Book - Predictably irrational

Author: Dan Ariely

Introduction

This book is about THE JOURNEY INTO the many ways in which we are all irrational. The discipline that allows me to play with this subject matter is called behavioral economics, or judgment and decision making (JDM).

In economics, this very basic idea, called rationality, provides the foundation for economic theories, predictions, and recommendations.

From this perspective, and to the extent that we all believe in human rationality, we are all economists.

I don’t mean that each of us can intuitively develop complex game-theoretical models or understand the generalized axiom of revealed preference (GARP); rather, I mean that we hold the basic beliefs about human nature on which economics is built.

In this book, when I mention the rational economic model, I refer to the basic assumption that most economists and many of us hold about human nature-the simple and compelling idea that we are capable of making the right decisions for ourselves.

Although a feeling of awe at the capability of humans is clearly justified, there is a large difference between a deep sense of admiration and the assumption that our reasoning abilities are perfect.

In fact, this book is about human irrationality - about our distance from perfection.

I believe that recognizing where we depart from the ideal is an important part of the quest to truly understand ourselves, and one that promises many practical benefits. Understanding irrationality is important for our everyday actions and decisions, and for understanding how we design our environment and the choices it presents to us.

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 for improving our decision making and changing the way we live for the better.

This leads me to the real “rub” between conventional economics and behavioral economics.

In conventional economics, the assumption that we are all rational implies that, in everyday life, we compute the value of all the options we face and then follow the best possible path of action. What if we make a mistake and do something irrational? Here, too, traditional economics has an answer: “market forces” will sweep down on us and swiftly set us back on the path of righteousness and rationality. On the basis of these assumptions, in fact, generations of economists since Adam Smith have been able to develop far-reaching conclusions about everything from taxation and health-care policies to the pricing of goods and services.

But, we are really far less rational than standard economic theory assumes. Moreover, these irrational behaviors of ours are neither random nor senseless. They are systematic, and since we repeat them again and again, predictable.

So, wouldn’t it make sense to modify standard economics, to move it away from naive psychology (which often fails the tests of reason, introspection, and-most important-empirical scrutiny)? This is exactly what the emerging field of behavioral economics, and this book as a small part of that enterprise, is trying to accomplish.

CHAPTER 1 The Truth about Relativity - Why Everything Is Relative - Even When It Shouldn’t Be

There is something important about human behavior: humans rarely choose things in absolute terms. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly.

(For instance, we don’t know how much a six-cylinder car is worth, but we can assume it’s more expensive than the four-cylinder model.)

Let me start with a fundamental observation:

most people don’t know what they want unless they see it in context. We don’t know what kind of racing bike we want-until we see a champ in the Tour de France ratcheting the gears on a particular model. We don’t know what kind of speaker system we like-until we hear a set of speakers that sounds better than the previous one. We don’t even know what we want to do with our lives-until we find a relative or a friend who is doing just what we think we should be doing. Everything is relative.

And that’s the point. Like an airplane pilot landing in the dark, we want runway lights on either side of us, guiding us to the place where we can touch down our wheels.

High-priced entrees on the menu boost revenue for the restaurant-even if no one buys them. Why? Because even though people generally won’t buy the most expensive dish on the menu, they will order the second most expensive dish. Thus, by creating an expensive dish, a restaurateur can lure customers into ordering the second most expensive choice (which can be cleverly engineered to deliver a higher profit margin).

This might be a mere curiosity, but for the fact that it mirrors the way the mind is wired:

we are always looking at the things around us in relation to others. We can’t help it. This holds true not only for physical things-toasters, bicycles, puppies, restaurant entrees, and spouses-but for experiences such as vacations and educational options, and for ephemeral things as well: emotions, attitudes, and points of view.

We always compare jobs with jobs, vacations with vacations, lovers with lovers, and wines with wines.

RELATIVITY IS (RELATIVELY) easy to understand. But there’s one aspect of relativity that consistently trips us up. It’s this:

we not only tend to compare things with one another but also tend to focus on comparing things that are easily comparable-and avoid comparing things that cannot be compared easily.

That may be a confusing thought, so let me give you an example.

Suppose you’re shopping for a house in a new town. Your real estate agent guides you to three houses, all of which interest you. One of them is a contemporary, and two are colonials. All three cost about the same; they are all equally desirable; and the only difference is that one of the colonials (the “decoy”) needs a new roof and the owner has knocked a few thousand dollars off the price to cover the additional expense.

So which one will you choose?

The chances are good that you will not choose the contemporary and you will not choose the colonial that needs the new roof, but you will choose the other colonial. Why? Here’s the rationale (which is actually quite irrational). We like to make decisions based on comparisons. In the case of the three houses, we don’t know much about the contemporary (we don’t have another house to compare it with), so that house goes on the sidelines. But we do know that one of the colonials is better than the other one. That is, the colonial with the good roof is better than the one with the bad roof. Therefore, we will reason that it is better overall and go for the colonial with the good roof, spurning the contemporary and the colonial that needs a new roof.

RELATIVITY HELPS US make decisions in life. But it can also make us downright miserable. Why? Because jealousy and envy spring from comparing our lot in life with that of others.

It has been shown repeatedly that the link between amount of salary and happiness is not as strong as one would expect it to be (in fact, it is rather weak). Studies even find that countries with the “happiest” people are not among those with the highest personal income. Yet we keep pushing toward a higher salary. Much of that can be blamed on sheer envy.

As H. L. Mencken, the twentieth-century journalist, satirist, social critic, cynic, and freethinker noted,

a man’s satisfaction with his salary depends on (are you ready for this?) whether he makes more than his wife’s sister’s husband.

CAN WE DO anything about this problem of relativity?

The good news is that we can sometimes control the “circles” around us, moving toward smaller circles that boost our relative happiness.

If we are at our class reunion, and there’s a “big circle” in the middle of the room with a drink in his hand, boasting of his big salary, we can consciously take several steps away and talk with someone else. If we are thinking of buying a new house, we can be selective about the open houses we go to, skipping the houses that are above our means. If we are thinking about buying a new car, we can focus on the models that we can afford, and so on.

We can also change our focus from narrow to broad.

We find it easy to spend $3,000 to upgrade to leather seats when we buy a new $25,000 car, but difficult to spend the same amount on a new leather sofa (even though we know we will spend more time at home on the sofa than in the car). Yet if we just thought about this in a broader perspective, we could better assess what we could do with the $3,000 that we are considering spending on upgrading the car seats. Would we perhaps be better off spending it on books, clothes, or a vacation?

Thinking broadly like this is not easy, because making relative judgments is the natural way we think.

That’s a lesson we can all learn:

The more we have, the more we want. And the only cure is to break the cycle of relativity.

Understand that relativity is everywhere, and that we view everything through its lens - rose-colored or otherwise.

When you meet someone in a different country or city and it seems that you have a magical connection, realize that the enchantment might be limited to the surrounding circumstances (You are under the effect of relativity in those circumstances). This realization might prevent you from subsequent disenchantment. 

CHAPTER 2 - The Fallacy of Supply and Demand - Why the Price of Pearls - and Everything Else - Is Up in the Air



A great law of human action is that in order to make a man covet a thing, it is only necessary to make the thing difficult to attain.

A few decades ago, the naturalist Konrad Lorenz discovered that goslings, upon breaking out of their eggs, become attached to the first moving object they encounter (which is generally their mother). Lorenz knew this because, in one experiment, he became the first thing they saw, and they followed him loyally from then on through adolescence. With that, Lorenz demonstrated that goslings

not only make initial decisions based on what’s available in their environment, but that they stick with a decision once it has been made. Lorenz called this natural phenomenon imprinting.

Is the human brain wired like that of a gosling?

Do our first impressions and decisions become imprinted?

And if so, how does this imprinting play out in our lives? When we encounter a new product, for instance, do we accept the first price that comes before our eyes? And more importantly, does that price (which in academic lingo, we call an anchor) have a long-term effect on our willingness to pay for the product from then on?

It seems that what’s good for the goose is good for humans as well. And this includes anchoring.

Once we buy a new product at a particular price, we become anchored to that price.

Once the participants were willing to pay a certain price for one product, their willingness to pay for other items in the same product category was judged relative to that first price (the anchor).

We have to recognize the existence of what we called arbitrary coherence.

The basic idea of arbitrary coherence is this: although initial prices (such as the price of Assael’s pearls) are “arbitrary,” once those prices are established in our minds they will shape not only present prices but also future prices (this makes them “coherent”).

Initial prices are largely “arbitrary” and can be influenced by responses to random questions; but once those prices are established in our minds, they shape not only what we are willing to pay for an item, but also how much we are willing to pay for related products (this makes them coherent).

In life we are bombarded by prices.

We see the manufacturer’s suggested retail price (MSRP) for cars, lawn mowers, and coffeemakers. We get the real estate agent’s spiel on local housing prices.

But price tags by themselves are not necessarily anchors. They become anchors when we contemplate buying a product or service at that particular price. That’s when the imprint is set. From then on, we are willing to accept a range of prices - but as with the pull of a bungee cord, we always refer back to the original anchor. Thus the first anchor influences not only the immediate buying decision but many others that follow.

We might see a 57-inch LCD high-definition television on sale for $3,000, for instance. The price tag is not the anchor. But if we decide to buy it (or seriously contemplate buying it) at that price, then the decision becomes our anchor henceforth in terms of LCD television sets.

That’s our peg in the ground, and from then on - whether we shop for another set or merely have a conversation at a backyard cookout - all other high- definition televisions are judged relative to that price.

