irrational predictability

1. Areily
Book review AHaller

2. Decision Making
• What Contributes to our Ability to Make
Sense of Information Before Us?
• What contributes to distortions from
making otherwise rational decisions?
• Why does relativity play such a prominent
aspect of decisions we make?

3. • Visually these length of the lines look different but
actually are the same lengths.
• Just as we have visual illusions we have decision
illusions

4. • Online $59 Results 16%
• Print Only (the decoy) $125 Results 0%
• Both $125 Results 84%
TakeAway the MiddleChoice
• Online $59 Results 68%
• Both $125 Results 32%

5. • TVs
• 36” $690
• 42” $850
• 50” $1480
• People chose the middle
choice.
• Restaurant
• $10 Meal
• $15 Meal
• $25 Meal
• People chose the middle
choice
• Houses – 3 Choices
– Contemporary same quality
and price as a goodTutor type
house
– Tudor move in condition
– Tudor lesser in cost but needs
repair
• People chose between the
twoTudors.
• Offered European
vacation
– Rome with Free Coffee
– Rome without Coffee
– Paris with Free Coffee
• People chose Rome with
Free Coffee

6. COMPARETHREE PEOPLE
• Given a choice betweenTom,
uglyTom, and Jerry,Tom is
chosen.
• Given a choice betweenTom,
Jerry, and ugly Jerry, Jerry is
chosen.
• Conclusion go out looking for
a date with a friend who looks
like you but is less attractive
and a 3rd person who looks
like neither of you
CEO PAY
• Their pay was forced by law
to be revealed.The idea was
it would force it down to give
stock holders better value
• Instead CEO’s compared pay
and demanded more. Now
they make 3 times more than
prior to the law

7. • In certain European countries 4 to 28% success rate
• In others 86-100%
• Check if you want to participate gave the lowest
results
• Check if you do not want to participate gave the
best results
• Conclusion: It matters how you phrase the
question. You will get the result you are looking for
more often.

8. • If told fixable with one medicine they recall
the decision for hip replacement
• If told more than one medicine they release
matter to hip replacement specialist.
• Too many choices creates more complexity –
pass on the decision to someone else

9. • Most people do not know what they want unless
they see it in a context
• We viewed things from a relativistic point of view as
to value
• We simplify matters that really at times are
complex comparisons.The mind avoids the complex
it provokes uncertainty which creates insecurity.
• PersonWho Designs the Forms or Menus or Ads or
Asks the Question Create the Results
• The PersonWho Frames the Question Creates the
Outcome

10. • Imprinting Preconditions Us – First impressions set
an invisible but real anchor
• Suggest ahead of time a number like the last 2
digits of social security number. Artificially we
anchor a corresponding high or low value like a
MSRP.
• People who buy real estate in one part of the
country pay the same amount in another market
even though the markets vary greatly.

11. • Habits matter – if we see a restaurant filled with
customers we stop and wait in line rather than chose
the empty restaurant across the street – it is known as
herding
• Coherence arbitration
• Anchoring creates a key role
• First decisions are important.They have ripple effects
in the years and months to come.
• Memory loss or retention affect. Double the price
people may adjust short term but they will come back
• Choices affected by random initial anchors
• Gut feeling and rationalizing after the fact is not
always bad

12. WhyWe Often PayToo MuchWhenWe Pay
Nothing
Free we find irresistible -Test offering
• Hersey Kiss @ 1 cent - 27%
• Lindt truffle @15 cents – 73%
• Hersey Kiss @ FREE! – 69%
• Lindt truffle @14 cents – 31%

13. • Free is considered more value with no
downside – we over react
• There can be no loss we assume
• Free can sometimes be deceptive
• In dining we are happiest when we pay
nothing (free!) – so one person should pay the
bill

14. SOCIAL CONTRACT
• Social Norms include the
friendly requests of others
• Instant payback is not
expected
• Both derive pleasure
through the exchange
MARKET CONTRACT
• Market Norms – wages,
prices, rent, and interest
you get what you pay for.
• The two worlds are on
different paths
Converging of the two spells trouble – people work more for a cause than for a cash
reward.

