Review of "Predictably Irrational"

As most of you know, I’ve been on a social science kick for the last few years, most of my reading being popular level books in behavioral economics (Nudge, Freakonomics, Wisdom of the Crowds, anything by Gladwell, etc.). Here are some notes from another such work, entitled “Predictably Irrational” (which pretty much sums up the focus of the book), and some of my reflections thereon (consider these “Ed’s Cliffnotes”). If you’re not that interested in the economic questions, you might want to look only at Chapter 4 or Chapters 12/13, which deal with “social” issues.

Chap. 1 – It’s All Relative: We make decisions not as rational analyses but always in comparison to something else. The example given is that when offered the choice of a $59 electronic subscription to “The Economist” or a $125 combined electronic & paper subscription, people split about 68-32, but when given a third option of a $125 paper subscription only, the combined subscription suddenly seemed much more valuable with the split now being 16-84. The choice was the same (electronic vs. electronic & paper), but the context for the decision had changed.

Another example came from the world of CEO salaries. In 1976, the average CEO was paid 36 times as much as the average worker, but by 1993, it was 131 times as much. In an effort to rein in that increase, federal regulators forced the top people at a company to have their salaries made public (that 990 form we all know about). Almost another 17 years later, and the figure is now 369 times as much as everyone at top wants to be paid more than the “average” of their peers. Oops!

There are lots of possible applications of this “keeping up with the Joneses” dilemma. One is that we might apply some of the marketing ideas from the first example to how we pitch ourselves in comparison to our main competition. People typically want the “good” option for close to the “low” price. Could we include a chart in our promotion literature, for instance, showing TRBF for Wheaton, JBU, and “out of state” UofA (or maybe Oklahoma Wesleyan)?

An application of the second example is that, contrary to my usual inclination, we shouldn’t distribute too much information that might disrupt “the social contract” in some way, such as GPA data (which we haven't but which I've supported doing in the past). On the other hand, in areas where you want people to compete, such as in the ancillary budget process, you probably want to distribute as much information as possible. Finding that balance, obviously, is the difficult part.

Chap. 2 – The Fallacy of Supply & Demand: This is something my game theory reading pointed to a lot as well, that determining the “value” of anything is much more difficult than we might think. The author calls this “arbitrary coherence.” Our initial “anchor” for any particular price is pretty arbitrary, but once that anchor is set, everything else compares to that anchor. Ask people how old their infant child is and then ask them to bid on an item, and they bid much lower than the average. Ask people how old their aging grandparent is and then ask them to bid, and they offer much higher than the average. The initial “anchor” is completely arbitrary, but people can be “fooled” pretty easily. In game theory, one would call this the “first mover” advantage.

I try to follow this approach, for example, in my salary negotiations with faculty in which I first tell people how we rank in cost-adjusted terms compared to the rest of the CCCU or in absolute terms compared to our regional CCCU peers. I don’t start with comparisons to the UofA. I’m sure there are lots of additional examples people could give about setting the initial reference points for a conversation.

Chap. 3 – The Cost of Zero Cost: For those of you who’ve seen the book “Free!” (or Gladstone’s rejection of many of its more radical ideas), you’ll understand the argument that we don’t act rationally when something is “Free!” (http://www.wired.com/techbiz/it/magazine/16-03/ff_free?currentPage=all). If you take two items and sell one at $15 and the other at $1, for instance, people might chose the $15 item that they think is a great deal more frequently than the $1 item that they think is only a mediocre deal. But change the prices to $14 and “Free!” and guess what, everyone takes the free item. Why? It’s the same price differential and the same value proposition, but “Free!” means “no risk,” apparently, so we no longer pay attention to the real value of something. We’ll wait in line for an hour for a cheap item that’s “Free!” when we could have worked the extra hour and made five times as much money.

I’m sure the marketing types already think in these terms (a “Free!” gift or “premium” for joining the Leadership Circle or a “Free!” application process if you submit your information on time), but this concept got me to wondering whether we should be focused on giving scholarship “discounts” but should instead offer “Free!” things. What if we said that all your books would be “Free!,” perhaps if you qualified at a certain level. What about “Free!” room or “Free!” board? According to the theory, the initial attraction of getting something “Free!” would help attract interest, and it should, again in theory, be cheaper to give away some “Free!” things than to try to buy students with sale prices on tuition.