Anchoring influences all kinds of purchases. Researchers found that people who move to a new city generally remain anchored to the prices they paid for housing in their former city. In their study, they found that people who move from inexpensive markets (say, Lubbock, Texas) to moderately priced cities (say, Pittsburgh) don’t increase their spending to fit the new market. Rather, these people spend an amount similar to what they were used to in the previous market, even if this means having to squeeze themselves and their families into smaller or less comfortable homes. Likewise, transplants from more expensive cities sink the same dollars into their new housing situation as they did in the past. People who move from Los Angeles to Pittsburgh, in other words, don’t generally downsize their spending much once they hit Pennsylvania: they spend an amount similar to what they used to spend in Los Angeles.

It seems that we get used to the particularities of our housing markets and don’t readily change. The only way out of this box, in fact, is to rent a home in the new location for a year or so. That way, we adjust to the new environment - and, after a while, we are able to make a purchase that aligns with the local market.

Our first decisions resonate over a long sequence of decisions.

First impressions are important, whether they involve remembering that our first DVD player cost much more than such players cost today (and realizing that, in comparison, the current prices are a steal) or remembering that gas was once a dollar a gallon, which makes every trip to the gas station a painful experience.

In all these cases, the random, and not so random, anchors that we encountered along the way and were swayed by remain with us long after the initial decision itself.

NOW THAT WE know we behave like goslings,

it is important to understand the process by which our first decisions translate into long-term habits.

To illustrate this process, consider this example.

You’re walking past a restaurant, and you see two people standing in line, waiting to get in. “This must be a good restaurant,” you think to yourself. “People are standing in line.” So you stand behind these people. Another person walks by. He sees three people standing in line and thinks, “This must be a fantastic restaurant,” and joins the line. Others join. We call this type of behavior herding. It happens when we assume that something is good (or bad) on the basis of other people’s previous behavior, and our own actions follow suit.

But there’s also another kind of herding, one that we call self-herding. This happens when we believe something is good (or bad) on the basis of our own previous behavior. Essentially, once we become the first person in line at the restaurant, we begin to line up behind ourself in subsequent experiences.

You can take an ambiguous experience and arbitrarily make it into a pleasurable or painful experience.

Of course, Mark Twain came to the same conclusions: “If Tom had been a great and wise philosopher, like the writer of this book, he would now have comprehended that work consists of whatever a body is obliged to do, and that play consists of whatever a body is not obliged to do.” Mark Twain further observed: “There are wealthy gentlemen in England who drive four-horse passenger-coaches twenty or thirty miles on a daily line in the summer because the privilege costs them considerable money; but if they were offered wages for the service, that would turn it into work, and then they would resign.”

What are the main lessons from these experiments about our lives in general? Could it be that the lives we have so carefully crafted are largely just a product of arbitrary coherence? Could it be that we made arbitrary decisions at some point in the past (like the goslings that adopted Lorenz as their parent) and have built our lives on them ever since, assuming that the original decisions were wise? Is that how we chose our careers, our spouses, the clothes we wear, and the way we style our hair? Were they smart decisions in the first place? Or were they partially random first imprints that have run wild?

Descartes said, Cogito ergo sum - “I think, therefore I am.” But suppose we are nothing more than the sum of our first, naive, random behaviors. What then? These questions may be tough nuts to crack, but in terms of our personal lives, we can actively improve on our irrational behaviors. We can start by becoming aware of our vulnerabilities. Suppose you’re planning to buy a cutting-edge cell phone, or even a daily $4 cup of gourmet coffee. You might begin by questioning that habit. How did it begin? Second, ask yourself what amount of pleasure you will be getting out of it. Is the pleasure as much as you thought you would get? Could you cut back a little and better spend the remaining money on something else? In fact, with everything you do, you should train yourself to question your repeated behaviors. In the case of the cell phone, could you take a step back from the cutting edge, reduce your outlay, and use some of the money for something else? And as for the coffee - rather than asking which blend of coffee you will have today, ask yourself whether you should even be having that habitual cup of expensive coffee at all.*



We should also pay particular attention to the first decision we make in what is going to be a long stream of decisions (about clothing, food, etc.). When we face such a decision, it might seem to us that this is just one decision, without large consequences; but in fact, the power of the first decision can have such a long-lasting effect that it will percolate into our future decisions for years to come. Given this effect, the first decision is crucial, and we should give it an appropriate amount of attention.



Socrates said that the unexamined life is not worth living. Perhaps it’s time to inventory the imprints and anchors in our own life. Even if they once were completely reasonable, are they still reasonable? Once the old choices are reconsidered, we can open ourselves to new decisions - and the new opportunities of a new day. That seems to make sense.



ALL THIS TALK about anchors and goslings has larger implications than consumer preferences. Traditional economics assumes that prices of products in the market are determined by a balance between two forces: production at each price (supply) and the desires of those with purchasing power at each price (demand). The price at which these two forces meet determines the prices in the marketplace.

This is an elegant idea, but it depends centrally on the assumption that the two forces are independent and that together they produce the market price. The results of all the experiments presented in this chapter (and the basic idea of arbitrary coherence itself) challenge these assumptions. First, according to the standard economic framework, consumers’ willingness to pay is one of the two inputs that determine market prices (this is the demand). But as our experiments demonstrate, what consumers are willing to pay can easily be manipulated, and this means that consumers don’t in fact have a good handle on their own preferences and the prices they are willing to pay for different goods and experiences.

Second, whereas the standard economic framework assumes that the forces of supply and demand are independent, the type of anchoring manipulations we have 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 are supply-side variables. It seems then that instead of consumers’ willingness to pay influencing market prices, the causality is somewhat reversed and it is market prices themselves that influence consumers’ willingness to pay. What this means is that demand is not, in fact, a completely separate force from supply.

In other words, the sensitivity we show to price changes might in fact be largely a result of our memory for the prices we have paid in the past and our desire for coherence with our past decisions - not at all a reflection of our true preferences or our level of demand.



ANOTHER IMPLICATION OF arbitrary coherence has to do with the claimed benefits of the free market and free trade. The basic idea of the free market is that if I have something that you value more than I do - let’s say a sofa - trading this item will benefit both of us. This means that the mutual benefit of trading rests on the assumption that all the players in the market know the value of what they have and the value of the things they are considering getting from the trade.

But if our choices are often affected by random initial anchors, the choices and trades we make are not necessarily going to be an accurate reflection of the real pleasure or utility we derive from those products. In other words, in many cases we make decisions in the marketplace that may not reflect how much pleasure we can get from different items. Now, if we can’t accurately compute these pleasure values, but frequently follow arbitrary anchors instead, then it is not clear that the opportunity to trade is necessarily going to make us better off.

#+begin_quote SO, WHERE DOES this leave us? If we can’t rely on the market forces of supply and demand to set optimal market prices, and we can’t count on free-market mechanisms to help us maximize our utility, then we may need to look elsewhere. This is especially the case with society’s essentials, such as health care, medicine, water, electricity, education, and other critical resources. If you accept the premise that market forces and free markets will not always regulate the market for the best, then you may find yourself among those who believe that the government (we hope a reasonable and thoughtful government) must play a larger role in regulating some market activities, even if this limits free enterprise. Yes, a free market based on supply, demand, and no friction would be the ideal if we were truly rational. Yet when we are not rational but irrational, policies should take this important factor into account. #+end_quote

Reflections on the Existence of Well-Defined Preferences

One of the lessons from Chapter 2 was that

we generally believe we have precise and well-articulated preferences, but in reality, we only think that we know what we want.

Sometimes we want our decisions to have a rational veneer when, in fact, they stem from a gut feeling - what we crave deep down. I suspect that in our attempts to make sure that we end up with decisions that seem well-reasoned and thoughtful, we commonly undergo a lot of unnecessary mental gymnastics and justifications, particularly when the choices are large and significant.

In the end, following our gut feelings and rationalizing them after the fact is not always bad. It can sometimes lead us to pick a satisfactory outcome or, at the very least, prevent us from ending up with a car we really don’t want.

CHAPTER 3 - The Cost of Zero Cost - Why We Often Pay Too Much When We Pay Nothing

ZERO HAS HAD a long history. The Babylonians invented the concept of zero; the ancient Greeks debated it in lofty terms (how could something be nothing?); the ancient Indian scholar Pingala paired zero with the numeral 1 to get double digits; and both the Mayans and the Romans made zero part of their numeral systems. But zero really found its place about AD 498, when the Indian astronomer Aryabhata sat up in bed one morning and exclaimed, “Sthanam sthanam dasa gunam”- which translates, roughly, as “Place to place in 10 times in value.” With that, the idea of decimal-based place-value notation was born.

WHAT IS IT about FREE! that’s so enticing? Why do we have an irrational urge to jump for a FREE! item, even when it’s not what we really want?

I believe the answer is this. 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 immensely more valuable than it really is. Why? It’s because humans are intrinsically afraid of loss. The real allure of FREE! is tied to this fear. There’s no visible possibility of loss when we choose a FREE! item (it’s free). But suppose we choose the item that’s not free. Uh-oh, now there’s a risk of having made a poor decision - the possibility of a loss. And so, given the choice, we go for what is free.

For this reason, in the land of pricing, zero is not just another price. Sure, 10 cents can make a huge difference in demand (suppose you were selling millions of barrels of oil), but nothing beats the emotional surge of FREE! This, the zero price effect, is in a category all its own.

To be sure, “buying something for nothing” is a bit of an oxymoron. But we often fall into the trap of buying something we may not want, simply because of that sticky substance, FREE!

#+begin_quote THE CONCEPT OF zero also applies to time. Time spent on one activity, after all, is time taken away from another. So if we spend 45 minutes in a line waiting for our turn to get a FREE! taste of ice cream, or if we spend half an hour filling out a long form for a tiny rebate, there is something else that we are not doing with our time. #+end_quote

Reflections on the Price of FREE!

