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Chapter 1: The truth about relativity

Why everything is relative even when it shouldn’t be 

  • People don’t look at things in absolute terms; they look at them relatively. The way we see things is relative to and dependent on the contextin which we see them.
  • We don’t have an internal value meter that tells us how much things are worth- rather we focus on the relative advantage of one thing over another and estimate value accordingly 
    • EG: We don’t know how much a 6-cylinder car is worth but we can assume it is more expensive than the 4 cylinder model
  • We are constantly looking at things around us in relation to other things 
  • This holds true not only for physical things (spouses and toasters) but for experiences (vacations and education) and fleeting things too (emotions and attitude) 
    • We always compare jobs with jobs and wines with wines 
  • Most people don’t know what they want until they see it in context:
    • You don’t know what bike you want until you see a champ in the Tour de France with a particular model 
  • We often don’t even know what we want to do with our lives until we see a friend, peer or relative who is doing what we think we should be doing 
    • EVERYTHING IS RELATIVE 

The dating game: 

  • Imagine you are single and want to appear attractive to many potential suitors at an upcoming singles event 
  • Bring a friend who has your basic physical characteristics (similar coloring or body type) BUT is slightly less attractive than you
  • Why? The people you want to attract will have a hard time evaluating you with no comparable around 
    • BUT if you are compared with a “–you” / ‘decoy’ friend, they will do a lot to make you look better 

Chapter 2: The fallacy of supply and demand 

Why the price of pearls and everything else is up in the air 

  • In 1975 Salvador Assael and his partner decided to harvest black pearls
    • There was no demand for such a thing at the time and his marketing efforts failed 
  • He was down and out and was on the verge of selling the pearls to a discount store at a very low price 
  • Before he gave up he made a last ditch effort and brought the pearls to an old friend of his: Harry Winston (the legendary gemstone dealer) 
  • Winston agreed to put them in a window in his store on 5thavenue with an outrageous price tag attached
    • Soon enough the pearls were being parading through the streets of NYC on the necks of famous divas 
  • Assael had taken something of uncertain worth and made it desirable 
    • “In order to make a human covet a thing it is only necessary to make that thing difficult to obtain.” – Mark Twain 
  • The question remains; How did he convince the cream of society to become passionate about these black pearls AND pay a royalty for them?
    • By associating the pearls with the highest-grade jewelry available, a perception of high value, and therefore premium pricing was created that in turn made them a must-have accessory for the Manhattan elite.

Imprinting and anchoring 

  • When baby geese (goslings) are born they become attached to the first moving object they encounter 
    • This shows that they make initial decisions based on what is available in their environment and that they stick with this decision once it has been made
  • This behavior describes a natural phenomenon called ‘imprinting’
  • The human brain is wired in a similar way: Once we have encountered an initial price of a product that price will then serve as an ‘anchor’ and this will affect our willingness to pay for a product going forward

Anchoring experiment – Arbitrary coherence 

  • 55 MIT students were asked to jot down the last 2 digit of their social security (ID) numbers
  • They were then asked to say whether or not they would be willing to pay that amount in dollars for a number of items, including a vintage wine
  • This experiment was attempting to prove ‘arbitrary coherence’
    • Although initial prices are arbitrary (random) once these are established in our minds they will shape not only how we think of the price currently but future prices for the same products (thus making them coherent/rational to us)
    • Those with the highest ending social security numbers bid highest and vice versa 
  • Once we have a price anchored in our minds this not only influences what we are willing to pay for a product but also related products 

Herding

  • You walk past a restaurant and see 2 people standing in a line- if people are waiting you naturally assume this must be a good place to eat and you too join the line 
  • Another person walks past, makes the same assumption and joins the line too 
  • This behavior is known as herding; it happens when we assume that something is good or bad on the basis of other people’s previous behavior 

Decisions 

  • We make decisions every day and economic theory says that we base these decisions on our fundamental values- our likes and dislikes 
  • BUT could it be that our lives have been carefully crafted by arbitrary coherence?
    • Could it be that we made random decisions at some point in the past and have built our lives on them ever since?
  • We can actively improve on our irrational behavior by becoming aware of our vulnerabilities 
  • When planning a purchase that may affect any future decisions take the time to understand what you have chosen and why

