignorethispower.Theseinfluenceshaveaneffectonusnotbecausewe lack knowledge, lack practice, or are weak-minded. On the contrary, theyrepeatedlyaffectexpertsaswellasnovicesinsystematicandpredictableways.The resulting mistakes are simply how we go about our lives, how we “dobusiness.”Theyareapartofus.Visualillusionsarealsoillustrativehere.Justaswecan’thelpbeingfooledby

visualillusions,wefallforthe“decisionillusions”ourmindsshowus.Thepointis that our visual and decision environments are filtered to us courtesy of oureyes,ourears,oursensesofsmellandtouch,andthemasterofitall,ourbrain.Bythetimewecomprehendanddigest information, it isnotnecessarilya truereflection of reality. Instead, it is our representation of reality, and this is theinputwebaseourdecisionson.Inessencewearelimitedtothetoolsnaturehasgiven us, and the natural way in which we make decisions is limited by thequalityandaccuracyofthesetools.Asecondmainlessonisthatalthoughirrationalityiscommonplace,itdoesnot

necessarilymeanthatwearehelpless.Onceweunderstandwhenandwherewemaymakeerroneousdecisions,wecantrytobemorevigilant,forceourselvestothink differently about these decisions, or use technology to overcome ourinherent shortcomings.This is alsowhere businesses and policymakers couldrevisetheirthinkingandconsiderhowtodesigntheirpoliciesandproductssoastoprovidefreelunches.

THANK YOU FOR reading this book. I hope you have gained some interestinginsightsabouthumanbehavior,gained some insight intowhat reallymakesustick,anddiscoveredways to improveyourdecisionmaking. Ialsohope that Ihavebeenabletosharewithyoumyenthusiasmforthestudyofrationalityandirrationality.Inmyopinion,studyinghumanbehaviorisafantasticgiftbecauseit helps us better understand ourselves and the daily mysteries we encounter.Althoughthetopicisimportantandfascinating,itisnoteasytostudy,andthereisstillalotofworkaheadofus.AstheNobellaureateMurrayGell-Mannoncesaid,“Thinkhowhardphysicswouldbeifparticlescouldthink.”

Irrationallyyours,DanAriely

PS: If you want to participate in this journey, log on towww.predictablyirrational.com, sign up for a few of our studies, and leave us

yourideasandthoughts.

Thanks

OvertheyearsIhavebeenfortunatetoworkonjointresearch projects with smart, creative, generous individuals. The researchdescribedinthisbookislargelyanoutcomeoftheiringenuityandinsight.Theseindividualsarenotonlygreatresearchers,butalsoclosefriends.Theymadethisresearch possible. Any mistakes and omissions in this book are mine. (Shortbiographies of these wonderful researchers follow.) In addition to those withwhomIhavecollaborated,Ialsowant to thankmypsychologyandeconomicscolleagues at large. Each idea I ever had, and every paper I ever wrote, wasinfluenced either explicitly or implicitly by theirwriting, ideas, and creativity.Scienceadvancesmainlythroughaseriesofsmallstepsbasedonpastresearch,and I am fortunate to be able to take my own small steps forward from thefoundationlaiddownbytheseremarkableresearchers.At theendof thisbook,Ihaveincludedsomereferencesforotheracademic papers related to each of the chapters. These should give the avidreaderanenhancedperspectiveon,andthebackgroundandscopeof,eachtopic.(Butofcoursethisisn’tacompletelist.)Muchof the researchdescribed in this bookwas carriedoutwhile Iwas at

MIT, andmany of the participants and research assistantswereMIT students.Theresultsoftheexperimentshighlighttheir(aswellasourown)irrationalities,andsometimespokefunatthem,butthisshouldnotbeconfusedwithalackofcaring or a lack of admiration. These students are extraordinary in theirmotivation, love of learning, curiosity, and generous spirit. It has been aprivilegetogettoknowyouall—youevenmadeBoston’swintersworthwhile!Figuringouthowtowritein“non-academese”wasnoteasy,butIgotalotof

help along the way. My deepest thanks to Jim Levine, Lindsay Edgecombe,Elizabeth Fisher, and the incredible team at the Levine Greenberg LiteraryAgency.IamalsoindebtedtoSandyBlakesleeforherinsightfuladvice;andto

Jim Bettman, Rebecca Waber, Ania Jakubek, Erin Allingham, Carlie Burck,Bronwyn Fryer, Devra Nelson, Janelle Stanley, Michal Strahilevitz, EllenHoffman, and Megan Hogerty for their role in helping me translate some oftheseideasintowords.Specialthankstomywritingpartner,ErikCalonius,whocontributed greatly to these pages, with many real-world examples and anarrativestylethathelpedmetell thisstoryaswellas itcouldbetold.Specialthanks also go tomy trusting, supporting, andhelpful editor atHarperCollins,ClaireWachtel.IwrotethebookwhilevisitingtheInstituteforAdvancedStudyatPrinceton.I

cannotimagineamoreidealenvironmentinwhichtothinkandwrite.Ievengottospendsometimeintheinstitute’skitchen,learningtochop,bake,sauté,andcook under the supervision of chefs Michel Reymond and Yann Blanchet—Icouldn’thaveaskedforabetterplacetoexpandmyhorizons.Finally, thanks to my lovely wife, Sumi, who has listened to my research

storiesoverandoverandoverandover.AndwhileIhopeyouagree that theyare somewhat amusing for the first few reads, her patience andwillingness torepeatedly lendme her earmerits sainthood. Sumi, tonight I will be home atseven-fifteenatthelatest;makeiteighto’clock,maybeeight-thirty;Ipromise.

ListofCollaborators

OnAmirOnjoinedMITasaPhDstudentayearaftermeandbecame“my”firststudent.Asmy first student,Onhad a tremendous role in shapingwhat I expect fromstudents and how I see the professor-student relationship. In addition to beingexceptionallysmart,Onhasanamazingsetofskills,andwhathedoesnotknowheisabletolearnwithinadayortwo.Itisalwaysexcitingtoworkandspendtimewithhim.OniscurrentlyaprofessorattheUniversityofCaliforniaatSanDiego.

MarcoBertiniWhenIfirstmetMarco,hewasaPhDstudentatHarvardBusinessSchool,andunlike his fellow students he did not see the Charles River as an obstacle heshould not cross. Marco is Italian, with a temperament and sense of style tomatch—anoverallgreatguyyoujustwanttogooutforadrinkwith.MarcoiscurrentlyaprofessoratLondonBusinessSchool.

ZivCarmonZivwasoneofthemainreasonsIjoinedDuke’sPhDprogram,andtheyearswespent togetheratDuke justified thisdecision.Notonlydid I learn fromhimagreatdealaboutdecisionmakingandhowtoconductresearch;healsobecameone of my dear friends, and the advice I got from him over the years hasrepeatedly proved to be invaluable. Ziv is currently a professor at INSEAD’sSingaporecampus.