We learned from our experiments that we all get a bit too excited when something is FREE! and that consequently, we can make decisions that are not in our best interest.

Here is the logic:

When we pay - regardless of the amount of money - we feel some psychological pain, which social scientists call the “pain of paying.”

It turns out that the pain of paying has two interesting features. First, and most obviously, when we pay nothing (for example, when someone else foots the bill) we don’t feel any pain of paying. Second, and less obviously, the pain of paying is relatively insensitive to the amount that we pay. This means that we feel more pain of paying as the bill increases, but every additional dollar on the bill pains us less. We call this “diminishing sensitivity.”

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 two different worlds - one where social norms prevail, and the other where market norms make the rules. The social norms include the friendly requests that people make of one another. Could you help me move this couch? Could you help me change this tire? Social norms are wrapped up in our social nature and our need for community. They are usually warm and fuzzy.

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, and costs-and-benefits. Such market relationships are not necessarily evil or mean - in fact, they also include self-reliance, inventiveness, and individualism - but they do imply comparable benefits and prompt payments. When you are in the domain of market norms, you get what you pay for - that’s just the way it is.

When we keep social norms and market norms on their separate paths, life hums along pretty well.

Once market norms enter our considerations, the social norms depart.

But what would happen if we replaced the payments with a gift? No one is offended by a small gift, because even small gifts keep us in the social exchange world and away from market norms.

They reacted to the explicitly priced gift in exactly the way they reacted to cash, and the gift no longer invoked social norms - by the mention of its cost, the gift had passed into the realm of market norms.

SO WE LIVE in two worlds: one characterized by social exchanges and the other characterized by market exchanges. And we apply different norms to these two kinds of relationships. Moreover, introducing market norms into social exchanges (offering money to your friends or relatives for something they are doing to help) violates the social norms and hurts the relationships. Once this type of mistake has been committed, recovering a social relationship is difficult.

Lets look at a very clever test of the long-term effects of a switch from social to market norms. A few years ago, a study was done in a day care center in Israel to determine whether imposing a fine on parents who arrived late to pick up their children was a useful deterrent. The researchers concluded that the fine didn’t work well, and in fact it had long-term negative effects. Why? Before the fine was introduced, the teachers and parents had a social contract, with social norms about being late. Thus, if parents were late - as they occasionally were they felt guilty about it - and their guilt compelled them to be more prompt in picking up their kids in the future. Guilt seems to be an effective way to get compliance. But once the fine was imposed, the day care center had inadvertently replaced the social norms with market norms. Now that the parents were paying for their tardiness, they interpreted the situation in terms of market norms. In other words, since they were being fined, they could decide for themselves whether to be late or not, and they frequently chose to be late. Needless to say, this was not what the day care center intended.

BUT THE REAL story only started here. The most interesting part occurred a few weeks later, when the day care center removed the fine. Now the center was back to the social norm. Would the parents also return to the social norm? Would their guilt return as well? Not at all. Once the fine was removed, the behavior of the parents didn’t change. They continued to pick up their kids late. In fact, when the fine was removed, there was a slight increase in the number of tardy pickups (after all, both the social norms and the fine had been removed).

This experiment illustrates an unfortunate fact: when a social norm collides with a market norm, the social norm goes away for a long time. In other words, social relationships are not easy to reestablish. Once the bloom is off the rose, once a social norm is trumped by a market norm - it will rarely return.

Today companies see an advantage in creating a social exchange. After all, in today’s market we’re the makers of intangibles. Creativity counts more than industrial machines. The partition between work and leisure has likewise blurred. The people who run the workplace want us to think about work while we’re driving home and while we’re in the shower. They’ve given us laptops, cell phones, and Blackberries to bridge the gap between the workplace and home.

Further blurring the nine-to-five workday is the trend in many companies to move away from hourly rates to monthly pay. In this 24/7 work environment, social norms have a great advantage: they tend to make employees passionate, hard-working, flexible, and concerned. In a market where employees’ loyalty to their employers is often wilting, social norms are one of the best ways to make workers loyal, as well as motivated.

Open-source software shows the potential of social norms. In the case of Linux and other collaborative projects, you can post a problem about a bug on one of the bulletin boards and see how fast someone, or often many people, will react to your request and fix the software - using their own leisure time. Could you pay for this level of service? Most likely. But if had to hire people of the same caliber, they would cost you an arm and a leg. Rather, people in these communities are happy to give their time to society at large (for which they get the same social benefits we all get from helping a friend paint a room). What can we learn from this that is applicable to the business world? There are social rewards that strongly motivate behavior – and one of the least used in corporate life is the encouragement of social rewards and reputation.

It’s really no surprise that “corporate loyalty,” in terms of the loyalty of employees to their companies, has become an oxymoron.

So how can we improve the educational system? We should probably first rethink school curricula, and link them in more obvious ways to social goals (elimination of poverty and crime, elevation of human rights, etc.), technological goals (boosting energy conservation, space exploration, nanotechnology, etc.), and medical goals (cures for cancer, diabetes, obesity, etc.) that we care about as a society. This way the students, teachers, and parents might see the larger point in education and become more enthusiastic and motivated about it. We should also work hard on making education a goal in itself, and stop confusing the number of hours students spend in school with the quality of the education they get. Kids can get excited about many things (baseball, for example), and it is our challenge as a society to make them want to know as much about Nobel laureates as they now know about baseball players. I am not suggesting that igniting a social passion for education is simple; but if we succeed in doing so, the value could be immense.

MONEY is very often the most expensive way to motivate people. Social norms are not only cheaper, but often more effective as well.

The answer is not to recreate society as Burning Man, but

to remember that social norms can play a far greater role in society than we have been giving them credit for. If we contemplate how market norms have gradually taken over our lives in the past few decades - with their emphasis on higher salaries, more income, and more spending - we may recognize that a return to some of the old social norms might not be so bad after all. In fact, it might bring quite a bit of the old civility back to our lives.

Financially speaking, the prospect of acting rationally sounds deeply irrational in terms of social norms.

The point is that while gifts are financially inefficient, they are an important social lubricant. They help us make friends and create long-term relationships that can sustain us through the ups and downs of life. Sometimes, it turns out, a waste of money can be worth a lot.

CHAPTER 5 - The Power of a Free Cookie - How FREE Can Make Us Less Selfish

When price is not a part of the exchange, we become less selfish maximizers and start caring more about the welfare of others.

In essence, when prices are zero and social norms are a part of the equation, people look at the world as a communal good. The important lesson from all of this? Not mentioning prices ushers in social norms, and with those social norms, we start caring more about others.

CHAPTER 6 - The Influence of Arousal - Why Hot Is Much Hotter Than We Realize

Robert Louis Stevenson, in his tale, Dr.Jekyll and Mr. Hyde - said,

“Man is not truly one, but truly two.”

The book was an overnight success, and no wonder. The story captivated the imagination of Victorians, who were fascinated with

the dichotomy between repressive propriety (represented by the mild-mannered scientist Dr. Jekyll) and uncontrollable passion (embodied in the murderous Mr. Hyde)

Dr. Jekyll thought he understood how to control himself. But when Mr. Hyde took over, look out.

The story was frightening and imaginative, but it wasn’t new. Long before Sophocles’s Oedipus Rex and Shakespeare’s Macbeth, the war between interior good and evil had been the stuff of myth, religion, and literature. In Freudian terms, each of us houses a dark self, an id, a brute that can unpredictably wrest control away from the superego. Thus a pleasant, friendly neighbor, seized by road rage, crashes his car into a semi. A teenager grabs a gun and shoots his friends. A priest rapes a boy. All these otherwise good people assume that they understand themselves. But in the heat of passion, suddenly, with the flip of some interior switch, everything changes.

Our experiment at Berkeley revealed not just the old story that we are all like Jekyll and Hyde, but also something new - that

every one of us, regardless of how “good” we are, underpredicts the effect of passion on our behavior.

In every case, the participants in our experiment got it wrong.

Even the most brilliant and rational person, in the heat of passion, seems to be absolutely and completely divorced from the person he thought he was. Moreover, it is not just that people make wrong predictions about themselves - their predictions are wrong by a large margin.

We think we know how we will behave in an aroused state, but our understanding is limited. We don’t truly understand that as our sexual motivation becomes more intense, we may throw caution to the wind. We may risk sexually transmitted diseases and unwanted pregnancies in order to achieve sexual gratification. When we are gripped by passion, our emotions may blur the boundary between what is right and what is wrong. In fact, we don’t have a clue to how consistently wild we really are, for when we are in one state and tries to predict our behavior in another state, we get it wrong.

Moreover, the study suggested that

our inability to understand ourselves in a different emotional state does not seem to improve with experience; we get it wrong even if we spend as much time in this state as our Berkeley students spend sexually aroused. Sexual arousal is familiar, personal, very human, and utterly commonplace. Even so, we all systematically underpredict the degree to which arousal completely negates our superego, and the way emotions can take control of our behavior.

WHAT HAPPENS when our irrational self comes alive in an emotional place that we think is familiar but in fact is unfamiliar? If we fail to really understand ourselves, is it possible to somehow predict how we or others will behave when “out of our heads” - when we’re really angry, hungry, frightened, or sexually aroused? Is it possible to do something about this?

The answers to these questions are profound, for they indicate that we must be wary of situations in which our Mr. Hyde may take over. When the boss criticizes us publicly, we might be tempted to respond with a vehement e-mail. But wouldn’t we be better off putting our reply in the “draft” folder for a few days? When we are smitten by a sports car after a test-drive with the wind in our hair, shouldn’t we take a break - and discuss our spouse’s plan to buy a minivan - before signing a contract to buy the car?