Chapter 3: The cost of zero cost- Why we often pay too much when we pay nothing 

  • It’s no secret that getting something for free feels good
  • Zero is not just another price but an emotional hot button and source of irrational excitement 
  • Free can lead us into trouble as things we never considered buying become irresistible when they are free

Chocolate Experiment: Power of 0

  • A table was set up outside a public building offering 2 types of chocolate:
    • Quality Swiss Lindt for 15c
    • Regular Hersheys for 1c
  • Consumers showed a good amount of rationality comparing the price vs the quality of the 2 options 
    • Purchase results were 73% Lindt and 27% Hershey
  • Now to show how free might effect this outcome they deducted 1c from each of the choices making the Lindt 14c and the Hersheys free
    • Would there be a difference? Prices of both chocolates had been reduced by the same amount
  • YES- the difference was HUGE and Hersheys Kisses became a fast favourite
    • Purchase results were 31% Lindt 69% Kisses
    • This demonstrates how big the difference between 1c and 0c really is 

Why do we jump for a free item even if it’s not really what we want?

  • Most transactions have an upside and a downside but when something is free we forget the downside
  • FREE gives us such an emotional charge that we perceive what is being offered as being more valuable than it actually is 
  • This is because as humans we are intrinsically afraid of loss and the real allure of free is tied to this fear 
  • There is no possibility of loss when you choose a free item BUT if we choose an item that isn’t free there is a risk of having made a poor decision

Amazon and the influence of free on our behaviour 

  • A few years ago Amazon started offering free shipping on orders over a certain amount 
  • Someone who bought a book for $10 might pay an extra $3 for shipping BUT if they bought one more book they would get their shipping FREE!
  • Most people probably didn’t want or need a second book but the free shipping offer was too tempting 
  • The difference between 2c and 1c is small but the difference between 1c and FREE is huge 

Chapter 4: The cost of social norms -Why we are happy to do things but not when we are paid to do them 

  • We live simultaneously in 2 different worlds- one where social norms prevail and one where market norms make the rules 
  • Social norms= friendly requests we make of one another 
    • These are wrapped up in our social nature and need for community 
    • Usually warm and instant payback is not required 
    • EG: Opening a door for someone – provides a sense of pleasure for both of you and reciprocity is not immediately required 
  • Market Norms= very different- nothing warm and fuzzy
    • Exchanges are sharp edged- wages, prices, rents
    • They imply prompt payment 
  • When we keep these 2 norms in their separate path’s life hums along pretty well
  • There are many examples that show that people will work more for a cause then for cash 
  • EG: a group of lawyers were asked if they would offer less expensive services to retirees- they said no 
    • They were then asked if they would offer their services to the needy retirees for free- overwhelmingly they said yes 
    • How could $0 be more attractive than $30?
    • When money was mentioned the lawyers used market norms and found the offer was lacking in relation to their market salary 
    • When no money was mentioned they used social norms and were willing to volunteer their time 
    • BUT why didn’t they just accept the $30 and think of themselves as paid volunteers?
      • Answer: once market norms enter our consideration social norms depart

The delicate balance between social norms and market norms in the business world 

  • Companies try to market themselves a social companions- they like us to think that they are ‘family’
  • This movement to treat consumers socially has potential, but the fact remains that business is still business and it is based on market norms 
    • When a customer is late on payment a receives a hefty and unexpected fee instead of a friendly phone call from a manager this violates the social relationship and the customer will be angry and hurt
  • It is NB to remember that you can’t have it all- you can’t treat customers like family one minute and like a nuisance when it becomes more convenient or profitable 

Social norms and employees

  • Social norms can have great advantages in the workplace- they can make employees passionate, loyal and concerned 
    • BUT employers must recognize this as a long-term commitment 
  • If employees promise to work harder to meet NB deadlines (often cancelling other obligations to do so) they expect something similar in return (like support and sympathy when they are sick)
  • If this social norm is not met the employee will switch to a market norm and loyalty is lost
  • Money, as it turns out is the most expensive way to motivate people 
    • Social norms are not only cheaper but more effective