ShaneFrederickImet Shanewhile Iwas a student atDuke and hewas a student atCarnegieMellon.Wehadalongdiscussionaboutfishoversushi,andthishasimprintedonmealastingloveforboth.AfewyearslaterShaneandIbothmovedtoMITandhadmanymore opportunities for sushi and lengthy discussions, including

thecentralquestionof life:“Ifabatandaballcost$1.10 in total,and thebatcosts a dollar more than the ball, how much does the ball cost?” Shane iscurrentlyaprofessoratMIT.

AyeletGneezyImetAyeletmany years ago at a picnic organized bymutual friends. I had averypositivefirstimpressionofher,andmyappreciationofheronlyincreasedwithtime.Ayeletisawonderfulpersonandagreatfriend,soitisabitoddthatthetopicswedecidedtoworkontogetherweremistrustandrevenge.Whateverdroveus to start exploring these topics initially, it endedupbeingveryusefulboth academically and personally. Ayelet is currently a professor at theUniversityofCaliforniaatSanDiego(andifyouhappentoseeanotherGneezyonmylistofcollaborators,thatisnotbecauseitisapopularlastname).

UriGneezyUriisoneofthemostsarcasticandcreativepeopleIhaveevermet,andbothofthese skills make him able to effortlessly and rapidly turn out important andusefulresearch.Afewyearsago,ItookUritoBurningMan,andwhilewewerethere,hecompletelyblendedintotheatmosphere.Onthewayback,helostsomebet tome, and as a consequence, hewas supposed to give a gift to a randomperson every day for a month—but sadly, once back in civilization, he wasunable todothis.Uri iscurrentlyaprofessorat theUniversityofCaliforniaatSanDiego.

ErnanHaruvyErnanandIgottospendsometimetogetherwhenhewasatHarvardBusinessSchoolandIwasontheothersideoftheriver.Ernanwasoneofthefirstpeopleto think carefully about how the Internet can change the anonymity of humaninteractionsand,asaconsequence,thewaywetreatoneanother.Heissmartandhardworking, and has an amazing willingness to help. Ernan is currently aprofessorattheUniversityofTexasatDallas.

JamesHeymanJamesandIspentayeartogetheratBerkeley.Hewouldoftencomeintodiscusssome idea, bringingwithhim someofhis recentbakingoutputs, and thiswasalwaysagoodstartforaninterestingdiscussion.Followinghislife’smaximthatmoney isn’t everything, his research focuses on nonfinancial aspects ofmarketplacetransactions.OneofJames’spassionsisthemanywaysbehavioraleconomicscouldplayoutinpolicydecisions,andovertheyearsIhavecometo

seethewisdominthisapproach.JamesiscurrentlyaprofessorattheUniversityofSt.Thomas(inMinnesota,nottheVirginIslands).

GünterHitschGünterisfunny,smart,andcharming—andnotjustrelativetoothereconomists.Heisthesortofguythatyouwanttohaveabeerwith,andtalkingwithhimisalwaysaninterestingyetsomewhatunexpectedexperience.GünterisalsooneofthemostmeticulouseconometriciansIknow,andhecanspendyears(Iamnotjoking) running very complex computer models to properly estimate someobscureparameters.GünteriscurrentlyaprofessorattheUniversityofChicago.

AliHortaçsuAliisoneofthemostwell-balancedindividualsIhaveevermet.Nothingseemstofazehim,andheisalwaysoozinggoodness(well,thisisnotcompletelytrue—hedoesseemtobecomeadifferentpersonwhen theTurkishsoccer teamisplaying). Ali was one of the first economists to take a careful look at onlineauctions, helping us understand how people actually behave in such auctions.Workingwithhimononlinedatinghasbeenaveryeducationalexperienceforme.AliiscurrentlyaprofessorattheUniversityofChicago.

LeonardLeeLeonard joined the PhD program at MIT to work on topics related to e-commerce.Sincewebothkeptlonghours,westartedtakingbreakstogetherlateat night, and this gave us a chance to startworking jointly on a few researchprojects.ThecollaborationwithLeonardhasbeengreat.Hehasendlessenergyand enthusiasm, and the number of experiments he can carry out during anaverageweekisaboutwhatotherpeopledoinasemester.Inaddition,heisoneofthenicestpeopleIhaveevermetandalwaysadelighttochatandworkwith.LeonardiscurrentlyaprofessoratColumbiaUniversity.

JonathanLevavJonathanloveshismotherlikenooneelseIhavemet,andhismainregretinlifeis that he disappointed her when he didn’t go to medical school. Jonathan issmart, funny, and an incredibly social animal, able to make new friends infractionsofseconds.Heisphysicallybigwithalargehead,largeteeth,andanevenlargerheart.JonathaniscurrentlyaprofessoratColumbiaUniversity.

GeorgeLoewensteinGeorgeisoneofmyfirst,favorite,andlongest-timecollaborators.Heisalsomy

rolemodel.InmymindGeorgeis themostcreativeandbroadestresearcherinbehavioral economics. George has an incredible ability to observe the worldaround him and find nuances of behavior that are important for ourunderstanding of human nature aswell as for policy.George is currently, andappropriately,theHerbertA.SimonProfessorofEconomicsandPsychologyatCarnegieMellonUniversity.

NinaMazarNinafirstcametoMITforafewdaystogetfeedbackonherresearchandendedup staying for five years. During this time we had oodles of fun workingtogetherandIcametogreatlyrelyonher.Ninaisobliviousofobstacles,andherwillingness to take on large challenges led us to carry out some particularlydifficultexperimentsinruralIndia.FormanyyearsIhopedthatshewouldneverdecide to leave; but, alas, at some point the time came: she is currently aprofessorat theUniversityofToronto.Inanalternativereality,Ninaisahigh-fashiondesignerinMilan,Italy.

ElieOfekElie is an electrical engineer by training who then saw the light (or so hebelieves)andswitchedtomarketing.Notsurprisingly,hismainareaofresearchandteachingisinnovationsandhigh-techindustries.Elieisagreatguytohavecoffeewithbecausehehasinterestinginsightsandperspectivesoneverytopic.Currently,ElieisaprofessoratHarvardBusinessSchool(orasitsmemberscallit,“TheHaaarvardBusinessSchool”).

YesimOrhunYesim is a true delight in every way. She is funny, smart, and sarcastic.Regrettably,wehadonlyoneyeartohangoutwhilewewerebothatBerkeley.Yesim’s research takes findings from behavioral economics and, using thisstartingpoint,providesprescriptionsforfirmsandpolicymakers.Forsomeoddreason, what really gets her going is any research question that includes thewords simultaneity and endogeneity. Yesim is currently a professor at theUniversityofChicago.