15. GIFTS
• No one is offended by a small
gift.
• People are willing to work free.
Offer them a small payment
they will walk away.
MARKET CONTRACT
• Using market norms makes it
difficult to recover to social
norms
• Example making people pay for
those who arrive late to pick up
kids at day care. It gave parents
the option to be late and they
were more often. Gone was the
social norm to be on time.
Converging of the two spells trouble – people work more for a cause than
for a cash reward. Avoid mentioning the cost of a meal. It shifts from a social
contract to a market means of evaluation

16. BUSINESS USING SOCIAL
NORMS
• Treat customers as family
• Loyalty occurs.
• Minor infractions easily are
ironed out
• What to do when conflict
arrives like a bounced check?
• A friendly call is better than a
stiff penalty fee.
BUSINESS USING MARKET
NORMS
• Consumers take offense
when errors occur. No
forgiveness of a breach of
contract only penalties
• Consumers shop elsewhere
for lesser fees.
Converging of the two spells trouble – punitive penalties drive the consumer away
and they are lost for an indeterminable amount of time

17. BUSINESS WITH SOCIAL
NORMS
• Employees are family
• Loyalty occurs.
• Work is a place of collaboration
• One worker befriends another as
they work together
• Company perks such as health,
day care, time off, etc are part of
the social contract.
• Look at Google.
BUSINESS USING MARKET
NORMS
• Obsession with cost containment
drives the employer to have rules,
regulations, and bidding for talent.
• Employees do not give extra effort
as they punch in on time and leave
on time.They are rewarded by
money and change to a higher
bidder.
• Money is the most expensive way
to motivate people.
•A company paid vacation is a social perk not a market driven one and has its place.
•Gifts practically they are a waste of money.
•Gifts soften the need to call on someone to later help.
•Gifts are a social facilitator

18. • “Running of the Brides” severely discounted bridal gowns –
the law of demand – demand spikes as the gowns become
more affordable and now secondly even multiple ones can
be bought
• When we add money (market norms) to social norms we get
less motivation.
• In economic exchanges we tend to be perfectly selfish and
unfair (deny someone else who is more needy the chance to
have we found).

19. • Example Starbursts one time sold at 1 cent each other times
“free”.
• The results 58 sold at 1 cent and 207 took the free starburst.
The results were on the average when free secondary
acquisition of starbursts declined versus the ones sold.
• Conclusion at zero cost we become less selfish and want to
leave something for others – social norms” take over our
decisions.
• The 2nd law of demand ceases to operate at the cost of zero
as far as money exchanges

20. • What if it changes from “money” to “effort” how does that
affect social norms?
• Test sort some letters for a free chocolate.The results were
midway between free and monetary results. Effort is
between social and market norms.
• Could we barter effort for reciprocity. It may not be market
efficient but it would restore some social norm of being there
for one another
• When emotions (arousal) run high social norms get trampled
• Examples of Cap NTrade give an example of where market
norms collide with social norms

21. • Passions once released distort rationality – hunger,
shelter, security, money, anger, pleasure, jealousy,
and lust
• Lesson learned
• Better toAvoid aTemptation versus
• Resisting aTemptation
• Human nature is revealed in the classic Dr. Jekyll
and Mr. Hyde. Dr. Jekyll had sober and somber self
control. Mr. Hyde became a passionate deviant.

22. • The potential of the heat of passion is real in us
all.
• We cannot fully understand how we might react
in an aroused emotional state of anger, lust,
greed, or despair. Internal collapses and lapses
are but a moment away from happening and we
may not know it.
• Best strategy walk away from the fire of passion
before one is consumed by it.
• Secondly, if in the fire strategize how to exit or
minimize the damage that could result.

23. • Example of American savings – 1994 5% and in 2006
0%. Europeans save 20%, Japan 25% , and China 50%.
• Conspicuous consumption – big houses with more
perks fueled by consumer credit.
• Procrastination – “for tomorrow” in Latin – Deferred
gratification or prudence gets postponed whether for
a budget, weight loss, a newer car, etc.
• Giving up our long term goals for immediate
gratification is procrastination

24. • Example of giving deadlines to college students
1. Students set own deadlines – students did not set all
term papers to the last day of class as expected –
they came to some middle ground between 2 and 3
2. Dictate certain strict deadlines by the instructor –
they got the best grades
3. Dictate submission of all work last day of class –
they got the worst grades
Conclusion: Students do procrastinate.Tighten deadlines over a period cures it
best.We have problems with self control.Therefore have a payroll deduction for
savings purposes, make appointments to exercise, make scheduled medical
appointments as preventive medicine is best etc.

25. • Procrastination causes everyone problems
• Introduction of email and social networking into our lives
create “schedules of reinforcement” and distractions
• Fixed ratio schedule – rat gets reward whenever presses lever
100 times
• Variable ratio schedule – rat never knows when pressing the
lever he gets a reward
• Surprisingly variable scheduling creates more demand.
Under a fixed schedule the rats stopped working the
moment they got a reward. Under a variable schedule
they never ceased to work.
• Analogous is gambling which gets addictive – rewards are
variable not fixed
• No wonder we get addicted to keep going back to our cell
phone or computer to see if a reward awaits us.