Here are a few more examples of ways to protect ourselves from ourselves:

Safe Sex

Many parents and teenagers, while in a cold, rational, Dr. Jekyll state, tend to believe that the mere promise of abstinence - commonly known as “Just say no” - is sufficient protection against sexually transmitted diseases and unwanted pregnancies. Assuming that this levelheaded thought will prevail even when emotions reach the boiling point, the advocates of “just saying no” see no reason to carry a condom with them. But as our study shows,

in the heat of passion, we are all in danger of switching from “Just say no” to “Yes!” in a heartbeat; and if no condom is available, we are likely to say yes, regardless of the dangers.

What does this suggest? First, widespread availability of condoms is essential.

We should not decide in a cool state whether or not to bring condoms; they must be there just in case.

Second, unless we understand how we might react in an emotional state, we will not be able to predict this transformation. For teenagers, this problem is most likely exacerbated, and thus sex education should focus less on the physiology and biology of the reproductive system, and more on strategies to deal with the emotions that accompany sexual arousal. Third, we must admit that carrying condoms and even vaguely understanding the emotional firestorm of sexual arousal may not be enough.

There are most likely many situations where teenagers simply won’t be able to cope with their emotions. A better strategy, for those who want to guarantee that teenagers avoid sex, is to teach teenagers that they must walk away from the fire of passion before they are close enough to be drawn in. Accepting this advice might not be easy, but our results suggest that it is easier for them to fight temptation before it arises than after it has started to lure them in. In other words,

avoiding temptation altogether is easier than overcoming it.

One thing is sure: if we don’t teach our young people how to deal with sex when they are half out of their minds, we are not only fooling them; we’re fooling ourselves as well. Whatever lessons we teach them, we need to help them understand that

they will react differently when they are calm and cool from when their hormones are raging at fever pitch (and of course the same also applies to our own behavior).

Safe Driving

Similarly, we need to teach teenagers and everyone else not to drive when their emotions are at a boil.

LOOKING FROM ONE emotional state to another is difficult. It’s not always possible; But to make informed decisions we need to somehow experience and understand the emotional state we will be in at the other side of the experience. Learning how to bridge this gap is essential to making some of the important decisions of our lives.

It is unlikely that we would move to a different city without asking friends who live there how they like it, or even choose to see a film without reading some reviews. Isn’t it strange that we invest so little in learning about both sides of ourselves? Why should we reserve this subject for psychology classes when failure to understand it can bring about repeated failures in so many aspects of our lives? We need to explore the two sides of ourselves; we need to understand the cold state and the hot state; we need to see how the gap between the hot and cold states benefits our lives, and where it leads us astray.

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 fully integrated human being. We may, in fact, be an agglomeration of multiple selves. Although there is nothing much we can do to get our Dr. Jekyll to fully appreciate the strength of our Mr. Hyde, perhaps just being aware that we are prone to making the wrong decisions when gripped by intense emotion may help us, in some way, to apply our knowledge of our “Hyde” selves to our daily activities.

How can we try to force our “Hyde” self to behave better?

This is what Chapter 7 is about.

CHAPTER 7 - The Problem of Procrastination and Self-Control - Why We Can’t Make Ourselves Do What We Want to Do

Wouldn’t it just be wiser if Americans learned to save, as in the old days, and as the rest of the world does, by diverting some cash to the cookie jar, and delaying some purchases until we can really afford them?

Why can’t we save part of our paychecks, as we know we should? Why can’t we resist those new purchases? Why can’t we exert some good old-fashioned self-control?

They say, the road to hell is paved with good intentions. And most of us know what that’s all about. We promise to save for retirement, but we spend the money on a vacation. We vow to diet, but we surrender to the allure of the dessert cart. We promise to have our cholesterol checked regularly, and then we cancel our appointment.

How much do we lose when our fleeting impulses deflect us from our long-term goals? How much is our health affected by those missed appointments and our lack of exercise? How much is our wealth reduced when we forget our vow to save more and consume less? Why do we lose the fight against procrastination so frequently?

IN CHAPTER 6 we discussed how

emotions grab hold of us and make us view the world from a different perspective. Procrastination (from the Latin pro, meaning for; and cras, meaning tomorrow) is rooted in the same kind of problem. When we promise to save our money, we are in a cool state. When we promise to exercise and watch our diet, again we’re cool. But then the lava flow of hot emotion comes rushing in: just when we promise to save, we see a new car, a mountain bike, or a pair of shoes that we must have. Just when we plan to exercise regularly, we find a reason to sit all day in front of the television. And as for the diet? I’ll take that slice of chocolate cake and begin the diet in earnest tomorrow. Giving up on our long-term goals for immediate gratification is procrastination.

People procrastinate (big news); But tightly restricting their freedom (equally spaced deadlines, imposed from above) is the best cure for procrastination. But the biggest revelation is that simply offering people a tool by which they could precommit to deadlines help them achieve better results.

What this finding implies is that the students generally understood their problem with procrastination and took action to fight it when they were given the opportunity to do so, achieving relative success in improving their grades. But why were the grades in the self-imposed deadlines condition not as good as the grades in the dictatorial (externally imposed) deadlines condition? My feeling is this:

not everyone understands their tendency to procrastinate, and even those who do recognize their tendency to procrastinate may not understand their problem completely. Yes, people may set deadlines for themselves, but not necessarily the deadlines that are best for getting the best performance.

Although almost everyone has problems with procrastination, those who recognize and admit their weakness are in a better position to utilize available tools for precommitment and by doing so, help themselves overcome it.

Resisting temptation and instilling self-control are general human goals, and repeatedly failing to achieve them is a source of much of our misery. When I look around, I see people trying their best to do the right thing, whether they are dieters vowing to avoid a tempting dessert tray or families vowing to spend less and save more. The struggle for control is all around us. We see it in books and magazines. Radio and television airwaves are choked with messages of self-improvement and help.

And yet, for all this electronic chatter and focus in print, we find ourselves again and again in the same predicament - failing over and over to reach our long-term goals. Why? Because without precommitments, we keep on falling for temptation.

What’s the alternative? From the experiments that I have described above, the most obvious conclusion is that when an authoritative “external voice” gives the orders, most of us will jump to attention. After all, the students for whom I set the deadlines for whom I provided the “parental” voice - did best. Of course, barking orders, while very effective, may not always be feasible or desirable. What’s a good compromise? It seems that the best course might be to give people an opportunity to commit up front to their preferred path of action. This approach might not be as effective as the dictatorial treatment, but it can help push us in the right direction (perhaps even more so if we train people to do it, and give them experience in setting their own deadlines).

What’s the bottom line? We have problems with self-control, related to immediate and delayed gratification - no doubt there. But each of the problems we face has potential self-control mechanisms, as well. If we can’t save from our paycheck, we can take advantage of our employer’s automatic deduction option; if we don’t have the will to exercise regularly alone, we can make an appointment to exercise in the company of our friends. These are the tools that we can commit to in advance, and they may help us be the kind of people we want to be.

WHAT OTHER PROCRASTINATION problems might precommitment mechanisms solve? Consider health care and consumer debt.

Thoreau wrote, “Simplify! Simplify!” And, indeed, simplification is one mark of real genius.

Reflections on Immediate Gratification and Self-Control

Most of us find the allure of immediate gratification so strong that it wrecks our best-laid plans for dieting, saving money, cleaning the house - the list is endless.

When we have problems with self-control, sometimes we delay tasks that we should do immediately. But we also exhibit problems with self-control when we attend too frequently to tasks that we should put off-such as obsessively checking our e-mail.

Schedules of reinforcement

I THINK E-MAIL addiction has something to do with what the behavioral psychologist B. F. Skinner called “schedules of reinforcement.” Skinner used this phrase

to describe the relationship between actions (in his case, a hungry rat pressing a lever in a so-called Skinner box) and their associated rewards (pellets of food).

In particular, Skinner distinguished between fixed-ratio schedules of reinforcement and variable-ratio schedules of reinforcement.

Under a fixed schedule, a rat received a reward of food after it pressed the lever a fixed number of times-say 100 times.

(To make a human comparison, a used-car dealer might get a $1,000 bonus for every 10 cars sold.)

Under the variable schedule, the rat earned the food pellet after it pressed the lever a random number of times.

Sometimes it would receive the food after pressing 10 times, and sometimes after pressing 200 times. (Analogously, our used-car dealer would earn a $1,000 bonus after selling an unknown number of cars.)

Thus, under the variable schedule of reinforcement, the arrival of the reward is unpredictable. On the face of it, one might expect that the fixed schedules of reinforcement would be more motivating and rewarding because the rat (or the used-car dealer) can learn to predict the outcome of his work. Instead, Skinner found that the variable schedules were actually more motivating. The most telling result was that when the rewards ceased, the rats who were under the fixed schedules stopped working almost immediately, but those under the variable schedules kept working for a very long time.

This variable schedule of reinforcement also works wonders for motivating people. It is the magic (or, more accurately, dark magic) that underlies gambling and playing the lottery.

How much fun would it be to play a slot machine if you knew in advance that you would always lose nine times before winning once, and that this sequence would continue for as long as you played? It would probably be no fun at all! In fact, the joy of gambling comes from the inability to predict when rewards are coming, so we keep playing.

So, what do food pellets and slot machines have to do with e-mail? If you think about it,

e-mail is very much like gambling. Most of it is junk and the equivalent to pulling the lever of a slot machine and losing, but every so often we receive a message that we really want.

Maybe it contains good news about a job, a bit of gossip, a note from someone we haven’t heard from in a long time, or some important piece of information. We are so happy to receive the unexpected e-mail (pellet) that we become addicted to checking, hoping for more such surprises. We just keep pressing that lever, over and over again, until we get our reward.

