Notes of Predictably Irrational

My notes of duke online course dan ariely - predictably irrational

Irrationality

  • Our decisions are influenced by environment, defaults and complexity.
  • Defaults are neither good nor bad, and it’s everywhere, we should think on when they work for us and when they not.
  • The path of least resistance is likely when deviating from the default is complex.
  • It’s hard for us to make evaluation
  • Decisions are influenced by choice set
  • Initial decision will influenced future decisions, self herding, so doubt your intuitions

The psychology of money

Opportunity cost

We place higher value on specific items than the money value of those items. This is because people tend to take shortcuts when problems are complex. (Do not consider real opportunity cost)

Example:

$1000 Pioneer stereo VS $700 Sony stereo VS $1000 Sony stereo with $300 CD coupon

Solution:

We should think money in terms of opportunity cost: what you give up for choosing one thing over another

Relativity

We think money in relative other than absolute.

Example:

  1. Save $8 on a $16 pen VS save $8 on a $1008 projector
  2. Add $2000 for a leather seat for $39,000 car VS Add $2000 for a leather seat for $500 office seat
  3. Add feature when renovate house VS select tomato in market
  4. Earn 90K as lowest VS earn 80k as highest in different company

Solution:

Control range of comparison, think of absolute value.

Pain of paying

There is a moral tax to consumption. Timing and method of payment affect enjoyment.

Example:

  1. Pay with credit card over cash
  2. Prepaid vacation
  3. Gift remove the pain of payment
  4. Chips in casino
  5. AOL’s switch to unlimited plan quadrupled user’s usage.

Application:

Mortgage, User prediction, gift

Mental accounting

When money is for a specific category, we value it differently: more easily be spent.

Example:

  1. Lost a ticket over same amount of money
  2. Saving interest rate and loan interest rate

Solution:

Partition our spending in advance and keep optimize it.

Fairness and Reciprocity

Judgement of fair price depends on perceived cost. We use this measurement because determine the real value is hard for us and we use shortcuts (based on effort).

Example:

  1. Giving a tip to lock locksmith who broke your lock after 2 hours over the one unlock it within 2 minutes without broking it.
  2. Pay for ATM over a banker.
  3. A beer from hotel or grocery store.

Solution:

Express your effort.

Loss aversion and endowment effect

Gains make us happy but losses make us really miserable. And once you own something, you start to value more on what you will give up and less on what you will gain by exchanging it.

Example:

  1. Prepaid commission for sales
  2. students who have a mug not want to exchange it for a candy from students who have candy, same for the opposite

Application:

  1. 401k matching from company
  2. 30 days money back guarantee

Market and and social norms

Gifts build up social capital, while money reduce it

Example:

  1. Volunteer job vs paid job
  2. Benefits of company
  3. Late fine for parents if the pick up their kid too late. Small fine actually make parents more likely to be late.
  4. Complete contract reduce social norm, and make people hard to agree on the sprit of contact.

Solution:

Think of where you are at the range of social norm to market norm and if it is suitable.

Micro payments

  1. Keep price same make us easier to buy
  2. Consolidate multiple purchases reduce pain of paying
  3. Pre-paid option reduce micro-payment and reduce pain of paying
  4. Free version increate the barrier of purchase, largely

Example:

  1. iTunes price are all $0.99
  2. the mircopricing experiment

Dishonesty

The model of rational crime

  1. Lots of people cheat a little bit.
  2. People will weight rewards of cheating, possibility of being caught and punishment (Becker model: cost benefits analyses).
  3. However, dishonesty does not solely rely on cost benefits analyses.
  4. So we should consider fudge factor: People will consider themselves moral if they cheat only a little bit.

Shrinking and expanding the fudge factor

Cheating is all about how we rationalize it. Some example of manipulate it:
Shrink

  1. Being reminded of morality (however, remind afterward will not work).

Expand

  1. Increase distant from money.
  2. Social acceptance (seeing others from same social group cheat).
  3. Creativity (Create story to defend yourself)

Solution:

Control small crimes, lots of small crimes may make a big difference.

Conflicts of interest

Conflicts of interest operate within the fudge factor: People tend to rationalize towards benefits/rewards.

Example:

  1. Data manipulate in science research.
  2. People like the art from gallery who give cash reward.

Solution:

Try to eliminate the result of interest conflict

Cheating Over time and across culture

  1. People start to cheat a little and at some point, they start to cheat a lot.
  2. Confession provide a way to reset, which cut down the way to cheat more.
  3. People shared the same basic fudge factor across cultures.
  4. However, culture can shrink/expand fudge factor on a specific domain.

Application:

Reconciliation act for South Africa

Guest speak

  1. Medical decisions: People tend to make different decision for their own than for others. (Peter Ubel)
  2. Moral pendulum: People tend to make up after doing bad / indulge after doing good. (Nina Mazar)

Labor and Motivation

We are motivated to do things that we find meaningful.