Chapter 5: the influence of arousal

Why hot is much hotter than we realize 

  • When we are in the grips of passion, emotional or arousal our decisions and mind-set will always be different than that of a ‘cool’ state 
  • Even the most brilliant and rational person, in the heat of passion seems to be completely divorced from the person he thought he was 
  • To make informed decisions we need to understand the emotional state we will be in at the other side of the experience

Chapter 6: The problem of procrastination and self-control 

Why we can’t make ourselves do what we want to do 

  • We promise to save money but then go on a shopping spree
  • We vow to go on a diet but then surrender to the allure of a cake
    • Why do we as humans continue to lose the fight against procrastination so frequently?
    • Our emotions grab hold of us and make us view the world from a different perspective
      • When we commit to saving money or losing weight we are in a cool state but then the lava flow of hot emotion comes over us and we cannot resist
  • Giving up on long term goals for immediate gratification= procrastination 
  • Resisting temptation and instilling self-control = general human goals
  • Without pre-commitments (deadlines) we keep on falling for temptation 
  • Having flexi deadlines for assignments might sound like a great idea but it has been proven that students achieve more with a defined path of action 
  • Debit orders, upfront gym memberships = tools we can use as pre-commitment mechanisms 

Chapter 7: The high price of ownership

Why we overvalue what we have 

  • Ownerships pervades our lives and in a strange way shapes many of the things we do
  • Much of our life story can be told describing the ebb and flow of our possessions- what we get and what we give up
  • Since so much of our lives is dedicated to ownership wouldn’t it be nice to make the best decisions about this?
  • Unfortunately, we are just fumbling around in the dark because of 3 irrational quirks in our human nature 

Three Quirks

Quirk one: We fall in love with what we already have 

  • Suppose you decide to sell your old car- before you even put it up for sale you begin to recall memories- trips you took, funny incidences- the warm glow of remembrance washes over you 

Quirk two: We focus on what we may lose rather than what we may gain

  • When we price our beloved car, we focus more on what we may lose (the memories) then what we will gain (Money to buy a new car) 
  • Our aversion to loss is a strong emotion- one that sometimes causes us to make bad decisions 

Quirk three: We assume other people will see the transaction from the same perspective as we do 

  • We somehow expect the buyer of the car to share our feelings, emotions and memories 
  • It is difficult for us to imagine that the person on the other end of the transaction is not seeing the world as we do (curse of knowledge) 

Other ownership peculiarities 

  • The Ikea Effect: The more work you put into something the more ownership you feel toward it 
  • Feeling ownership before we own something: entering an online auction and being the highest bidder at a point- you begin to imagine your life with that new watch and how good it will look
    • The longer the auction lasts the greater this ‘grip’ of virtual ownership will have and the more you will likely spend 
  • Virtual ownershipis a mainspring of the advertising industry- we see happy couples road tripping in a Jeep and imagine ourselves on the same adventure 
  • The Trial promotion: If we have a basic DSTV subscription but get offered a Premium package at a trial rate for a month we will take it and tell ourselves we can always go back
    • BUT once you have had a taste of a premium package with all of its bells and whistles the thought of losing it is too much to bear
  • Ownership is not limited to material things- it can also apply to a point of view 
    • Once we take ownership of an idea (sports, politics) we fall in love with it and prize it more than it is worth leavings us with rigid ideology

Chapter 8: Keeping doors open 

Why options distract us from our main objective

  • As people we work feverishly to keep all our options open- 
  • Why is it that choosing one options is so difficult? Why can we not simply commit ourselves?
  • If we think of this in terms of dating we are often hesitant to let go of an old relationship for a new one- even if the former is dying out 
    • Instead we risk losing both because of our aversion to loss 
  • So how do we unshackle ourselves from the irrational impulse to chase worthless options?
  • One of the biggest problems we face is that we are exposed to a dizzying abundance of opportunity 
    • We are constantly reminded that we can be anything we want to be & the issue with this = we try to develop ourselves in every way possible 
      • We are spreading ourselves too thin
  • The other side of this tragedy = when we fail to realize that some doors are closing and require our immediate attention
    • We might work hours at our jobs while our relationships slip away
  • Keeping all our doors open wears out our emotions and our wallets 
  • We need to consciously start closing doors- they draw energy and commitment from doors that should be left open 