This explanation gives me a better understanding of my e-mail addiction, and more important, it might suggest a few means of escape from this Skinner box and its variable schedule of reinforcement. One helpful approach I’ve discovered is to turn off the automatic e-mail-checking feature. This action doesn’t eliminate my checking, but it reduces the frequency with which my computer notifies me that I have new e-mail waiting.

THE LESSON I took away from my interferon treatment is a general one:

if a particular desired behavior results in an immediate negative outcome (punishment), this behavior will be very difficult to promote, even if the ultimate outcome (e.g. improved health) is highly desirable. After all, that’s what the problem of delayed gratification is all about. Certainly, we know that exercising regularly and eating more vegetables will help us be healthier, even if we don’t live to be as old as the Delany sisters; but because it is very hard to hold a vivid image of our future health in our mind’s eye, we can’t keep from reaching for the doughnuts.

In order to overcome many types of human fallibility, it is useful to look for tricks that match immediate, powerful, and positive reinforcements with the not-so-pleasant steps we have to take toward our long-term objectives.

ONE OF MY colleagues at Duke University, Ralph Keeney, recently noted that

America’s top killer isn’t cancer or heart disease, nor is it smoking or obesity. It’s our inability to make smart choices and overcome our own self-destructive behaviors. Ralph estimates that about half of us will make a life-style decision that will ultimately lead us to an early grave. And as if this were not bad enough, it seems that the rate at which we make these deadly decisions is increasing at an alarming pace.

I suspect that over the next few decades, real improvements in life expectancy and quality are less likely to be driven by medical technology than by improved decision making.

CHAPTER 8 - The High Price of Ownership - Why We Overvalue What We Have

Why does the seller of a house usually value that property more than the potential buyer? Why does the seller of an automobile envision a higher price than the buyer? In many transactions why does the owner believe that his possession is worth more money than the potential owner is willing to pay? There’s an old saying, “One man’s ceiling is another man’s floor.” Well, when you’re the owner, you’re at the ceiling; and when you’re the buyer, you’re at the floor.

Since so much of our lives is dedicated to ownership, wouldn’t it be nice to make the best decisions about this? Wouldn’t it be nice, for instance, to know exactly how much we would enjoy a new home, a new car, a different sofa, and an Armani suit, so that we could make accurate decisions about owning them? Unfortunately, this is rarely the case. We are mostly fumbling around in the dark. Why? Because of three irrational quirks in our human nature.

The first quirk is that we fall in love with what we already have.

The second quirk is that we focus on what we may lose, rather than what we may gain.

Our aversion to loss is a strong emotion, and one that sometimes causes us to make bad decisions. Do you wonder why we often refuse to sell some of our cherished clutter, and if somebody offers to buy it, we attach an exorbitant price tag to it? As soon as we begin thinking about giving up our valued possessions, we are already mourning the loss.

The third quirk is that we assume other people will see the transaction from the same perspective as we do. We somehow expect the buyer to share our feelings, emotions, and memories. Or we expect the buyer of our house to appreciate how the sunlight filters through the kitchen windows.

“Virtual ownership,” of course, is one mainspring of the advertising industry. We see a happy couple driving down the California coastline in a BMW convertible, and we imagine ourselves there. We get a catalog of hiking clothing from Patagonia, see a polyester fleece pullover, and-poof-we start thinking of it as ours. The trap is set, and we willingly walk in. We become partial owners even before we own anything.

There’s another way that we can get drawn into ownership. Often, companies will have “trial” promotions. If we have a basic cable television package, for instance, we are lured into a “digital gold package” by a special “trial” rate (only $59 a month instead of the usual $89). After all, we tell ourselves, we can always go back to basic cable or downgrade to the “silver package.”

But once we try the gold package, of course, we claim ownership of it. Will we really have the strength to downgrade back to basic or even to “digital silver”? Doubtful. At the on-set, we may think that we can easily return to the basic service, but once we are comfortable with the digital picture, we begin to incorporate our ownership of it into our view of the world and ourselves, and quickly rationalize away the additional price. More than that, our aversion to loss - the loss of that nice crisp “gold package” picture and the extra channels - is too much for us to bear. In other words, before we make the switch we may not be certain that the cost of the digital gold package is worth the full price; but once we have it, the emotions of ownership come welling up, to tell us that the loss of “digital gold” is more painful than spending a few more dollars a month. We may think we can turn back, but that is actually much harder than we expected.

OWNERSHIP IS NOT limited to material things. It can also apply to points of view. Once we take ownership of an idea — whether it’s about politics or sports-what do we do? We love it perhaps more than we should. We prize it more than it is worth. And most frequently, we have trouble letting go of it because we can’t stand the idea of its loss. What are we left with then? An ideology-rigid and unyielding.

There is no known cure for ownership. As Adam Smith said, it is woven into our lives. But being aware of it might help. Everywhere around us we see the temptation to improve the quality of our lives by buying a larger home, a second car, a new dishwasher, a lawn mower, and so on. But, once we change our possessions we have a very hard time going back down. Ownership simply changes our perspective. Suddenly, moving backward to our preownership state is a loss, one that we cannot abide. And while moving up in life, we indulge ourselves with the fantasy that we can always ratchet ourselves back if need be; but in reality, we can’t. Downgrading to a smaller home, for instance, is experienced as a loss, it is psychologically painful, and we are willing to make all kinds of sacrifices in order to avoid such losses - even if, in this case, the monthly mortgage sinks our ship.

Ownership fundamentally changes our perspective. In the same way that we think our own kids are more wonderful and special than our friends’ and neighbors’ children (regardless of whether our children deserve such esteem), we overvalue everything that we own, whether it’s a pair of basketball tickets or our domiciles.

OUR PROPENSITY TO Overvalue what we own is a basic human bias, and it reflects a more general tendency to fall in love with, and be overly optimistic about, anything that has to do with ourselves. Think about it - don’t you feel that you are a better-than-average driver, are more likely to be able afford retirement, and are less likely to suffer from high cholesterol, get a divorce, or get a parking ticket if you overstay your meter by a few minutes? This positivity bias, as psychologists call it, has another name: “The Lake Wobegone Effect,” named after the fictional town in Garrison Keillor’s popular radio series A Prairie Home Companion. In Lake Wobegone, according to Keillor, “all the women are strong, all the men are good-looking, and all the children are above average.”

I don’t think we can become more accurate and objective in the way we think about our children and houses, but maybe we can realize that we have such biases and listen more carefully to the advice and feedback we get from others.

CHAPTER 9 - Keeping Doors Open - Why Options Distract Us from Our Main Objective

In 210 BC, a Chinese commander named Xiang Yu led his troops across the Yangtze River to attack the army of the Qin (Ch’in) dynasty. Pausing on the banks of the river for the night, his troops awakened in the morning to find, to their horror, that their ships were burning. They hurried to their feet to fight off their attackers, but soon discovered that was Xiang Yu himself who had set their ships on fire, and that he had also ordered all the cooking pots crushed.

Xiang Yu explained to his troops that without the pots and the ships, they had no other choice but to fight their way to victory or perish. That did not earn Xiang Yu a place on the Chinese army’s list of favorite commanders, but it did have a tremendous focusing effect on his troops: grabbing their lances and bows, they charged ferociously against the enemy and won nine consecutive battles, completely obliterating the main-force units of the Qin dynasty.

Xiang Yu’s story is remarkable because it is completely antithetical to normal human behavior. Normally, we cannot stand the idea of closing the doors on our alternatives.

See Burn Your Ships 

In the context of today’s world, we work just as feverishly to keep all our options open. We buy the expandable computer system, just in case we need all those high-tech bells and whistles. We buy the insurance policies that are offered with the plasma high-definition television, just in case the big screen goes blank. We keep our children in every activity we can imagine-just in case one sparks their interest in gymnastics, piano, French, organic gardening, or tae kwon do. And we buy a luxury SUV, not because we really expect to drive off the highway, but because just in case we do, we want to have some clearance beneath our axles.

We might not always be aware of it, but in every case we give something up for those options. We end up with a computer that has more functions than we need, or a stereo with an unnecessarily expensive warranty. And in the case of our kids, we give up their time and ours - and the chance that they could become really good at one activity-in trying to give them some experience in a large range of activities. In running back and forth among the things that might be important, we forget to spend enough time on what really is important. It’s a fool’s game, and one that we are remarkably adept at playing.

What is it about options that is so difficult for us? Why do we feel compelled to keep as many doors open as possible, even at great expense? Why can’t we simply commit ourselves?

For computer science, he needed Algorithms, Artificial Intelligence, Computer Systems Engineering, Circuits and Electronics, Signals and Systems, Computational Structures, and a laboratory in Software Engineering.

HOW CAN WE unshackle ourselves from this irrational impulse to chase worthless options? In 1941, the philosopher Erich Fromm wrote a book called Escape from Freedom. In a modern democracy, he said, people are beset not by a lack of opportunity, but by a dizzying abundance of it. In our modern society, this is emphatically so. We are continually reminded that we can do anything and be anything we want to be. The problem is in living up to this dream. We must develop ourselves in every way possible; must taste every aspect of life; must make sure that of the 1,000 things to see before dying, we have not stopped at number 999. But then comes a problem-are we spreading ourselves too thin? The temptation Fromm was describing, is what we saw as we watched our participants racing from one door to another.

THE OTHER SIDE of this tragedy develops when we fail to realize that some things really are disappearing doors, and need our immediate attention. We may work more hours at our jobs, for instance, without realizing that the childhood of our sons and daughters is slipping away. Sometimes these doors close too slowly for us to see them vanishing. One of my friends told me, for instance, that the single best year of his marriage was when he was living in New York, his wife was living in Boston, and they met only on weekends. and Before they had this arrangement-when they lived together in Boston-they would spend their weekends catching up on work rather than enjoying each other. But once the arrangement changed, and they knew that they had only the weekends together, their shared time became limited and had a clear end (the time of the return train). Since it was clear that the clock was ticking, they dedicated the weekends to enjoying each other rather than doing their work.

