Psychology Today Blogs - Predictably Irrational

Clinton, Obama, and the decoy effect!

Dan Ariely — Fri, 11 Apr 2008 19:53:45 -0700

Clinton recently suggested that if she wins the Democratic primaries, she would select Obama as her vice president. Was this a good move on her part? How should Obama have reacted to this?

The field of behavioral economics has shown a phenomenon called the asymmetric dominance effect (or the decoy effect). The basic idea is that when we are presented with two options that are rather different, we have a hard time making a choice between them. In such cases, if a third alternative that is similar to one option but clearly inferior to it is added to the mix it can change the choices we make. It sounds odd that adding an inferior option that no one would select would influence our choices, but it does.

For example, if you had to choose between a weekend in Rome with all expenses paid and a weekend in Paris with all expenses paid, the decision is difficult because the options are different in so many ways (food, culture, atmosphere). But what would happen if we added a decoy option? What if we added a weekend in Rome with almost all expenses paid? This would be the same as the other trip to Rome but without the espresso in the morning. The idea is that Rome without the espresso would make Rome with espresso look better in comparison to Rome without the espresso—and also overall, and relative to Paris. This is why adding Rome without the espresso can get a larger market share for Rome.

In my mind, Clinton and Obama are in many ways like Paris and Rome. Some people might have strong preferences but they are different options with very different advantages and disadvantages.

When Clinton introduced the Clinton + Obama option, she in fact introduced a Rome + espresso option and by doing this I suspect that she did two things. She made the option of choosing Clinton + Obama look good not just in relation to the Clinton only option but overall and compared to the Obama only option. At the same time, I suspect that she also made the Clinton only option look inferior in comparison. Not only to the Clinton + Obama option but also relative to the Obama option.

Now what should Obama have done? If he had presented a counteroffer in which he announced that he would accept Clinton as his vice president, he would have affected the same structure around his own candidacy and as a result, would have muted the decoy effect on the Clinton side.

Alternatively, he could have strongly declared that he would never accept the vice presidency and eliminated the viability of the Clinton + Obama option altogether, leaving Clinton with only the negative effect of suggesting this joint ticket in the first place.

From this perspective, the worst option for Obama is to not react to Clinton’s offer and keep it viable in people’s minds.

Sub prime mortgages

Dan Ariely — Sat, 05 Apr 2008 15:36:35 -0700

Do we know enough to give stimulus packages?

Dan Ariely — Sun, 16 Mar 2008 10:04:01 -0700

The US government is clearly under some pressure to take action in an attempt to stabilize the economy, and as a consequence, just announced a $150 billion (more or less) stimulus packages that is supposed to rejuvenate the economy and stabilize the market (H.R. 5140 -- the Economic Stimulus Act of 2008).

Will the current plan achieve the government’s goals?

The field of behavioral economics has rather convincingly shown that money given in different forms can have different effects. Paying for dinner in cash feels very different than paying the same amount with credit card, giving your hosts a gift when you arrive at their place for a dinner party is not the same as giving them cash, and giving employees a monthly increase in their salary has different effects on their spending compared to an equivalent yearly bonus.

In the domain of the stimulus packages these results suggest that the method of delivering the stimulus packages (individual tax relief in the form of tax rebates, money toward retirement saving, gift certificates, pre-paid debit cards etc) could have large consequences on its effectiveness.

The next question, of course, is which delivery method to select. Here behavioral economics has been instructive as well. In particular, years of research have demonstrated over and over that our intuitions about the relative effectiveness of different approaches are often wrong.

Given that the method of delivery could make a large difference, and given that our intuitions about their relative effectiveness could be wrong, what should we do?

The simple answer is to conduct an experiment, as this is the only method we have for testing what really works and what is likely to fail. In the same way that we force drug companies to test the efficacy of their drugs before rolling them onto the market, shouldn’t we ask the government to first test their ideas before they invest billions of dollars of our tax money on some stimulus packages?

Doing such experiments is clearly not simple, but in order to learn what is truly effective, we must select a few leading candidates, try them out in different markets or market sectors and compare their effectiveness over time. The value of such investments in learning about the effectiveness of different policies is not only useful for helping us spend the immediate stimulus package but, more importantly, it can help us with market problems that we are certain to encounter in the future.

We all have some complaints about the FDA, yet we also realize that without the FDA medicine could have been nothing but leeches and placebo—isn’t it time to take the same systematic approach to policies that are so central for our society?

Maybe the fed should hire some experimentalists and start investing in learning about these hugely important decisions?

Some links
http://www.whitehouse.gov/news/releases/2008/02/20080213-3.html

http://topics.nytimes.com/top/reference/timestopics/subjects/u/united_states_economy/economic_stimulus/index.html?inline=nyt-classifier

http://edition.cnn.com/2008/POLITICS/01/24/economic.stimulus/index.html

http://online.wsj.com/article_email/SB120541641601433381-lMyQjAxMDI4MDE1MzQxMTM2Wj.html

http://www.whitehouse.gov/news/releases/2008/01/20080124-4.html

http://www.latimes.com/news/nationworld/politics/la-na-stimulus8feb08,1,7830253.story

http://money.cnn.com/2008/01/24/news/economy/stimulus_package/index.htm

http://www.npr.org/templates/story/story.php?storyId=18390704

http://www.wxow.com/News/index.php?ID=16573

Do We Get What We Pay For?

Dan Ariely — Wed, 05 Mar 2008 22:10:38 -0800

The nights in the burn department were always difficult, and many of the patients would regularly ask (beg) for more painkillers to help them fall sleep. One afternoon I overheard the doctors tell the nurses not to give a certain patient any more morphine. A few hours later, when the same patient started begging for painkillers I saw the nurse go to her room with an injection and a few seconds later the patient quietly went to sleep. When the nurse stopped by my room, I asked her about it and with a smile she told me that she had given the patient IV fluid.