Chapter 9: The effect of expectations

Why the mind gets what it expects 

  • Imagine you are watching a soccer game with a friend- you are an avid Man United fan while he supports Arsenal 
    • The game is heated and a tackle takes place- the ref calls a yellow card, you are outraged and insist the card was given unfairly- the ref must be blind, dumb or both
    • Your friend however sees this differently- he thinks the call was fair
  • Is there something fundamentally irrational in us that encourages conflict that forces us to look at the same event and depending on our view see it so differently?

Does our expectation influence our opinions?

  • An experiment on students at  MIT set out to test if expectations for a certain type of beer shapes their perception of its taste
  • The first beer was a plain Budweiser while the second was a Budweiser with 2 drops of balsamic vinegar
    • In a blind taste test a student was given the 2 beers to try and then asked to point out his favourite- he chose the Budweiser with vinegar
    • The next student approached but this time they were informed of the differences between the two beers- she chose the beer without vinegar
  • This experiment was conducted on hundreds of students and the result was typical:
    • Without previous knowledge of the vinegar most students chose the vinegary brew but when they knew about the vinegar in advance their response was completely different 
  • The moral= If you tell people upfront that something might be distasteful the odds are good that they will end up agreeing with you 
    • Not because their experience tells them so but because of their expectations
  • Can previous knowledge actually modify the neural activity underlying the taste itself so that when we expect something to taste good it actually tastes that way?
    • YES- it does in fact matter whether knowledge comes before or after an event 

Descriptions and expectations 

  • Expectations can influence nearly every aspect of our lives
  • Say you are getting married and have 2 options of caterers:
    • Caterer 1 is offering a delicious Asian style ginger chicken 
    • Caterer 2 is offering succulent, organic fillet of chicken, roasted to perfection and drizzled with a merlot, resting on a bed of herbed Israeli couscous
  • There is no way of knowing which caterers’ food will taste better BUT the sheer depth of the description leads us to believe the second option will be better 
  • Adding small details that sound exotic and fashionable can change expectations and effectively influence our experiences 
  • Expectations = also essential for the reputation of a brand or product
    • That’s what marketing is all about- providing info that will heighten someone’s anticipated and real pleasure 

Expectations and stereotypes 

  • Expectations also shape Stereotypes
  • Stereotypes= way of categorizing info in hope of predicting experiences and provide shortcuts in our never-ending attempt to make sense of our surroundings:
    • This is why we have the expectation that Harvard students will be clever or that an old person will need help with a computer
  • BUT because Stereotypes provide us with specific expectations about members of a group it can also unfavorably influence both our perceptions and behaviour 
  • Research on Stereotypes has shown that we not only react differently when we have a Stereotype of a group of people, but also that the stereotypes people themselves react differently when they are aware of the label they are forced to wear 
    • They are ‘primed’ with this label 
  • Our own behaviour can be influenced by the reinforcement of certain Stereotypes (Women are weaker than men) 
  • The activation of Stereotypes can depend on our current state of mind and how we view ourselves at the moment
    • Someone saying “All Jews are rich and successful” can be taken as offensive or as a compliment 

Chapter 10: The Power of Price 

Why a R2 Panado can do what a 50c Panado Can’t 

  • Expectations change the way we perceive and appreciate experiences
    • They can also effect us by altering our subjective and objective experiences 

Placebos

  • Placebo- comes from latin word for “I shall please”
    • Does pricy medicine really make us feel better than expensive medicine?
  • When researchers tested the effects of 6 leading anti-depressants they noted that 75% of the effects were duplicated in placebo controls
  • The truth= placebos run on the power of suggestion- they are effective because people believe in them 
  • 2 mechanisms shape the expectations that make placebos work:
    • Belief: our confidence in the drug, procedure of professional
      • A doctors enthusiasm for a particular pill or treatment may predispose us toward a positive outcome
    • Conditioning: The body builds up expectancy after repeated experiences and releases various chemicals to prepare us for the future
      • If you order pizza night after night then when the delivery man buzzes you will start to salivate 
      • Familiarity may or may not build contempt but it definitely breeds expectations 

Does Price make a difference?