I’m not advocating giving up work and staying home for the sake of spending all your time with your children, or moving to a different city just to improve your weekends with your spouse. But wouldn’t it be nice to have a built-in alarm, to warn us when the doors are closing on our most important options?

Too much choice not only wears out our emotions but also wears out our wallets. What we need is to consciously start closing some of our doors.

But the bigger doors (or those that seem bigger) are harder to close. Doors that just might lead to a new career or to a better job might be hard to close. Doors that are tied to our dreams are also hard to close. So are relationships with certain people-even if they seem to be going nowhere.

We have an irrational compulsion to keep doors open. It’s just the way we’re wired. But that doesn’t mean we shouldn’t try to close them. Think about a fictional episode: Rhett Butler leaving Scarlett O’Hara in Gone with the Wind, in the scene when Scarlett clings to him and begs him, “Where shall I go? What shall I do?” Rhett, after enduring too much from Scarlett, and finally having his fill of it, says, “Frankly, my dear, I don’t give a damn.” It’s not by chance that this line has been voted the most memorable in cinematographic history. It’s the emphatic closing of a door that gives it widespread appeal. And it should be a reminder to all of us we have doors-little and big ones-which we ought to shut.

We need to drop out of committees that are a waste of our time and stop sending holiday cards to people who have moved on to other lives and friends. We need to determine whether we really have time to watch basketball and play both golf and squash and keep our family together; perhaps we should put some of these sports behind us. We ought to shut them because they draw energy and commitment away from the doors that should be left open-and because they drive us crazy.

SUPPOSE YOU’VE CLOSED SO many of your doors that you have just two left. I wish I 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 most difficult decisions we can make. This is a situation not just of keeping options open for too long, but of being indecisive to the point of paying for our indecision in the end. Let me use the following story to explain.

A hungry donkey approaches a barn one day looking for hay and discovers two haystacks of identical size at the two opposite sides of the barn. The donkey stands in the middle of the barn between the two haystacks, not knowing which to select. Hours go by, but he still can’t make up his mind. Unable to decide, the donkey eventually dies of starvation.*

This story is hypothetical, of course, and casts unfair aspersions on the intelligence of donkeys. A better example might be the U.S. Congress. Congress frequently gridlocks itself, not necessarily with regard to the big picture of particular legislation the restoration of the nation’s aging highways, immigration, improving federal protection of endangered species, etc.- but with regard to the details. Often, to a reasonable person, the party lines on these issues are the equivalent of the two bales of hay. Despite this, or because of it, Congress is frequently left stuck in the middle. Wouldn’t a quick decision have been better for everybody?

We need to take into account the consequences of not deciding. More important, we all fail to take into consideration the relatively minor differences that would come with either one of the decisions.

ALTHOUGH CHOOSING BETWEEN two very similar options should be simple, in fact it is not.

CHAPTER 10 - The Effect of Expectations - Why the Mind Gets What It Expects

How could two friends - two honest guys - see one soaring pass in two different ways? In fact, how could any two parties look at precisely the same event and interpret it as supporting their opposing points of view? How could Democrats and Republicans look at a single schoolchild who is unable to read, and take such bitterly different positions on the same issue? How could a couple embroiled in a fight see the causes of their argument so differently?

Violence over disagreements happen so frequently that we rarely stop to ask ourselves why. Why do they happen? Is it an outcome of history, or race, or politics - or is there something fundamentally irrational in us that encourages conflict, that causes us to look at the same event and, depending on our point of view, see it in totally different terms?

The moral is that if you tell people up front 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.

WHEN WE BELIEVE beforehand that something will be good, therefore, it generally will be good - and when we think it will be bad, it will bad. But how deep are these influences? Do they just change our beliefs, or do they also change the physiology of the experience itself? In other words, can previous knowledge actually modify the neural activity underlying the taste itself, so that when we expect something to taste good (or bad), it will actually taste that way?

Does it matter if knowledge comes before or after the experience? And if so, which type of input is more important - knowledge before the experience, or an input of information after an experience has taken place?

AS YOU SEE, expectations can influence nearly every aspect of our life.

This is also essential for building the reputation of a brand or product. That’s what marketing is all about - providing information that will heighten someone’s anticipated and real pleasure.

EXPECTATIONS ALSO SHAPE stereotypes. A stereotype, after all, is a way of categorizing information, in the hope of predicting experiences. The brain cannot start from scratch at every new situation. It must build on what it has seen before. For that reason, stereotypes are not intrinsically malevolent. They provide shortcuts in our never-ending attempt to make sense of complicated surroundings. This is why we have the expectation that an elderly person will need help using a computer or that a student at Harvard will be intelligent.* But because a stereotype provides us with specific expectations about members of a group, it can also unfavorably influence both our perceptions and our behavior.

Research on stereotypes shows not only that we react differently when we have a stereotype of a certain group of people, but also that stereotyped people themselves react differently when they are aware of the label that they are forced to wear (in psychological parlance, they are “primed” with this label). One stereotype of Asian-Americans, for instance, is that they are especially gifted in mathematics and science. A common stereotype of females is that they are weak in mathematics. This means that Asian-American women could be influenced by both notions.

Results show that even our own behavior can be influenced by our stereotypes, and that activation of stereotypes can depend on our current state of mind and how we view ourselves at the moment.

Perhaps even more astoundingly, stereotypes can also affect the behavior of people who are not even part of a stereotyped group.

The likelihood of agreement about “the facts” becomes smaller and smaller as personal investment in the problem grows. This is clearly disturbing. We like to think that sitting at the same table together will help us hammer out our differences and that concessions will soon follow. But history has shown us that this is an unlikely outcome; and now we know the reason for this catastrophic failure.

When stripping away our preconceptions and our previous knowledge is not possible, perhaps we can at least acknowledge that we are all biased. If we acknowledge that we are trapped within our perspective, which partially blinds us to the truth, we may be able to accept the idea that conflicts generally require a neutral third party - who has not been tainted with our expectations - to set down the rules and regulations. Of course, accepting the word of a third party is not easy and not always possible; but when it is possible, it can yield substantial benefits. And for that reason alone, we must continue to try.

Time heals all wounds, and one of the ways time works in our favor is to help us either forget or misremember the past in a way that makes us feel better about ourselves.

THE BRILLIANT SATIRIST Alexander Pope once wrote: “Blessed is he who expects nothing, for he shall never be disappointed.” To me, it seems that Pope’s advice is the best way to live an objective life.

CHAPTER 11 - The Power of Price - Why a 50-Cent Aspirin Can Do What a Penny Aspirin Can’t

CHAPTER 12 - The Cycle of Distrust - Why We Don’t Believe What Marketers

A good analogy for social distrust can be found in The Tragedy of the Commons

A Moral Tale

Aesop’s tale of “The Boy Who Cried Wolf” is a powerful fable of lost trust. You recall the story: A boy shepherd tending a town’s livestock one day decides to have a little fun. “Wolf! Wolf!” he cries, and immediately the townsmen come armed, ready to defend their precious animals. They find that they’ve been duped 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’s desperate cries for help fall on deaf ears. The townsmen no longer trust him and leave him to fend off the wolf on his own. Consequently, the livestock fall prey to the wolf (in some versions of the story, the wolf eats the boy as well).

There are two morals to the story. The first is that people are willing to forgive a bit of lying.

But the second, more important moral - one that we are just beginning to understand is that trust, once eroded, is the very hard to restore.

CHAPTER 13 - The Context of Our Character, Part I - Why We Are Dishonest, and What We Can Do about It

There might be two types of dishonesty. One is the type of dishonesty that evokes the image of a pair of crooks circling a gas station. As they cruise by, they consider how much money is in the till, who might be around to stop them, and what punishment they may face if caught and how much time off they might get for good behavior. On the basis of this cost-benefit calculation, they decide whether to rob the place or not.

Then there is the second type of dishonesty. This is the kind committed by people who generally consider themselves honest - the men and women (please stand) who have “borrowed” a pen from a conference site, taken an extra splash of soda from the soft drink dispenser, exaggerated the cost of their television on their property loss report, or falsely reported a meal with Aunt Enid as a business expense (well, she did inquire about how work was going).

When given the opportunity, many honest people will cheat. In fact, rather than finding that a few bad apples weighted the averages, we discovered that the majority of people cheated, and that they cheated just a little bit.

Something held them back - something inside them. But what was it?

What is honesty, anyhow?

TO THAT QUESTION, Adam Smith, the great economic thinker, had a pleasant reply: “Nature, when she formed man for society, endowed him with an original desire to please, and an original aversion to offend his bretheren. She taught him to feel pleasure in their favourable, and pain in their unfavourable regard,” he noted.

To this Smith added, “The success of most people…almost always depends upon the favour and good opinion of their neighbours and equals; and without a tolerably regular conduct, these can very seldom be obtained. Therefore, the good old proverb that honesty is always the best policy, holds, in such situations, almost always perfectly true.”

That sounds like a plausible industrial-age explanation, as balanced and harmonious as a set of balance weights and perfectly meshed gears. However optimistic this perspective might seem, Smith’s theory had a darker corollary: since people engage in a cost-benefit analysis with regard to honesty, they can also engage in a cost-benefit analysis to be dishonest. According to this perspective, individuals are honest only to the extent that suits them (including their desire to please others).