DrazenPrelecDrazenisoneofthesmartestpeopleIhaveevermetandoneofthemainreasonsIjoinedMIT.IthinkofDrazenasacademicroyalty:heknowswhatheisdoing,heissureofhimself,andeverythinghetouchesturnstogold.Iwashopingthatbyosmosis,Iwouldgetsomeofhisstyleanddepth,buthavingmyofficenext

tohiswasnotsufficientforthis.DrazeniscurrentlyaprofessoratMIT.

KristinaShampanierKristina came to MIT to be trained as an economist, and for some odd butwonderfulreasonelectedtoworkwithme.Kristinaisexceptionallysmart,andIlearned a lot from her over the years. As a tribute to her wisdom, when shegraduated from MIT, she opted for a nonacademic job: she is now a high-poweredconsultantinBoston.

JiwoongShinJiwoong is a yin and yang researcher.On one hand he carries out research instandardeconomicsassumingthatindividualsareperfectlyrational;ontheotherhand he carries out research in behavioral economics showing that people areirrational. He is thoughtful and reflective—a philosophical type—and thisduality does not faze him. Jiwoong and I started working together mostlybecause we wanted to have fun together, and indeed we have spent manyexciting hours working together. Jiwoong is currently a professor at YaleUniversity.

BabaShivBabaandIfirstmetwhenwewerebothPhDstudentsatDuke.OvertheyearsBaba has carried out fascinating research in many areas of decision making,particularlyonhowemotionsinfluencedecisionmaking.Heisterrificineverywayandthekindofpersonwhomakeseverythingaroundhimseemmagicallybetter.BabaiscurrentlyaprofessoratStanfordUniversity.

StephenSpillerStephen startedhis academic career as a student of JohnLynch. JohnwasmyPh.D.adviseraswell,soinessence,StephenandIareacademicbrothers,andIfeel as though he is my little (but much taller) brother. Stephen is smart andcreative, and it has been a privilege to watch him advance on his academicadventures.StepheniscurrentlyadoctoralstudentatDukeUniversity,andifhisadvisershadanysayinthematter,wewouldtrytoneverlethimgraduate.

RebeccaWaberRebeccaisoneofthemostenergeticandhappiestpeopleIhaveevermet.Sheisalso the only person I ever observed to burst out laughing while reading hermarriagevows.Rebeccaisparticularlyinterestedinresearchondecisionmakingappliedtomedicaldecisions,andIcountmyselfasveryluckythatshechoseto

workwithme on these topics. Rebecca is currently a graduate student at theMediaLaboratoryatMIT.

KlausWertenbrochKlaus and Imetwhen hewas a professor at Duke and Iwas a PhD student.Klaus’s interest in decision making is mostly based on his attempts to makesenseofhisowndeviationfromrationality,whetheritishissmokinghabitorhisprocrastination in delaying work for the pleasure of watching soccer ontelevision.Itwasonlyfittingthatweworkedtogetheronprocrastination.KlausiscurrentlyaprofessoratINSEAD.

Notes

1.JodiKantor,“EntreesReach$40,”NewYorkTimes(October21,2006).2.ItamarSimonson,“GetClosertoYourCustomersbyUnderstandingHow

TheyMakeChoices,”CaliforniaManagementReview(1993).3.LouisUchitelle,“LureofGreatWealthAffectsCareerChoices,”New

YorkTimes(November27,2006).4.KatieHafner,“IntheWebWorld,RichNowEnvytheSuperrich,”New

YorkTimes(November21,2006).5.www.filenesbasement.com/bridal.php6.ValerieUlene,“CarKeys?NotSoFast,”LosAngelesTimes(January8,

2007).7.JohnLeland,“DebtorsSearchforDisciplinethroughBlogs,”NewYork

Times(February18,2007).8.“EmailHasMadeSlavesofUs,”AustralianDailyTelegraph(June16,

2008).9.“StudiesFindBigBenefitsinMarriage,”NewYorkTimes(April10,

1995).10.RalphKeeney,“PersonalDecisionsAretheLeadingCauseofDeath,”

OperationResearch(2008).11.“PearlsBeforeBreakfast,”WashingtonPost(April8,2007).12.ColinSchieman,“TheHistoryofPlaceboSurgery,”Universityof

Calgary(March2001).13.MargaretTalbot,“ThePlaceboPrescription,”NewYorkTimes(June9,

2000).14.SarahBakewell,“CookingwithMummy,”ForteanTimes(July1999).15.D.J.Swank,S.C.GSwank-Bordewijk,W.C.J.Hop,etal.,

“LaparoscopicAdhesiolysisinPatientswithChronicAbdominalPain:ABlindedRandomisedControlledMulti-CenterTrial,”Lancet(April12,2003).

16.“Off-LabelUseofPrescriptionDrugsShouldBeRegulatedbythe

FDA,”HarvardLawSchool,LegalElectronicArchive(December11,2006).

17.IrvingKirsch,“AntidepressantsProventoWorkOnlySlightlyBetterThanPlacebo,”PreventionandTreatment(June1998).

18.SherylStolberg,“ShamSurgeryReturnsasaResearchTool,”NewYorkTimes(April25,1999).

19.MargaretE.O’Kane,NationalCommitteeforQualityAssurance,lettertotheeditor,USAToday(December11,2006).

20.GreilMarcus,“OneStepBack:WhereAretheElixirsofYesteryearWhenWeHurt?”NewYorkTimes,January26,1998.

21.CrisisManagement:MasteringtheSkillstoPreventDisasters(HarvardBusinessEssentials),HarvardBusinessPress(2004),and“TylenolmadeaheroofJohnson&Johnson:Therecallthatstartedthemall,”NewYorkTimes,March23,2002,byJudithRehak.

22.FederalBureauofInvestigation,CrimeintheUnitedStates2004—UniformCrimeReports(Washington,D.C.:U.S.GovernmentPrintingOffice,2005).

23.BrodyMullins,“NoFreeLunch:NewEthicsRulesVexCapitolHill,”WallStreetJournal(January29,2007).

24.“PessimismfortheFuture,”CaliforniaBarJournal(November1994).25.MarylandJudicialTaskForceonProfessionalism(November10,2003):

http://www.courts.state.md.us/publications/professionalism2003.pdf.26.FloridaBar/JosephsonInstituteStudy(1993).27.DPACorrelator,Vol.9,No.3(September9,2002).SeealsoSteve

Sonnenberg,“TheDeclineinProfessionalism—AThreattotheFutureoftheAmericanAssociationofPetroleumGeologists,”Explorer(May2004).

28.JanCrosthwaite,“MoralExpertise:AProblemintheProfessionalEthicsofProfessionalEthicists,”Bioethics,Vol.9(1995):361–379.

29.The2002TransparencyInternationalCorruptionPerceptionsIndex,transparency.org.

30.McKinseyandCompany,“Payments:ChartingaCoursetoProfits”(December2005).

BibliographyandAdditionalReadings

Belowisalistofthepapersonwhichthechapterswerebased,plussuggestionsforadditionalreadingsoneachtopic.