  • Can the price of a drug (or anything else) effect our response to it?
  • On the basis of price alone it is easy to imagine that a 40k couch will be more comfortable than a 2k couch 
    • But can such implied difference in quality influence the actual experience?
    • Can we assume that higher price = higher quality?
    • Do our expectations translate into objective efficacy of the product?

The Power of Price: An Experiment

  • Imagine you are one of 100 people taking part in an experiment to test the efficacy of a new painkiller: Veladrone X 
  • You arrive at the testing room and are greeted warmly and handed a brochure on the drug 
  • You read the brochure which states:
    • Veladrone is an exciting medication in the opioid family
    • Clinical studies show that 92% of patients receiving Veladrone in double blind controlled studies reported significant pain relief within only 10 minutes & that pain relief lasted up to 8 hours
    • It costs R30 for a single dose
  • You are then hooked up to a complicated looking machine, greased with electrode gel and attached to an electric shock generator to test your perception and tolerance of pain 
  • Shocks keep coming getting worse and worse every time and you are asked to record the severity of the pain
  • Next you are given a Veledrone X pill and told it will kick in within the next 15 minutes
  • After 15 mins you are hooked back up to the same machine but this time the pain is much less 
    • It must be the Veadrone X!
  • This was the result of the majority of participants in the study
  • Very interesting considering Veladrone X was just Vitamin C 
  • In the next experiment the brochure changed to say that the cost of a single dose was 10c
    • Indeed the experienced pain relief was only half that of before 

Chapter 11: The context of our character 

Why we are dishonest and what we can do about it 

  • Why are some crimes (particularly white collar) judged less severly than others? Especially when the purpetrators can inflict more financial damage than a standard burglar in a lifetime.

2 types of dishonesty

  • ONE: A pair of crooks circling the gas station considering how much money is in the till, who might be around the stop them and what might happen to them if caught
    • On the basis of this cost-benefit calculation they decide whether to rob the place or not 
  • TWO: Dishonesty committed by people who generally consider themselves to be honest
    • Those who ‘borrow’ a pen at a conference or write off a meal as a business expense 
  • We know this 2ndtype of dishonesty exists but how prevalent is it?
  • If we put a group of these ‘honest’ people into a controlled experiment and tempted them to cheat would they compromise their integrity? And by how much?

Honest students: A Harvard Business School experiment 

  • Harvard Business School holds a place of distinction in American life
  • A group of students were asked to take a test consisting of 50 multi choice questions in a time of 15 minutes
  • At the end they were asked to transfer their answers onto a scoring sheet and submit this to a proctor at the front of the room
    • For each right answer they would get 10c
  • In another setup a group was asked to do the same test BUT this time the scoring sheet would have the correct answers pre marked 
  • Therefore when they transferred their answers they could decide to lie and mark the correct answer on the sheet
    • They were then paid the 10c per right answer
  • A 3rdgroup was tempted even more- they were in similar conditions to group 2 BUT this time they would be allowed to tear up their original worksheet and only hand in the scoring sheet (thus destroying any evidence of possible cheating)
  • Group 4 took it to the extreme and students were instructed to destroy both sheets and merely walk to the front of the room and withdraw their said earnings before leaving 
  • The test results were as follows:
    • Group 1: 32.6
    • Group 2: 36.2
    • Group 3: 35.9
    • Group 4: 36.1
  • Conclusions: when given the opportunity many honest people to cheat 
    • Instead of finding just a few bad apples we found that the majority of people cheated and they cheated just a little bit 
    • Once tempted to cheat people didn’t seem to be as influenced by the risk of being caught as one might think
    • When given the chance to cheat without being able to shred their papers they increased correct answers by 3.6 
    • BUT when given the opportunity to shred their papers hiding their crime completely they didn’t push their dishonesty much further
    • This means that even when we have no chance of getting caught we still don’t become wildly dishonest 
      • Something holds us back- but what is it?