Sigmund Freud explained it this way. He said that as we grow up in society, we internalize the social virtues. This internalization leads to the development of the superego. In general, the superego is pleased when we comply with society’s ethics, and unhappy when we don’t. This is why we stop our car at four AM when we see a red light, even if we know that no one is around; and it is why we get a warm feeling when we return a lost wallet to its owner, even if our identity is never revealed. Such acts stimulate the reward centers of our brain - the nucleus accumbens and the caudate nucleus and make us content.

But if honesty is important to us (in a recent survey of nearly 36,000 high school students in the United States, 98 percent of them said it was important to be honest), and if honesty makes us feel good, why are we so frequently dishonest?

This is my take. We care about honesty and we want to be honest. The problem is that our internal honesty monitor is active only when we contemplate big transgressions, like grabbing an entire box of pens from the conference hall. For the little transgressions, like taking a single pen or two pens, we don’t even consider how these actions would reflect on our honesty and so our superego stays asleep.

The cost-benefit analysis, and the probability of getting caught in particular, does not seem to have much influence on dishonesty.

THIS IS THE way the world turns. It’s almost impossible to open a newspaper without seeing a report of a dishonest or deceptive act. We watch as the credit card companies bleed their customers with outrageous interest rate hikes; as the airlines plunge into bankruptcy and then call on the federal government to get them - and their underfunded pension funds - out of trouble; and as schools defend the presence of soda machines on campus (and rake in millions from the soft drinks firms) all the while knowing that sugary drinks make kids hyperactive and fat. Taxes are a festival of eroding ethics, as the insightful and talented reporter David Cay Johnston of the New York Times describes in his book Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich - and Cheat Everybody Else.

Against all of this, society, in the form of the government, has battled back, at least to some extent. The Sarbanes-Oxley Act of 2002 (which requires the chief executives of public companies to vouch for the firms’ audits and accounts) was passed to make debacles like Enron’s a thing of the past.

Take the ethics reforms in Congress, for instance. The statutes ban lobbyists from serving free meals to congressmen and their aides at “widely attended” functions. So what have lobbyists done? Invited congressmen to luncheons with “limited” guest lists that circumvent the rule. Similarly, the new ethics laws ban lobbyists from flying congressmen in “fixed wing” aircraft. So hey, how about a lift in a helicopter?

The word profession comes from the Latin professus, meaning “affirmed publicly.” Professions started somewhere deep in the past in religion and then spread to medicine and law. Individuals who had mastered esoteric knowledge, it was said, not only had a monopoly on the practice of that knowledge, but had an obligation to use their power wisely and honestly. The oath-spoken and often written - was a reminder to practitioners to regulate their own behavior, and it also provided a set of rules that had to be followed in fulfilling the duties of their profession.

Those oaths lasted a long time. But then, in the 1960s, a strong movement arose to deregulate professions. Professions were elitist organizations, it was argued, and needed to be turned out into the light of day. For the legal profession, that meant more briefs written in plain English prose, cameras in the courtrooms, and advertising. Similar measures against elitism were applied to medicine, banking, and other professions as well. Much of this could have been beneficial, but something was lost when professions were dismantled. Strict professionalism was replaced by flexibility, individual judgment, the laws of commerce, and the urge for wealth, and with it disappeared the bedrock of ethics and values on which the professions had been built.

A study by the state bar of California in the 1990s, for instance, found that a preponderance of attorneys in California were sick of the decline in honor in their work and “profoundly pessimistic” about the condition of the legal profession. Two-thirds said that lawyers today “compromise their professionalism as a result of economic pressure.” Nearly 80 percent said that the bar “fails to adequately punish unethical attorneys.” Half said they wouldn’t become attorneys if they had it to do over again.

A comparable study by the Maryland Judicial Task Force found similar distress among lawyers in that state. According to Maryland’s lawyers, their profession had degenerated so badly that “they were often irritable, short-tempered, argumentative, and verbally abusive” or “detached, withdrawn, preoccupied, or distracted.” When lawyers in Virginia were asked whether the increasing problems with professionalism were attributable to “a few bad apples” or to a widespread trend, they overwhelmingly said this was a widespread issue.

Lawyers in Florida have been deemed the worst. In 2003 the Florida bar reported that a “substantial minority” of lawyers were “money-grabbing, too clever, tricky, sneaky, and not trustworthy; who had little regard for the truth or fairness, willing to distort, manipulate, and conceal to win; arrogant, condescending, and abusive.” They were also “pompous and obnoxious.” What more can I say?

The medical profession has its critics as well. The critics mention doctors who do unnecessary surgeries and other procedures just to boost the bottom line: who order tests at laboratories that are giving them kickbacks, and who lean toward medical tests on equipment that they just happen to own. And what about the influence of the pharmaceutical industry? A friend of mine said he sat waiting for his doctor for an hour recently. During that time, he said, four (very attractive) representatives of drug companies went freely into and out of the office, bringing lunch, free samples, and other gifts with them.

You could look at almost any professional group and see signs of similar problems. How about the Association of Petroleum Geologists, for instance? The image I see is Indiana Jones types, with more interest in discussing Jurassic shale and deltaic deposits than in making a buck. But look deeper and you’ll find trouble. “There is unethical behavior going on at a much larger scale than most of us would care to think,” one member of the association wrote to her colleagues.

What kind of dishonesty, for goodness’ sake, could be rife in the ranks of petroleum geologists, you ask? Apparently things like using bootlegged seismic and digital data; stealing maps and materials; and exaggerating the promise of certain oil deposits, in cases where a land sale or investment is being made. “The malfeasance is most frequently of shades of gray, rather than black and white,” one petroleum geologist remarked.

But let’s remember that petroleum geologists are not alone. This decline in professionalism is everywhere. If need more proof, consider the debate within the field of professional ethicists, who are called more often than ever before to testify at public hearings and trials, where they may be hired by one party or another to consider issues such as treatment rendered to a patient and the rights of the unborn. Are they tempted to bend to the occasion? Apparently so. “Moral Expertise: A Problem in the Professional Ethics of Professional Ethicists” is the title of one article in an ethics journal. As I said, the signs of erosion are everywhere.

So we learned that people cheat when they have a chance to do so, but they don’t cheat as much as they could. Moreover, once they begin thinking about honesty - whether by recalling the Ten Commandments or by signing a simple statement - they stop cheating completely. In other words, when we are removed from any benchmarks of ethical thought, we tend to stray into dishonesty. But if we are reminded of morality at the moment we are tempted, then we are much more likely to be honest.

At present, several state bars and professional organizations are scrambling to shore up their professional ethics. Some are increasing courses in college and graduate schools, and others are requiring, brush-up ethics classes. In the legal profession, Judge Dennis M. Sweeney of the Howard County (Maryland) circuit published his own book, Guidelines for Lawyer Courtroom Conduct, in which he noted, “Most rules, like these, are simply what our mothers would say a polite and well raised man or woman should do. Since, given their other important responsibilities, our mothers (and yours) cannot be in every courtroom in the State, I offer these rules.”

Will such general measures work? Let’s remember that lawyers do take an oath when they are admitted to the bar, as doctors take an oath when they enter their profession. But occasional swearing of oaths and occasional statements of adherence to rules are not enough. From our experiments, it is clear that oaths and rules must be recalled at, or just before, the moment of temptation. Also, what is more, time is working against us as we try to curb this problem. I said in Chapter 4 that when social norms collide with market norms, the social norms go away and the market norms stay. Even if the analogy is not exact, honesty offers a related lesson: once professional ethics (the social norms) have declined, getting them back won’t be easy.

THIS DOESN’T MEAN that we shouldn’t try. Why is honesty so important? For one thing, let’s not forget that the United States holds a position of economic power in the world today partly because it is (or at least is perceived to be) one of the world’s most honest nations, in terms of its standards of corporate governance.

In 2002, the United States ranked twentieth in the world in terms of integrity, according to one survey (Denmark, Finland, and New Zealand were first; Haiti, Iraq, Myanmar, and Somalia were last, at number 163). On this basis, I would suspect that people doing business with the United States generally feel they can get a fair deal. But the fact of the matter is that the United States ranked fourteenth in 2000, before the wave of corporate scandals made the business pages in American newspapers look like a police blotter. We are going down the slippery slope, in other words, not up it, and this can have tremendous long-term costs.

Adam Smith reminded us that honesty really is the best policy, especially in business. To get a glimpse at the other side of that realization - at the downside, in a society without trust, you can take a look at several countries. In China, the word of one person in one region rarely carries to another region. Latin America is full of family-run cartels that hand out loans to relatives (and then fail to cut off credit when the debtor begins to default). Iran is another example of a nation stricken by distrust. An Iranian student at MIT told me that business there lacks a platform of trust. Because of this, no one pays in advance, no one offers credit, and no one is willing to take risks. People must hire within their families, where some level of trust still exists. Would you like to live in such a world? Be careful, because without honesty we might get there faster than you’d imagine.

What can we do to keep ourselves and our country honest? We can read the Bible, the Koran, or whatever reflects our values, perhaps. We can revive professional standards. We can sign our names to promises that we will act with integrity. Another path is to first recognize that when we get into situations where our personal financial benefit stands in opposition to our moral standards, we are able to “bend” reality, see the world in terms compatible with our selfish interest, and become dishonest. What is the answer, then? If we recognize this weakness, we can try to avoid such situations from the outset. We can prohibit physicians from ordering tests that would benefit them financially; we can prohibit accountants and auditors from functioning as consultants to the same companies; we can bar members of Congress from setting their own salaries, and so on.