Introduction

RELATEDREADINGSDanielKahneman,BarbaraL.Fredrickson,CharlesA.Schreiber,andDonald

A.Redelmeier,“WhenMorePainIsPreferredtoLess:AddingaBetterEnd,”PsychologicalScience(1993).DonaldA.RedelmeierandDanielKahneman,“Patient’sMemoriesofPainful

MedicalTreatments—Real-TimeandRetrospectiveEvaluationsofTwoMinimallyInvasiveProcedures,”Pain(1996).DanAriely,“CombiningExperiencesoverTime:TheEffectsofDuration,

IntensityChanges,andOn-LineMeasurementsonRetrospectivePainEvaluations,”JournalofBehavioralDecisionMaking(1998).DanArielyandZivCarmon,“GestaltCharacteristicsofExperienced

Profiles,”JournalofBehavioralDecisionMaking(2000).

Chapter1:TheTruthaboutRelativity

RELATEDREADINGSAmosTversky,“FeaturesofSimilarity,”PsychologicalReview,Vol.84

(1977).AmosTverskyandDanielKahneman,“TheFramingofDecisionsandthe

PsychologyofChoice,”Science(1981).JoelHuber,JohnPayne,andChrisPuto,“AddingAsymmetricallyDominated

Alternatives:ViolationsofRegularityandtheSimilarityHypothesis,”JournalofConsumerResearch(1982).ItamarSimonson,“ChoiceBasedonReasons:TheCaseofAttractionand

CompromiseEffects,”JournalofConsumerResearch(1989).

AmosTverskyandItamarSimonson,“Context-DependentPreferences,”ManagementScience(1993).DanArielyandTomWallsten,“SeekingSubjectiveDominancein

MultidimensionalSpace:AnExplanationoftheAsymmetricDominanceEffect,”OrganizationalBehaviorandHumanDecisionProcesses(1995).ConstantineSedikides,DanAriely,andNilsOlsen,“Contextualand

ProceduralDeterminantsofPartnerSelection:OnAsymmetricDominanceandProminence,”SocialCognition(1999).

Chapter2:TheFallacyofSupplyandDemand

BASEDONDanAriely,GeorgeLoewenstein,andDrazenPrelec,“CoherentArbitrariness:

StableDemandCurveswithoutStablePreferences,”QuarterlyJournalofEconomics(2003).DanAriely,GeorgeLoewenstein,andDrazenPrelec,“TomSawyerandthe

ConstructionofValue,”JournalofEconomicBehaviorandOrganization(2006).

RELATEDREADINGSCassR.Sunstein,DanielKahneman,DavidSchkade,andIlanaRitov,

“PredictablyIncoherentJudgments,”StanfordLawReview(2002).UriSimonsohn,“NewYorkersCommuteMoreEverywhere:ContrastEffects

intheField,”ReviewofEconomicsandStatistics(2006).UriSimonsohnandGeorgeLoewenstein,“Mistake#37:TheImpactof

PreviouslyFacedPricesonHousingDemand,”EconomicJournal(2006).

Chapter3:TheCostofZeroCost

BASEDONKristinaShampanier,NinaMazar,andDanAriely,“HowSmallIsZeroPrice?

TheTrueValueofFreeProducts,”MarketingScience(2007).

RELATEDREADINGSDanielKahnemanandAmosTversky,“ProspectTheory:AnAnalysisof

DecisionunderRisk,”Econometrica(1979).EldarShafir,ItamarSimonson,andAmosTversky,“Reason-BasedChoice,”

Cognition(1993).

Chapter4:TheCostofSocialNorms

BASEDONUriGneezyandAldoRustichini,“AFineIsaPrice,”JournalofLegalStudies

(2000).JamesHeymanandDanAriely,“EffortforPayment:ATaleofTwoMarkets,”

PsychologicalScience(2004).KathleenVohs,NicoleMead,andMirandaGoode,“ThePsychological

ConsequencesofMoney,”Science(2006).

RELATEDREADINGSMargaretS.ClarkandJudsonMills,“InterpersonalAttractioninExchange

andCommunalRelationships,”JournalofPersonalityandSocialPsychology,Vol.37(1979),12–24.MargaretS.Clark,“RecordKeepinginTwoTypesofRelationships,”Journal

ofPersonalityandSocialPsychology,Vol.47(1984).AlanFiske,“TheFourElementaryFormsofSociality:Frameworkfora

UnifiedTheoryofSocialRelations,”PsychologicalReview(1992).PankajAggarwal,“TheEffectsofBrandRelationshipNormsonConsumer

AttitudesandBehavior,”JournalofConsumerResearch(2004).

Chapter5:ThePowerofaFreeCookie

BASEDONDanAriely,UriGneezy,andErnanHaruvy,“OntheDiscontinuityofDemand

Curves at Zero: Charging More and Selling More,” Working Paper, DukeUniversity(2010).

RELATEDREADINGSJohnQuah,“TheLawofDemandandRiskAversion,”Econometrica(2003).Angus Deaton and John Muellbauer, Economics and Consumer Behavior,

CambridgeUniversityPress,Cambridge,UK(1980).Martin Dufwenberg and Georg Kirchsteiger, “A Theory of Sequential

Reciprocity,”GamesandEconomicBehavior(2004).Armin Falk and Urs Fischbacher, “A Theory of Reciprocity,” Games and

EconomicBehavior(2006).James Coleman, Foundations of Social Theory, Harvard University Press,

Cambridge,MA(1990).SeealsoreadingsforChapter4.

Chapter6:TheInfluenceofArousal

BASEDONDanArielyandGeorgeLoewenstein,“TheHeatoftheMoment:TheEffectof

SexualArousalonSexualDecisionMaking,”JournalofBehavioralDecisionMaking(2006).

RELATEDREADINGSGeorgeLoewenstein,“OutofControl:VisceralInfluencesonBehavior,”

OrganizationalBehaviorandHumanDecisionProcesses(1996).PeterH.Ditto,DavidA.Pizarro,EdenB.Epstein,JillA.Jacobson,andTara

K.McDonald,“MotivationalMyopia:VisceralInfluencesonRiskTakingBehavior,”JournalofBehavioralDecisionMaking(2006).

Chapter7:TheProblemofProcrastinationandSelf-Control

BASEDONDanArielyandKlausWertenbroch,“Procrastination,Deadlines,and

Performance:Self-ControlbyPrecommitment,”PsychologicalScience(2002).

RELATEDREADINGSTedO’DonoghueandMathewRabin,“DoingItNoworLater,”American

EconomicReview(1999).YaacovTropeandAyeletFishbach,“CounteractiveSelf-Controlin

OvercomingTemptation,”JournalofPersonalityandSocialPsychology(2000).