What is honesty anyhow?

  • “Man is endowed with an original desire to please and an original aversion to offend”- Adam Smith
  • The success of most people almost always depends on the favour and good opinion of their neighbors and equals 
    • The proverb ‘honesty is the best policy’ holds true in such situations 
  • Another perspective says that people engage in a cost-benefit analysis with regard to honesty/dishonesty
    • Therefore, individuals are only honest to the extent that suits them and their desire to please others 
  • Freud said that as we grow up in society we internalize its social virtues
    • This leads to the development of the superego
    • Super ego= pleased when we comply with societies ethics and unhappy when we don’t 
      • That’s why we stop our car at a red light at 4am even though no one is around or why we get a good feeling returning a lost item to its owner
      • Such acts stimulate the reward centres in our brain and make us content 

If honesty is so important to us, why are we so frequently dishonest?

  • We care about, and want to be honest but our honesty monitor is only active when we contemplate big transgressions
    • Grabbing a whole box of pens from work vs taking just one or two where we don’t even consider how these actions reflect on our honesty and superego stays asleep

A cure for dishonesty

  • Imposing external controls to enforce honesty often causes people or companies to simply jump through hoops- could there be a better ‘cure’?

Honesty experiment 2: Fresh Recollection

  • 3 groups of participants were brought together at UCLA and asked to do a simple math test 
  • they were all given the same test but 2 groups were given the opportunity to cheat when handing in their papers
    • one group was asked to recall the 10 commandments before taking the test 
      • would this have an impact on their integrity?
      • YES: While the other groups cheated a little bit the 10 commandments group did not cheat at all
      • The exercise evoked a reminder / sense of honesty
  • When we are reminded of morality at the moment we are about to cheat we are more likely to stop and be honest

Chapter 12: The context of our character Part II

Why dealing with cash makes us more honest 

  • When we look at the world around us most of the dishonesty we see is one step removed from cash
    • Companies cheat with their accounting processes
    • Executives cheat by using back dated stock options 
  • In an experiment at MIT Ariely visited the dorms and the communal areas and left 6  packs of cokes in some of the fridges
  • In other fridges he left plates containing 6 $1 bills
    • Within 72 hours all of the cokes were gone but the cash was untouched
  • Most people can justify taking a coke- after all we have all had a coke taken from us right?
  • What permits us to cheat when cheating involves non-monetary objects and what restrains us when dealing with cash?

Experiment: The nature of dishonesty and symbolic currency

  • 3 groups of MIT students were asked to solve 20 simple math problems to receive 50c for each correct answer
  • each experiment began similarly but ended in a different way
    • Group 1: After completion took their sheets to the moderator who tallied results and gave them the money
    • Group 2: were told to tear up their sheets and tell the moderator how many questions they answered correctly 
    • Group 3: were told to tear up their sheets and the moderator would give them a token for each correct answer- then they would have to walk to the front of the room to another moderator who would exchange each token for 50c
  • Would the insertion of a token into the equation effect the students honesty?
  • The results:
    • Group 1: no cheating- 3.5 correct 
    • Group 2: 6.2 correct
    • Group 3: 9.4 correct
  • This means that when given a chance to cheat under ordinary circumstances the students cheated on an average of 2.7 questions BUT when given a chance to cheat with non-monetary currency the cheating more than doubled
  • As humans we fail to see how quickly we can rationalize our dishonesty when it is one step removed from cash
    • Think about insurance fraud and how quick we are to report the loss of a 32inch TV when we really had a 27inch
    • The people that would do this would not likely steal cash from someone’s pocket 
    • The same is true for business claims and expenses
  • Dealing with non-monetary currencies leads us to bypass our conscious and explore the benefits of dishonesty