This was the first time I experienced (secondhand) the power of placebo. I am not sure if they ever treated me with the same method, but it is certainly possible.

Years later I became even more impressed with placebos when I learned that a placebo for pain has a very clear physiology. When we expect to get pain relief, our brain secretes a substance that is very much like morphine and this substance makes the pain go away. This means that even if the injection contains no painkiller we can still get pain relief courtesy of our own brain.

Yesterday we published a study in The Journal of the American Medical Association about placebos. In this study we showed that when people get more expensive painkillers (placebos in our case) they expect a lot and get a lot of pain relief, but when the price of these pills is discounted, the expectations are lowered and so is their efficacy. As it turns out, with painkillers, we sometimes get what we pay for.

Book experience

Dan Ariely — Fri, 22 Feb 2008 05:02:47 -0800

My first book was about to be born .....

I stayed awake until midnight, just to see the countdown on my computer arrive at the “In Stores Now!” I went to bed soon after but at 2:30 AM woke up, full of excitement, and could not fall a sleep again. I was not too worried because I was sure that the excitement would give me sufficient energy for the day ahead and indeed this was correct.

From 7:00 AM until 4:30 PM I went from studio to interview and back to studio. TV was a bit strange because the time was so short, and the pace was so fast. Radio was more relaxed and conversational. Magazine interviews were even more natural.

At 7:00 PM I began my first “book reading.” Given my experience with reading poetry for experiments I decided not to read but instead just talk about my research. The audience was filled with collaborators, former students, friends, family, and the teams from the literary agency and publisher. Overall, it was the most supporting audience one could imagine.

I intended to begin by describing my injury and how it set me on the path of thinking about irrational behavior more generally. Although I had spent time beforehand walking between the aisles of Barnes & Noble, planning what I would say, to my amazement the moment I started talking, I also started to cry (not too much but enough to prevent me from being able to talk).

This happened to me once before at an academic conference. I am very used to discussing my injury with people, and so at the conference I decided to share some of my experiences and make some comments about adaptation–the things that I got used to and the things I did not. The emotions that overwhelmed me the moment I started talking were surprising and I was unable to talk without crying. I tried to walk it off and start again, but without any luck. After a few attempts I gave up and just skipped to the other points I’d planned on making.

Before the “book reading” I was thinking about that experience, and I wondered if the existence of the audience at the academic conference was the trigger that so strongly amplified my emotions. I tried to predict if it would happen again with the audience at Barnes & Noble. I did not feel any of those emotions surface as I planned my talk among the bookstore’s aisles, so I assumed it would be fine–but of course I was wrong. The moment I started talking in front of an audience the emotions overcame me and I again had to skip to other topics.

This was a very good lesson on the power of emotions and our inability to predict their onset. In essence, when we don’t feel the emotions it is very hard to determine how they will influence us once they are evoked. And oddly, even with the research I have done on this very specific problem, I was unable to make a correct prediction.

I was also puzzled by the effect of the audience itself, and I am wondering if the existence of other people, in general, amplifies emotions–maybe this is what happens to actors, singers and other people that perform in front of audiences. I am not sure I want to continue doing these experiments on myself, but I sure am curious about it.

Irrationally yours
Dan

Cheating

Dan Ariely — Sat, 16 Feb 2008 19:27:03 -0800

Harvard Business review recently published a short description of some research that Nina Mazar, On Amir, and I carried out over the past few years as part of their “Breakthrough Ideas for 2008.” The academic paper describing these findings in more detail will come out in the Journal of Marketing Research sometime in the near future, but in the meantime, here is the short version of it: In general, the results point to a few interesting aspects of human nature. One is that most of us, when tempted, are willing to be a little dishonest, regardless of the risks. Another is that even when we have no chance of getting caught, we still don’t become wild liars-our conscience imposes some limits. Finally (and what I find most disturbing), it’s clear that we have an incredible ability to rationalize our dishonesty and that justifying it becomes substantially easier when cheating is one step removed from cash. Nonmonetary exchanges allow people greater psychological latitude to cheat-leading to crimes that go well beyond pilfered pens to backdated stock options, falsified financial reports, and crony deals. Such latitude is the force behind the Enrons of the world. Irrationally yours Dan

Can People Love the One They are Compatible With?

Dan Ariely — Wed, 13 Feb 2008 06:22:28 -0800

Leonard Lee, George Loewenstein, James Hong, Jim Young and I recently conducted a study on the ways that one’s own attractiveness influences their perception of, and actions toward, others.

The first question we had is whether people who are less attractive themselves view the attractiveness of others differently. Using data sets from HOTorNOT.com we found that regardless of how attractive people themselves are, they seem to judge others’ attractiveness in similar ways, supporting the notion that we have largely universal, culturally independent standards of beauty (e.g. symmetric faces). Moreover, we found that people prefer to date others who are moderately more attractive than they are themselves.

We also found a difference in who they approached for a date, where less attractive individuals approached others who were less attractive. So in essence, less attractive people have the same sense of esthetics but being aware of their own attractiveness, they approach people who are in the same range as themselves.

Finally, we wondered how less attractive individuals rationalized to themselves, their selection of less attractive others. Using a speed-dating study we found that more attractive people placed more weight on physical attractiveness in selecting their dates, while less attractive people placed more weight on other qualities (e.g. sense of humor). Much like the famous line from Crosby, Stills, Nash, and Young, people find a way to love the ones they can be with.