Chapter8:TheHighPriceofOwnership

BASEDONZivCarmonandDanAriely,“FocusingontheForgone:HowValueCan

AppearSoDifferenttoBuyersandSellers,”JournalofConsumerResearch(2000).JamesHeyman,YesimOrhun,andDanAriely,“AuctionFever:TheEffectof

OpponentsandQuasi-EndowmentonProductValuations,”JournalofInteractiveMarketing(2004).

RELATEDREADINGSRichardThaler,“TowardaPositiveTheoryofConsumerChoice,”Journalof

EconomicBehaviorandOrganization(1980).JackKnetsch,“TheEndowmentEffectandEvidenceofNonreversible

IndifferenceCurves,”AmericanEconomicReview,Vol.79(1989),1277–1284.DanielKahneman,JackKnetsch,andRichardThaler,“ExperimentalTestsof

theEndowmentEffectandtheCoaseTheorem,”JournalofPoliticalEconomy(1990).DanielKahneman,JackKnetsch,andRichardH.Thaler,“Anomalies:The

EndowmentEffect,LossAversion,andStatusQuoBias,”JournalofEconomicPerspectives,Vol.5(1991),193–206.

Chapter9:KeepingDoorsOpen

BASEDONJiwoongShinandDanAriely,“KeepingDoorsOpen:TheEffectof

UnavailabilityonIncentivestoKeepOptionsViable,”ManagementScience(2004).

RELATEDREADINGSSheenaIyengarandMarkLepper,“WhenChoiceIsDemotivating:CanOne

DesireTooMuchofaGoodThing?”JournalofPersonalityandSocialPsychology(2000).DanielGilbertandJaneEbert,“DecisionsandRevisions:TheAffective

ForecastingofChangeableOutcomes,”JournalofPersonalityandSocialPsychology(2002).ZivCarmon,KlausWertenbroch,andMarcelZeelenberg,“Option

Attachment:WhenDeliberatingMakesChoosingFeelLikeLosing,”JournalofConsumerResearch(2003).

Chapter10:TheEffectofExpectations

BASEDONJohnBargh,MarkChen,andLaraBurrows,“AutomaticityofSocial

Behavior:DirectEffectsofTraitConstructandStereotypeActivationonAction,”JournalofPersonalityandSocialPsychology(1996).MargaretShih,ToddPittinsky,andNaliniAmbady,“Stereotype

Susceptibility:IdentitySalienceandShiftsinQuantitativePerformance,”PsychologicalScience(1999).SamMcClure,JianLi,DamonTomlin,KimCypert,LatanéMontague,and

ReadMontague,“NeuralCorrelatesofBehavioralPreferenceforCulturallyFamiliarDrinks,”Neuron(2004).LeonardLee,ShaneFrederick,andDanAriely,“TryIt,You’llLikeIt:The

InfluenceofExpectation,Consumption,andRevelationonPreferencesforBeer,”PsychologicalScience(2006).

MarcoBertini,ElieOfek,andDanAriely,“ToAddorNottoAdd?TheEffectsofAdd-OnsonProductEvaluation,”WorkingPaper,HBS(2007).

RELATEDREADINGSGeorgeLoewenstein,“AnticipationandtheValuationofDelayed

Consumption,”EconomicJournal(1987).GregBerns,JonathanChappelow,MilosCekic,CaryZink,GiuseppePagnoni,

andMeganMartin-Skurski,“NeurobiologicalSubstratesofDread,”Science(2006).

Chapter11:ThePowerofPrice

BASEDONLeonardCobb,GeorgeThomas,DavidDillard,AlvinMerendino,andRobert

Bruce,“AnEvaluationofInternalMammaryArteryLigationbyaDouble-BlindTechnic,”NewEnglandJournalofMedicine(1959).BruceMoseley,KimberlyO’Malley,NancyPetersen,TerriMenke,Baruch

Brody,DavidKuykendall,JohnHollingsworth,CarolAshton,andNeldaWray,“AControlledTrialofArthroscopicSurgeryforOsteoarthritisoftheKnee,”NewEnglandJournalofMedicine(2002).BabaShiv,ZivCarmon,andDanAriely,“PlaceboEffectsofMarketing

Actions:ConsumersMayGetWhatTheyPayFor,”JournalofMarketingResearch(2005).RebeccaWaber,BabaShiv,ZivCarmon,andDanAriely,“Commercial

FeaturesofPlaceboandTherapeuticEfficacy,”JAMA(2008).

RELATEDREADINGSTorWager,JamesRilling,EdwardSmith,AlexSokolik,KennethCasey,

RichardDavidson,StephenKosslyn,RobertRose,andJonathanCohen,“Placebo-InducedChangesinfMRIintheAnticipationandExperienceofPain,”Science(2004).AliaCrumandEllenLanger,“Mind-SetMatters:ExerciseandthePlacebo

Effect,”PsychologicalScience(2007).

Chapter12:TheCycleofDistrust

BASEDONAyeletGneezy,StephenSpiller,andDanAriely,“TrustintheMarketplace:A

Fundamentlly Disbelieving State of Mind,” Working Paper, Duke University

(2010).MarianFriestadandPeterWright,“ThePersuasionKnowledgeModel:How

PeopleCopewithPersuasionAttempts,”JournalofConsumerResearch(1994).WilliamForsterLloyd,“TwoLecturesontheCheckstoPopulation,Delivered

BeforetheUniversityofOxford,inMichaelmasTerm,”OxfordPress(1833).Günter Hitsch, Ali Hortaçsu, and Dan Ariely, “Matching and Sorting in

OnlineDating,”AmericanEconomicReview(2010).Günter Hitsch, Ali Hortaçsu, and Dan Ariely, “What Makes You Click?—

Mate Preferences in Online Dating,” Working Paper, University of Chicago(2010).

RELATEDREADINGSGarrettHardin,“TheTragedyoftheCommons,”Science(1968).Peter Darke and Robin Ritchie, “The Defensive Consumer: Advertising

Deception,DefensiveProcessing,andDistrust,”JournalofMarketingResearch(2007).Richard Emerson, “Social Exchange Theory,” Annual Review of Sociology

(1976).ErnstFehrandSimonGachter,“FairnessandRetaliation:TheEconomicsof

Reciprocity,”JournalofEconomicPerspectives(2000).GitaJohar,“ConsumerInvolvementandDeceptionfromImpliedAdvertising

Claims,”JournalofMarketingResearch(1995).ScottKoslow,“CantheTruthHurt?HowHonestandPersuasiveAdvertising

can Unintentionally Lead to Increased Consumer Skepticism,” Journal ofConsumerAffairs(2000).

Chapters13and14:TheContextofOurCharacter,PartsIandII

BASEDONNinaMazarandDanAriely,“DishonestyinEverydayLifeandItsPolicy

Implications,”JournalofPublicPolicyandMarketing(2006).NinaMazar,OnAmir,andDanAriely,“TheDishonestyofHonestPeople:A

TheoryofSelf-ConceptMaintenance,”JournalofMarketingResearch(2008).