26. Lesson Learned from Recovering from Severe Burns
• If a particular desired behavior ( recovery from hepatitis)
results in an immediate negative outcome (punishment
for taking Interferon), this behavior will be very difficult
to promote.
• The human mind is too distant from seeing short term
pain creates long term gain.
• Knowing this predisposition we must trick our minds. At
the same time doing the difficult thing do a positive
thing.Watch your favorite movie while walking on the
treadmill. Pair something you detest with something
you love?
• America’s top killer is not smoking or obesity.These are
symptoms. It is our inability to make smart choices and
overcome our own self destructive behaviors.

27. • Example of Duke basketball tickets.Those
who bore the brunt of every special
disqualifier and got tickets over valued them.
Those who failed in the process under bid the
value of the tickets.
• Whether a house or car why does the seller
envision a greater price than the seller?

28. • We fall in love with what we already have.
• We focus on what we will lose rather than
what we might gain.We have a strong
aversion to loss.This can lead to bad
decisions. Downgrading to a smaller house is
seen as a loss not a gain.
• We assume wrongly that other people see the
transaction the same way we do.
Three Quirks to Ownership

29. • The more work we put into something the more
sense of ownership occurs.
• We feel ownership before we own it. It creates
an upward spiral in an auction. People have pre-
visions of driving a certain car one day before
ever buying it.
• Trial promotions – we yield to the promotion
and then claim ownership of the service.
Example 30 day money back guarantee.
Other Quirks to Ownership

30. • Ownership also applies to point of views not just
the material world.
• Take ownership of an idea.We love it more than
we should.
• We prize it more than it is worth
• We have trouble letting go of a point of view as
we cannot stand the loss of this idea.
• People get left with an ideology – rigid and
unyielding
Ideas

31. • Home owners did not believe their own home value
had fallen very much.Two thirds assumed there was
little to no change in the value of their home.
• Simply human nature overvalues everything we
own.
• Buyers do not want our home.They want their own
version and will remodel it once they move in
• Our biases distort reality. Listen instead to advice
and feedback we receive from others.
Lessons of the Great Recession

32. • “Burn the Boats” – normally, we cannot stand the idea of eliminating an
alternative.Once the alternative is discarded though all our energy goes
to the task at hand. Split interests cease.
• We relinquish something by not giving up our options. Example of
woman with two suitors. Example of college student with two choices of
career.
• Our era is an abundance of opportunity. Doors close on our most
important options and we fail to act as we are distracted by less
important options.
• There is a price to pay for indecision.There is a consequence for not
deciding.Time is fleeting. Opportunities expire like a coupon.
• Time is finite. Opportunities are few. Our endurance has an upper limit.
Our economic resource have limits.
• Acting decisively means knowing what is chosen is the best at the
moment not necessarily the perfect decision as we cannot all foresee
every contingency of rippled effects.
• Awkward having some quality instead of no quality but it happens.Our
expectation for a higher quality simply is not achieveable.
• Beggars cannot be choosers

33. • If you predetermine to tell someone something is
distasteful, the odds are good they will agree with you.
• Expectations influence our life. Exotic names given
ordinary food dishes creates the expectations it will be
even more flavorable than in an ordinary taste test.
• Do not underestimate the power of presentation. Put the
food nicely arranged on the plate.
• Enhance the wine by serving it in special wine glasses.
• Mention a movie got great reviews.
• Expectations shape stereotypes. Asian American women
prescreened for a math test. Stereotype Asians are good
at math but women are not. Depending on the
prescreening as to their gender versus their Asian origins
the scores were different.

34. • Biased processes influence how we experience our world.
These processes become the source of escalation in many
conflicts
• Likelihood of agreement about the “the facts” grow small
as personal investment in a bias grows.
• Conflicts can engage a neutral 3rd party.
• A top talented maestro plays a violin in a subway station.
Only up to 3% stop to listen. Ambiance matters.
Expectations triumph over experience.
• In Carnegie Hall poor violinists get standing ovations.
Expectations triumph over the musical experience.
• Blessed is he who expects nothing, for he shall never be
disappointed – Pope – if we expect nothing we get nothing
• Positive expectations allow us to enjoy things more

35. • Beliefs and expectations affect how we perceive and
interpret sights, tastes, and other sensory items.
• Placebos run on the power of suggestion.
Confidence in the procedure plus conditioning
create apparent remedies.
• The higher the cost of the drug the more responsive
one was to a placebo.