CHAPTER 14 - The Context of Our Character, Part II - Why Dealing with Cash Makes Us More Honest

When we look at the world around us, much of the dishonesty we see involves cheating that is one step removed from cash. Companies cheat with their accounting practices; executives cheat by using backdated stock options; lobbyists cheat by underwriting parties for politicians; drug companies cheat by sending doctors and their wives off on posh vacations. To be sure, these people don’t cheat with cold cash (except occasionally). And that’s my point: cheating is a lot easier when it’s a step removed from money.

Do you think that the architects of Enron’s collapse - Kenneth Lay, Jeffrey Skilling, and Andrew Fastow - would have stolen money from the purses of old women? Certainly, they took millions of dollars in pension monies from a lot of old women. But do you think they would have hit a woman with a blackjack and pulled the cash from her fingers? You may disagree, but my inclination is to say no.

So what permits us to cheat when cheating involves non-monetary objects, and what restrains us when we are dealing with money? How does that irrational impulse work?

BECAUSE WE ARE SO adept at rationalizing our petty dishonesty, it’s often hard to get a clear picture of how non-monetary objects influence our cheating.

This means that when given a chance to cheat under ordinary circumstances, the students cheated, on average, by 2.7 questions. But when they were given the same chance to cheat with non-monetary currency, their cheating increased to 5.9 - more than doubling in magnitude. What a difference there is in cheating for money versus cheating for something that is a step away from cash!

WE HAVE LEARNED that given a chance, people cheat. But what’s really odd is that most of us don’t see this coming.

But how wrong they were! They didn’t see how fast we can rationalize our dishonesty when it is one step away from cash. Of course, their blindness is ours as well. Perhaps it’s why so much cheating goes on. Perhaps it’s why Jeff Skilling, Bernie Ebbers, and the entire roster of executives who have been prosecuted in recent years let themselves, and their companies, slide down the slope.

There are other interesting practices.

How about expense reports? When people are on business trips, they are expected to know what the rules are, but expense reports too are one step, and sometimes even a few steps, removed from cash. In one study, we found that not all expenses are alike in terms of people’s ability to justify them as business expenses. For example, buying a mug for five dollars for an attractive stranger was clearly out of bounds, but buying the same stranger an eight-dollar drink in a bar was very easy to justify. The difference was not the cost of the item, or the fear of getting caught, but people’s ability to justify the item to themselves as a legitimate use of their expense account.

A few more investigations into expense accounts turned up similar rationalizations. In one study, we found that when people give receipts to their administrative assistants to submit, they are then one additional step removed from the dishonest act, and hence more likely to slip in questionable receipts. In another study, we found that businesspeople who live in New York are more likely to consider a gift for their kid as a business expense if they purchased it at the San Francisco airport (or someplace else far from home) than if they had purchased it at the New York airport, or on their way home from the airport. None of this makes logical sense, but when the medium of exchange is non-monetary, our ability to rationalize increases by leaps and bounds.

All these electronic transactions, with no physical exchange of money from hand to hand, might make it easier for people to be dishonest - without ever questioning or fully acknowledging the immorality of their actions.

This view of human nature is worrisome. We can hope to stay clear of dishonesty, surround ourselves with good, moral people, but we have to be realistic. Even good people are not immune to being partially blinded by their own minds. This blindness allows them to take actions that bypass their own moral standards on the road to financial rewards. In essence, motivation can play tricks on us whether or not we are good, moral people.

As the author and journalist Upton Sinclair once noted, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” We can now add the following thought: it is even more difficult to get a man to understand something when he is dealing with non-monetary currencies.

But look at the latitude we have with non-monetary exchanges. There’s always a convenient rationale. We can take a pencil from work, a Coke from the fridge - we can even backdate our stock options - and find a story to explain it all. We can be dishonest without thinking of ourselves as dishonest. We can steal while our conscience is apparently fast asleep.

How can we fix this? We could label each item in the supply cabinet with a price, for instance, or use wording that explains stocks and stock options clearly in terms of their monetary value. But in the larger context, we need to wake up to the connection between non-monetary currency and our tendency to cheat. We need to recognize that once cash is a step away, we will cheat by a factor bigger than we could ever imagine. We need to wake up to this - individually and as a nation, and do it soon.

For one thing, the days of cash are coming to a close. Cash is a drag on the profits of banks - they want to get rid of it. On the other hand, electronic instruments are very profitable. Profits from credit cards in the United States rose from $9 billion in 1996 to a record $27 billion in 2004. By 2010, banking analysts say, there will be $50 billion in new electronic transactions, nearly twice the number processed under the Visa and MasterCard brands in 2004. The question, therefore, is how we can control our tendency to cheat when we are brought to our senses only by the sight of cash - and what we can do now that cash is going away.

CHAPTER 15 - Beer and Free Lunches - What Is Behavioral Economics, and Where Are the Free Lunches?

Standard economics assumes that we are rational - that we know all the pertinent information about our decisions, that we can calculate the value of the different options we face, and that we are cognitively unhindered in weighing the ramifications of each potential choice.

The result is that we are presumed to be making logical and sensible decisions. And even if we make a wrong decision from time to time, the standard economics perspective suggests that we will quickly learn from our mistakes either on our own or with the help of “market forces.” On the basis of these assumptions, economists draw far-reaching conclusions about everything from shopping trends to law to public policy.

But, as the results presented in this book (and others) show, we are all far less rational in our decision making than standard economic theory assumes. Our irrational behaviors are neither random nor senseless - they are systematic and predictable. We all make the same types of mistakes over and over, because of the basic wiring of our brains. So wouldn’t it make sense to modify standard economics and move away from naive psychology, which often fails the tests of reason, introspection, and - most important - empirical scrutiny?

Wouldn’t economics make a lot more sense if it were based on how people actually behave, instead of how they should behave? As I said in the Introduction, that simple idea is the basis of behavioral economics, an emerging field focused on the (quite intuitive) idea that people do not always behave rationally and that they often make mistakes in their decisions.

In many ways, the standard economic and Shakespearean views are more optimistic about human nature, since they assume that our capacity for reasoning is limitless.

By the same token, the behavioral economics view, which acknowledges human deficiencies, is more depressing, because it demonstrates the many ways in which we fall short of our ideals. Indeed, it can be rather depressing to realize that we all continually make irrational decisions in our personal, professional, and social lives. But there is a silver lining: the fact that we make mistakes also means that there are ways to improve our decisions - and therefore that there are opportunities for “free lunches.”

ONE OF THE main differences between standard and behavioral economics involves this concept of “free lunches.” According to the assumptions of standard economics, all human decisions are rational and informed, motivated by an accurate concept of the worth of all goods and services and the amount of happiness (utility) all decisions are likely to produce. Under this set of assumptions, everyone in the market-place is trying to maximize profit and striving to optimize his experiences. As a consequence, economic theory asserts that there are no free lunches - if there were any, someone would have already found them and extracted all their value.

Behavioral economists, on the other hand, believe that people are susceptible to irrelevant influences from their immediate environment (which we call context effects), irrelevant emotions, shortsightedness, and other forms of irrationality (see any chapter in this book or any research paper in behavioral economics for more examples).

What good news can accompany this realization? The good news is that these mistakes also provide opportunities for improvement. If we all make systematic mistakes in our decisions, then why not develop new strategies, tools, and methods to help us make better decisions and improve our overall well-being? That’s exactly the meaning of free lunches from the perspective of behavioral economics - the idea that there are tools, methods, and policies that can help all of us make better decisions and as a consequence achieve what we desire.

From the perspective of behavioral economics, which does not assume that people are rational, the idea that we are not saving enough is perfectly reasonable. In fact, research in behavioral economics points to many possible reasons why people are not saving enough for retirement. People procrastinate. People have a hard time understanding the real cost of not saving as well as the benefits of saving. (By how much would your life be better in the future if you were to deposit an additional $1,000 in your retirement account every month for the next 20 years?) Being “house rich” helps people believe that they are indeed rich. It is easy to create consumption habits and hard to give them up. And there are many, many more reasons.

IF I WERE to distill one main lesson from the research described in this book, it is that we are pawns in a game whose forces we largely fail to comprehend. We usually think of ourselves as sitting in the driver’s seat, with ultimate control over the decisions we make and the direction our life takes; but, alas, this perception has more to do with our desires - with how we want to view ourselves - than with reality.

Each of the chapters in this book describes a force (emotions, relativity, social norms, etc.) that influences our behavior. And while these influences exert a lot of power over our behavior, our natural tendency is to vastly underestimate or completely ignore this power. These influences have an effect on us not because we lack knowledge, lack practice, or are weak-minded. On the contrary, they repeatedly affect experts as well as novices in systematic and predictable ways. The resulting mistakes are simply how we go about our lives, how we “do business.” They are a part of us.

Visual illusions are also illustrative here. Just as we can’t help being fooled by visual illusions, we fall for the “decision illusions” our minds show us. The point is that our visual and decision environments are filtered to us, courtesy of our eyes, our ears, our senses of smell and touch, and the master of it all, our brain. By the time we comprehend and digest information, it is not necessarily a true reflection of reality. Instead, it is our representation of reality, and this is the input we base our decisions on. In essence we are limited to the tools nature has given us, and the natural way in which we make decisions is limited by the quality and accuracy of these tools.

A second main lesson is that although irrationality is commonplace, it does not necessarily mean that we are helpless. Once we understand when and where we may make erroneous decisions, we can try to be more vigilant, force ourselves to think differently about these decisions, or use technology to overcome our inherent shortcomings. This is also where businesses and policy makers could revise their thinking and consider how to design their policies and products so as to provide free lunches.

As the Nobel laureate Murray Gell-Mann once said, “Think how hard physics would be if particles could think.”

Book suggestions

1. Taxes are a festival of eroding ethics, as the insightful and talented reporter David Cay Johnston of the New York Times describes in his book Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich-and Cheat Everybody Else.