RELATEDREADINGSMaxBazermanandGeorgeLoewenstein,“TakingtheBiasoutofBean

Counting,”HarvardBusinessReview(2001).MaxBazerman,GeorgeLoewenstein,andDonMoore,“WhyGood

AccountantsDoBadAudits:TheRealProblemIsn’tConsciousCorruption.It’sUnconsciousBias,”HarvardBusinessReview(2002).MauriceSchweitzerandChrisHsee,“StretchingtheTruth:Elastic

JustificationandMotivatedCommunicationofUncertainInformation,”JournalofRiskandUncertainty(2002).

Chapter15:BeerandFreeLunches

BASEDONDanArielyandJonathanLevav,“SequentialChoiceinGroupSettings:Taking

theRoadLessTraveledandLessEnjoyed,”JournalofConsumerResearch(2000).RichardThalerandShlomoBenartzi,“SaveMoreTomorrow:Using

BehavioralEconomicstoIncreaseEmployeeSavings,”JournalofPoliticalEconomy(2004).

RELATEDREADINGSEricJ.JohnsonandDanielGoldstein,“DoDefaultsSaveLives?”Science,

(2003).

AbouttheAuthor

DAN ARIELY is the James B. Duke Professor of Psychology and BehavioralEconomics at Duke University, with appointments at the Fuqua School ofBusiness,theCenterforCognitiveNeuroscience,theDepartmentofEconomics,andtheSchoolofMedicine.HeisalsothefounderoftheCenterforAdvancedHindsight.DanearnedonePh.D.incognitivepsychologyandanotherPh.D.inbusinessadministration.Overtheyearshehaswonnumerousscientificawards.DanwrotethisbookwhilehewasafellowattheInstituteforAdvancedStudyatPrinceton. His work has been featured in leading scholarly journals inpsychology,economics,neuroscience,medicine,andbusiness, and inavarietyofpopularmediaoutlets,includingtheNewYorkTimes,theWallStreetJournal,theWashingtonPost,TheNew Yorker, theBostonGlobe,Scientific American,andScience.HehasappearedonCNNandCNBC,andisaregularcommentatoronNationalPublicRadio.HelivesinDurham,NorthCarolina,withhiswifeandtwochildren.

Visit www.AuthorTracker.com for exclusive information on your favoriteHarperCollinsauthor.

PraiseforPredictablyIrrational

“This is a wonderful, eye-opening book. Deep, readable, and providingrefreshingevidencethattherearedomainsandsituationsinwhichmaterialincentivesworkinunexpectedways.Wehumansarehumans,withqualitiesthatcanbedestroyedbytheintroductionofeconomicgains.Amust-read!”

—NassimNicholasTaleb,NewYorkTimesbestsellingauthorof

TheBlackSwan:TheImpactoftheHighlyImprobable

“Surprisingly entertaining. . . . Ariely’s book makes economics and thestrangehappeningsofthehumanmindfun.”

—USAToday

“Afascinatingrompthroughthescienceofdecision-makingthatunmasksthe ways that emotions, social norms, expectations, and context lead usastray.”

—Time

“Increativeways,authorDanArielyputs rationality to the test. . . .Newexperiments and optimistic ideas tumble out of him, like water from afountain.”

—BostonGlobe

“An entertaining tour of the many ways people act against their bestinterests,drawingonAriely’sown ingeniouslydesignedexperiments. . . .Personalandaccessible.”

—BusinessWeek

“Ariely’sbookaddressessomeweightyissues...withanunexpecteddashofhumor.”

—EntertainmentWeekly

“Thisslyandlucidbookisnotaboutyourgrandfather’sdismalscience....Arielymovescomfortablyfromthelabtobroadsocialquestionstohisownlife. . . .He isgood-temperedcompany . . .andcrystalclearaboutallhedescribes.ButPredictablyIrrationalisafarmorerevolutionarybookthanits unthreateningmanner lets on. It’s a concise summary of why today’ssocial science increasingly treats themarkets-know-bestmodel as a fairytale.”

—NewYorkTimesBookReview

“Inventive....Anaccessibleaccount....Thebookhasalottorecommendit.Arielyisamorethancapablestoryteller,andhesticksclosetohisownresearchsohiswriting is fullofcoloranddetail.Healsohasaknackforconveyingtherigoroftheexperiments....Thereisafreshinsightineverychapter. I could scarcely imagine a better introduction to ‘behavioraleconomics,’ a discipline of growing influence that sits on the boundarybetweeneconomicsandpsychology. . . .Ariely’s research shows thatourperceptionsofagooddealcanbehugelyinfluencedbymarketingtricks...

. And there is plenty there for the economic traditionalists—I am one ofthem—to chew on. . . . [Ariely] describe[s] with charm his relentlesslycreative experiments. For anyone interested in marketing—either as apractitioner or victim—this is unmissable reading. Other readers will beengaged and looking forward to a sequel. If onlymore researchers couldwritelikethis,theworldwouldbeabetterplace.”

—FinancialTimes

“A spry treatise on how theworldworks and howwe spend ourmoneybased on other people’s rules. . . . Ariely has a brilliant solution to aproblemthatisveryreal. . . .Makeapointofseeingthisbook.Thatwayyou’llknowyouwantit,andyouwill.”

—KirkusReviews(starred)

“Ariely’s intelligent, exuberant style and thought-provoking argumentsmakeforafascinating,eye-openingread.”

—PublishersWeekly

“Ataxonomyoffinancialfolly.”—TheNewYorker

“Amarvelousbookthatisboththoughtprovokingandhighlyentertaining,ranging from the power of placebos to the pleasures of Pepsi. Arielyunmasks the subtle but powerful tricks that our minds play on us, andshowsushowwecanpreventbeingfooled.”

—JeromeGroopman,NewYorkTimesbestsellingauthorofHowDoctorsThink

“DanAriely is a genius at understanding human behavior: no economistdoesabetter jobofuncoveringandexplaining thehidden reasons for theweirdwaysweact,inthemarketplaceandout.PredictablyIrrationalwillreshapethewayyouseetheworld,andyourself,forgood.”

—JamesSurowiecki,authorofTheWisdomofCrowds

“Predictably Irrational is a charmer—filled with clever experiments,engagingideas,anddelightfulanecdotes.DanArielyisawiseandamusingguidetothefoibles,errors,andbloopersofeverydaydecision-making.”

—DanielGilbert,ProfessorofPsychology,HarvardUniversity,andauthorofStumblingonHappiness

“Predictably Irrational is going to be the most influential, talked-aboutbookinyears.Itissofullofdazzlinginsights—andsoengaging—thatonceIstartedreadingIcouldn’tputitdown.”

—DanielMcFadden,NobelLaureateinEconomics,E.MorrisCoxProfessorofEconomics,

UniversityofCalifornia,Berkeley

“The most difficult part of investing is managing your emotions. Danexplainswhythatissochallengingforallofus,andhowrecognizingyourbuilt-inbiasescanhelpyouavoidcommonmistakes.”