36. • Trust is a crucial facilitator for any economy to
succeed.
• When we use a common resource at a rate slower
than the rate it replenishes all is well. If though a few
become greedy and take more than their share in the
long term everyone suffers.
• Examples of over fishing, over subscription to food
stamps, government benefits, etc. eventually the
benefits to everyone get curtailed.
• Distrust is infectious. When we all cooperate, trust is
high and the total value to society is maximized.
• When we begin to cheat, even if only by a little, over
time it can become a habit.

37. • Transparency and Sacrifice gotTylenol to recover from
its pharma-terrorist incident.
• Companies need to proactively address consumer
complaints. Get ahead of the complaints by monitoring
Twitter or other social networking sites
• Some companies see trust as a public good and go extra
lengths that cost them.
• People forgive a bit of lying.The lies ripple out affecting
others in the same trade. Skeptism grows.
• Once trust is eroded it becomes extremely difficult to
restore and maintain. Pre-emptive action is important.

38. • Employee theft and fraud is greater than all the theft and
robbery by thieves in the country.
• Insurance owners over claim their justified
reimbursement.
• The IRS receives constant under payment of actual taxes
due
• People engage in a cost benefit analysis with honesty but
also as a corollary a cost benefit analysis with dishonesty.
An added factor -what social norms are in play?
• Grand dishonesty gets greater thought than minor
dishonesty where it routinely gets rationalized.
• Social norms where honesty is corporately held in high
honor dampen the yielding to dishonesty

39. • In a controlled experiment where the students were asked
to recall the 10 commandments prior to an exam cheating
disappeared.
• Conclusion: Reminders of a moral benchmark keeps
people honest.
• Professions use to have oaths of conduct. Starting in the
1960’s professions began to become deregulated. Strict
professionalism was replaced due to economic pressures.
• Lawyers would no longer bar bad conduct by their peers.
Bad behavior became more common and got rewarded.
Statistical quotas became more important for everyone in
law enforcement.
• Doctors prescribed more tests out of economic worries
than the likely overall need of the patient.
• This decline in professionalism is prevalent everywhere.
Corners are cut and bad behavior not dealt with. A code of
honor is lost.

40. • Recall: Reminders of a moral benchmark kept
people honest.
• The writer suggests that prior to submitting a
proposal that an oath or affirmation of an honor
code is placed at the beginning (not the end) of
the document. In his experiments this had
measureable influence in the reduction of
dishonesty
• If we are reminded of morality at the moment of
temptation then we are much more likely to be
honest

41. • When social norms collide with market norms, the social norms
fade away and the market norm stays.
• Once professional ethics (social norms) decline they are very
difficult to regain
• In 2002 the USA was rated 20th in integrity in the world. Denmark,
Finland, and New Zealand were at the top. Haiti, Iraq, Burma, and
Somalia at the bottom.
• Trust is eroded and economic prosperity for all is undermined.
• Honesty really is the best policy.
• We all are inherently selfish. We need reminders that avoiding a
temptation is easier than resisting a temptation. Example avoid
over spending by limiting visits to the mall where temptations
abound.
• Self denial has merit. It is long term in its view point. It needs
reminders.The alternative is yielding short term to self
gratification at the expense of others and ultimately ourselves.

42. Why Dealing with Cash Makes Us More Honest
• Examples of leaving Coke in a dormitory refrigerator versus dollar
bills. Stealing of the cokes not viewed the same as stealing of $6 left
in the refrigerator which were not touched.
• Given a chance people cheat.We do not see it coming how easily we
rationalize it with non cash items in smaller not grand amounts.
• People over claim on an insurance claim
• People buy clothes, wear them, and then return them
• Expense reports get padded
• We are moving towards a cashless society and thus as a society more
vulnerable to the temptation to cheat

43. • People do not always behave rationally
• They often make mistakes in their decisions
• We all fall prey to this irrationality
• Choices have more to do with our desires with how we
view ourselves than with reality
• We tend to vastly underestimate these forces
• Irrationality is common place in our decisions.
• Errors occur anywhere in observing, in interpreting, and
in applying.We can be right on two and utterly miss on
the third.
• The influence of others – example of verbally ordering
at a restaurant versus writing order so no one hears.We
get what we want to eat instead of getting what we
socially want which is uniqueness when we order out
loud.

44. • Act II Scene 2
• Hamlet discourse on how reasonable a
person is and really we are not