Sisyphus condition (Meaning)

Doing same job repeatedly without meaning will be demotivate. And in this case, their internal love for this procedure will not reduce their demotivation.

Acknowledgement

  1. It is relatively easy to make people feel good about their work. (Just a simple acknowledgement)
  2. In contrast, simply ignoring people can be as demotivating as destroying their work.

Solution

Inject more meaning to various situation.

IKEA effect (Labor)

  1. Labor lead to love.
  2. Builder mistakenly think everyone will love it.
  3. Labor lead to love only when builder finish the task and create something. (Too much effort will have negative effect)

Example

  1. Your own child.
  2. Self-designed T-shirt/shoes.
  3. Girls chased by boys

Application

Customization is more about preference, but the effort people put in.

Not-invented-here bias

IKEA effect on idea: people love their solution than others.

Solution

We should love what we do but now too much.

Cognitive Dissonance

We behave one way but don’t believe in the same way. So we shift our belief afterwards.

Example

  1. Boring task with high pay is boring while low pay is more interesting (people shift because they don’t want to admit they are doing boring job for low payment)

  2. Zappos hiring process (People convince they love the company because they give up $2000 by deciding join the company)

Monetary Stress and Performance

  1. Bonus’s effect follows Yerkes-Dodson Curve except it is only for pure mechanical task.

  2. Keep getting bonus will lead to future loss aversion and continue to decrease performance.

Solution

A state of “flow” drive the best performance (immersed in task).

Inspiration

Is current high-tech company’s bonus system working?

Social Stress and Performance

Higher motivation does not necessarily result in better performance: Anxiety caused by public pressure impedes performance.

Example

NBA player have lower free throw rate in the last 5 minutes.

Bonus, Labor and Motivation (Summary)

Bonus:
Small amount of money can move relationship from social to financial domain. Large amount can increase motivation but decrease performance. And we do not operate by simple rules of rewards but multiple combination.

Motivation:
Current world have more potential to find the meaning of our work. So A production line environment may not be as efficient as before. And people are less easy to be supervised.

Solution

  1. Think of motivation not only by money: A thoughtful gift can mean much more than money bonus.
  2. Make work has meaning and trust employee to do the right thing. So that people will connect to the output.

Guest speak (Lailn Anik)

  1. At different stage of life, motivation change.
  2. When facing different type task, bonus and pressure work differently.

Self-control

Difficulty with self-control

Present focus bias: Give more weight to the current state and environment.

Example:

  1. Global warming and how to incentive people to help environment.
  2. Toyota Prius: Social rewards of hybrid driving.

Solution

  1. Reward Substitution: Using an alternate reward that is intermediate and more motivating.
  2. Ulysses (Self-control) Contracts: Enforce self-control by removing the tempting.
  3. Distracted yourself from temptations.
  4. Eliminate decision point. (Religious people do not think of smoking on Sabbath)

Maximize Reward

  1. Lotteries
  2. Randomization
  3. Counterfactuals
  4. Regret
  5. Reward Substitution

Freedom

Freedom reduce power of Ulysses Contracts. We must find a balance between the amount of freedom we crave and the control we need to shield us from tempting.

Emotion

  1. Basic part of human.
  2. Can overcome cognition.
  3. Can work both for or against us.

Two systems

The limbic systems: Similar across all animals.
The cognitive system: Mark us as human.

Example

  1. Emotion are transient and more short-live than we expect.
  2. Emotion can over take cognition. Example: People being sexual aroused

solution

Understand how emotion can change us.

Intro-empathy problem

We making decision under a specific emotional state, we have Intro-empathy gap: Thinking we will have the same emotional state in the future

Example

  1. Movie choice diffs at different emotion.
  2. The thirsty you are, the more likely you will donate to charity.

The Identifiable Victim Effect

A single victim inspire action while generation information about massive victims does not (statistic information inspire cognitive thinking)

Cause

The discrepancy between cognitive and emotional thinking.

Example

  1. The mismatch between actual need and money donated to each event/disease.
  2. The trolley problem.
  3. Donation for people in another side of the world.

Solution

Portray right information (Break big problem into small pieces) to people if you want to convey them.

Emotional Decision Making

For products that are consumed emotionally, lack of cognitive input can lead to increased enjoyment.

Example

Buying jams without knowing any cognitive information (price, brand etc).

Solution

The decision environment should match up with the consumption environment.

Example

Buying ugly speaker with better sound VS good-looking speaker with worse sound.

Risk Assessment

We value risk higher when:

  1. Recently being reminded (salient in memory).
  2. We have no control.
  3. We have emotional response.

Example

  1. Kill by shark (reminded by lots of movies) VS by airplane wreckage drop from sky
  2. Terrorist (lack of control) VS Car accident

Mindnode

Converting Markdown to a mind map

Book Notes of Predictably Irrational

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