—CharlesSchwab,ChairmanandCEOofTheCharlesSchwabCorporation

“PredictablyIrrationaliswildlyoriginal.Itshowswhy—muchmoreoftenthan we usually care to admit—humans make foolish, and sometimesdisastrous,mistakes.Arielynotonlygivesusagreatread;healsomakesusmuchwiser.”

—GeorgeAkerlof,NobelLaureateinEconomics,KoshlandProfessorofEconomics,UniversityofCalifornia,Berkeley

“Dan Ariely’s ingenious experiments explore deeply how our economicbehavior is influenced by irrational forces and social norms. In acharmingly informal style that makes it accessible to a wide audience,Predictably Irrational provides a standing criticism to the explanatorypowerofrationalegotisticchoice.”

—KennethArrow,NobelLaureateinEconomics,JoanKenneyProfessorofEconomics,StanfordUniversity

“Adelightfullybrilliantguidetoourirrationality—andhowtoovercomeit—inthemarketplaceandeveryplace.”

—GeoffreyMoore,authorofCrossingtheChasmandDealingwithDarwin

“DanAriely isoneof themostoriginalandconsistently interestingsocialscientists Iknow.His researchcoversanunusuallybroad rangeof topics,and in every one of them he has produced some distinctive findings andideas.Hismethodologicalinventivenessisremarkable.”

—ProfessorDanielKahneman,NobelLaureateinEconomics,PrincetonUniversity

“Freakonomics held that people respond to incentives, perhaps inundesirableways,butalwaysrationally.DanArielyshowsyouhowpeoplearedeeplyirrational,andpredictablyso.”

—ChipHeath,coauthorofMadetoStickandProfessorofOrganizationalBehavior,

StanfordGraduateSchoolofBusiness

“Anexuberantbook. . . .Arielybacksupeachclaimwithexamplesfromhis own inventive research—subjects includeunwittingMIT students andunsuspecting trick-or-treaters—forming an argument as charminglyanecdotalasitisconvincing.”

—Seed

“Danhasaninternationallyrecognizedreputationasatop-tierscholarandresearcher.Hisworkdrawstogetheranicesynergybetweenpsychologistsand economists, philosophers and economists, theorists and practitioners,andbehavioralandconventionaleconomists.GiventhatDanhasspokentoallofthesegroupsdirectlyinhisownresearchforyears,heisthenaturalpersontospearheadsuchaneffortforabook.”

—ProfessorJohnList,DepartmentofEconomics,UniversityofChicago

“Dan Ariely’s research covers and, in fact, creates many of the majorfrontiers of behavioral researchondecision-making.Thepleasurehegetsfromdoingresearchshinesthroughhiswritings,whichareclever,playful,humorous,hard-hitting,insightful,anduniformlyfunandexcitingtoread.”

—PaulSlovic,FounderandPresidentofDecisionResearch

“DanAriely is an innovative, iconoclastic experimenter whomanages toseemorenewthingsthroughthosetwoi’sthanalmostanyoneelse.Arielyworksattheinterfaceofpsychology,economics,andmarketing,andistheonlyexperimentalscientistIcanthinkofwhoseworkspeakscompellinglytoscholarsinallthreedisciplines.ThehallmarkofanArielyexperimentisthatitusesaninnovativeexperimentaldesigntomakeanunusualpoint.Hiswork covers a wide range of factors that affect human decision-making,from the usual suspects, inattention and confusion and myopia, to lessstudiedissueslikepainandlust.”

—AlvinRoth,ProfessorofEconomicsand

BusinessAdministration,HarvardUniversity

“Dan is full of passion for life in general, which is also apparent in hiswritingandresearch.Dan’sresearchisverybroad,coveringmanyaspectsand implicationsfor thenewfieldofbehavioraleconomics.This includesthe psychology of consumers, employees, and investors, crossing topicsfromdating todishonesty.Whilehealso loves thepure intellectual joyofideas,thispassionextendstohisintrinsicdesiretohelpandgivehisworkpracticalmeaning.Therangeofhisexpertisehasbeenvaluableinmywork.Thedemandforhisexperienceandtheexcellenceofhisresearcharealsoclearinthemanyappointmentsandhonorshehasreceivedoverthesefewyears.”

—AdmiralJohnMarlanPoindexter,Ph.D.

“Predictably Irrational is a scientific but imminently readable anddecidedly insightful look intowhywedowhatwedoeveryday . . . andwhy,eventhoughwe‘knowbetter,’wemayneverchange.”

—WendaHarrisMillard,PresidentandChiefOperatingOfficer,

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Copyright

PREDICTABLY IRRATIONAL,REVISEDANDEXPANDEDEDITION.Copyright©2009byDanAriely.AllrightsreservedunderInternationalandPan-AmericanCopyrightConventions.Bypaymentoftherequiredfees,youhavebeengrantedthenon-exclusive,non-transferable right to access and read the textof this e-bookon-screen. No part of this text may be reproduced, transmitted, down-loaded,decompiled,reverseengineered,orstoredinorintroducedintoanyinformationstorageandretrievalsystem,inanyformorbyanymeans,whetherelectronicormechanical, now known or hereinafter invented, without the express writtenpermissionofHarperCollinse-books.

FIRSTHARPERPERENNIALEDITIONPUBLISHED2010.

LibraryofCongressCataloging-in-PublicationDataisavailableuponrequest.

ISBN978-0-06-135324-6(pbk.)EPubEdition©2010ISBN:9780061958724

1011121314ID/RRD10987654321

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*Asaconventioninthisbook,everytimeImentionthatconditionsaredifferentfromeachother,itisalwaysastatisticallysignificantdifference.Irefertheinterestedreadertotheendofthisbookforalistoftheoriginalacademicpapersandadditionalreadings.

*Nowthatyouknowthisfact,andassumingthatyouarenotmarried,takethisintoaccountwhenyousearchforasoulmate.Lookforsomeonewhosesiblingismarriedtoaproductivity-challengedindividual.

*Ofcourse,physicianshaveotherproblemsaswell,includinginsuranceforms,bureaucracy,andthreatsoflawsuitsformalpractice.

*Thepricethehighestbidderpaidforanitemwasbasednotonhisownbid,butonthatofthesecondhighestbidder.Thisiscalledasecondpriceauction.WilliamVickreyreceivedtheNobelprizeineconomicsfordemonstratingthatthistypeofauctioncreatestheconditionswhereitisinpeople’sbestinteresttobidthemaximumamounttheyarewillingtopayforeachitem(thisisalsothegenerallogicbehindtheauctionsystemoneBay).

*WhenI’vetriedthiskindofexperimentonexecutivesandmanagers(attheMITExecutiveEducationProgram),I’vehadsimilarsuccessmakingtheirsocialsecuritynumbersinfluencethepricestheywerewillingtopayforchocolates,books,andotherproducts.

*Theresultwasnotduetowealth,taxes,orotherfinancialreasons.

*Toensurethatthebidswegotwereindeedthelowestpricesforwhichtheparticipantswouldlistentotheannoyingsounds,weusedthe“Becker-DeGroot-Marschakprocedure.”Thisisanauction-likeprocedure,inwhicheachoftheparticipantsbidsagainstapricerandomlydrawnbyacomputer.

*Wewillreturntothisastuteobservationinthechapteronsocialandmarketnorms(Chapter4).

*Iamnotclaimingthatspendingmoneyonawonderfulcupofcoffeeeveryday,orevenafewtimesaday,isnecessarilyabaddecision—Iamsayingonlythatweshouldquestionourdecisions.

*Wepostedthepricessothattheywerevisibleonlywhenpeoplegotclosetothetable.Wedidthisbecausewewantedtomakesurethatwedidnotattractdifferenttypesofpeopleinthedifferentconditions—avoidingwhatiscalledself-selection.

*Foramoredetailedaccountofhowarationalconsumershouldmakedecisionsinthesecases,seetheappendixtothischapter.

*Similartotheotherexperiments,whenweincreasedthecostofbothcertificatesby$1,makingthe$10certificatecost$1andthe$20certificatecost$8,themajorityjumpedforthe$20certificate.

*Whenitcomestocreditcards,theappealoffree!isfurtherenhancedbecausemostofusareoveroptimisticaboutourfinancialfuture,andoverconfidentaboutourabilitytoalwayspayourbillsontime.

*Thisgeneralprocedureiscalledpriming,andtheunscramblingtaskisusedtogetparticipantstothinkaboutaparticulartopic—withoutdirectinstructionstodoso.

*Foracompletelistsofthequestionsweasked,seetheappendixtothischapter.

*Theseresultsapplymostdirectlytosexualarousalanditsinfluenceonwhoweare;butwecanalsoassumethatotheremotionalstates(anger,hunger,excitement,jealousy,andsoon)workinsimilarways,makingusstrangerstoourselves.

**Iteachabout200graduatestudentseachyear,andinearly2009Iaskedforashowofhandstothequestionofhowmanystudentshadeverusede-mailortextmessagingwhiledriving.Allbutthreeraisedtheirhands(andoneofthethreewhodidnotwasvisuallyimpaired!).

**Ididexperiencesuchanegativeassociationwitheggs.SoonafterIwasinjured,thedoctorsfedmethirtyraweggsdailythroughafeedingtube.Tothisday,eventhesmellofeggsturnsmeoff.

**ThearchitecturedepartmentatMITisinfactverygood.

*I’moftensurprisedbyhowmuchpeopleconfideinme.Ithinkit’spartlyduetomyscars,andtotheobviousfactthatI’vebeenthroughsubstantialtrauma.Ontheotherhand,whatIwouldliketobelieveisthatpeoplesimplyrecognizemyuniqueinsightintothehumanpsyche,andthusseekmyadvice.Eitherway,Ilearnalotfromthestoriespeoplesharewithme.

*Matrimonyisasocialdevicethatwouldseemtoforceindividualstoshutdowntheiralternativeoptions,but,asweknow,ittoodoesn’talwayswork.

*TheFrenchlogicianandphilosopherJeanBuridan’scommentariesonAristotle’stheoryofactionweretheimpetusofthisstory,knownas“Buridan’sass.”

*Wewerealsohopingtomeasuretheamountofvinegarstudentsaddedtothebeer.Buteveryonewhoaddedvinegaraddedtheexactamountspecifiedintherecipe.

*ThereisaniceT-shirtonsaleattheMITbookstorethatreads“Harvard:BecausenoteveryonecangetintoMIT.”

**Infact,gooseliverpâtéisbasicallyequalpartsgooseliverandbutter,withsomewineandspices.

*ThemusicincludedBach’s“Chaconne,”FranzSchubert’s“AveMaria,”ManuelPonce’s“Estrellita,”apiecebyJulesMassenet,aBachgavotte,andarepriseof“Chaconne.”

*Wedounderstandquitepreciselyhowaplaceboworksinthedomainofpain,andthisiswhyweselectedthepainkillerasourobjectofinvestigation.Butotherplaceboeffectsarenotaswellunderstood.

**IsuspectthatAirborneincorporatesmanyelementstomaximizetheplaceboeffect(bubbles,foaming,medicinalcolor,exaggeratedclaims,andsoon)and,asaconsequence,hadarealbeneficialimpactonmyimmunesystemandmyabilitytofightoffillnesses.Placebosareallaboutself-fulfillingprophecies,andAirborneisoneofthebest.

*AsclaimedbytheHarvardBusinessSchool.

*WeoftenconductourexperimentsatHarvard,notbecausewethinkitsstudentsaredifferentfromMIT’sstudents,butbecauseithaswonderfulfacilitiesandthefacultymembersareverygenerousinlettingususethem.

*Thedistributionofthenumberofcorrectlysolvedquestionsremainedthesameacrossallfourconditions,butwithameanshiftwhentheparticipantscouldcheat.

*DoyouknowtheTenCommandments?Ifyou’dliketotestyourself,writethemdownandcompareyourlistwiththelistattheendofthischapter.Tobesureyouhavethemright,don’tjustsaythemtoyourself;writethemdown.

*CantheTenCommandmentsraiseone’smathscores?Weusedthesametwomemorytaskswiththecontrolconditiontotestthatpremise.Theperformanceinthecontrolconditionwasthesameregardlessofthetypeofmemorytask.SotheCommandmentsdonotraisemathscores.

*Theoretically,itispossiblethatsomepeoplesolvedalltheproblems.Butsincenooneinthecontrolconditionssolvedmorethan10problems,thelikelihoodthatfourofourparticipantstrulysolved20isvery,verylow.Forthisreasonweassumedthattheycheated.

*Independentofyouropinionabouttheeffect(orlackthereof)ofcarbonemissions,forthesakeofthisillustration,let’sassumethatwewanttolimitit.

*TheBostonCommon,todayapublicparkindowntownBoston,wascreatedin1634asadesignatedcommonpastureforgrazinganimals.

*Thetwopoliticalpartiesengenderedthesamelevelofmistrust,evenintheeyesoftheirownvoters.ThismeansthatDemocratsandRepublicansdidnotbelievethattheirownpartywasmoretrustworthythantheopposingparty—asadpictureindeed.

*Thetragedyofthecommonsreferstoasituationinwhichindividuals,actingtopromotetheirownself-interest,ultimatelydepleteasharedlimitedresource—evenwhenithurtseveryone,includingthemselves,inthelongterm.

*AstheCommandmentsvarybyreligion,correctanswerscouldbefromanyversion.Foryourinterest,herearethreeversions.