Chap. 4 – The Cost of Social Norms: This chapter has been the most valuable to me so far. The argument is that we typically operate in one of two worlds, a “market” world and a “social” world. The boundaries are hard to define, but if we transgress them in a major way, watch out. One of the interesting conclusions is people work even harder for “social” reasons than for “market” reasons. People always feel that they should be paid a little more (the famous Carnegie line when asked how much money he needed, he responded “just a little more”), so when they feel that they’re working “for a paycheck,” they generally feel undervalued and they therefore don’t work quite as hard as they really could. But ask people to help out a “cause,” and people generally work even harder than if they were paid well. Giving “cause” people the impression that money is a key factor disrupts the whole calculus, and once they start thinking in market terms, you can’t go back.

A couple conclusions from this argument that the author makes is that you should put everyone on monthly or annual pay (and no one on hourly pay, which is what Bakke argued in “Joy at Work” as well) and you should be wary of merit or market pay systems in a “cause-related” organization. Hmm . . . I’ve been fully supportive of the former, contra Pat, but Pat was opposed to the latter, which I was in favor of.

But then it gets really interesting because it turns out that you can give “gifts” of the equivalent value as a monetary wage without disrupting the “social calculus” that people are working for a cause or a friend and not for money. “Gifts” are still socially okay. Money is not. (I’m not quite sure how “gift cards” fit into this line of thinking, though I’m guessing that it depends on the amounts involved.) Are there “big” gifts that we could give people that would still be socially acceptable? A week’s stay at Lakeside Manor? A course release or other time off? A public recognition that doesn’t have a monetary award attached to it? Professional development resources (conferences, research stipends, etc.)? A “gift card” to JBU food services (this might work well if we ever got to the personalized budget accounts I’ve been talking to Tom, Pat, Kim, and Paul about)?

Once we’ve agreed that staying on the “social norm” side of the ledger is a good thing, that decision really should reorient much of how we operate as an organization, but we usually don’t make that transition. One conclusion, for example, is that social groups protect their own from outside forces, so we should try to avoid as much as possible reducing positions for financial (outside) reasons, but that we should instead have higher bars for “performance” (internal) reasons. We typically think the opposite (it’s easier to fire people in an economic downturn), but doing so creates the impression that money (the market) is the primary driver of the organization and not the social group. Enforcing rules narrowly, using monetary “sticks” (ancillary budget process?) to enforce compliance, and talking a lot about the business end of the operation all transgress the “social” exchange and move us into the “market” exchange. The bottom line is that if we’re going to talk the “family” talk, we have to be more willing to walk that walk as well, though again, determining where those lines are is difficult.

Chap. 5 – Hot is Hotter than you Think: Basically, when people are in their cool “Dr. Jekyl” moments, they really can’t imagine what they will say or do when they’re in their emotional “Mr. Hyde” moments. So if you want to keep people (he focuses on teens) from doing stupid things, it’s not enough to just teach them what not to do. You have to help them avoid situations where their emotions can take over. Our "prudential" alcohol policy might be an example?

Chap. 6 - The Problem of Procrastination: The author's research shows that, sure enough, people procrastinate, that tightly restricting people's freedom (think deadlines for turning in assignments) is the best cure for procrastination, but that simply offering a tool for pre-commitment helps a lot (this would be the "Nudge" argument), especially for people who recognize their tendency toward procrastination. His favorite pre-commitment device is something like a deposit where you are forced to put money down up front, but you get it back if you do the "right" thing. He also likes the simplicity of "bundling" services (the one-stop shop idea, for example, when it comes to student services) and accountability partners (real or virtual).

Chap. 7 - The High Price of Ownership: Once we "own" something, we value it much more highly than before. And I mean MUCH more highly (about 14 times as much in the experiment the author presents). Reminded me a lot of our "name" feedback. People didn't know or care about the name John Brown before they came to the school, but afterwards, they "owned" it and were very intense about not wanting to see it changed. People attach very quickly, they focus on loss more than gain (witness the recent health care debate), and they have a hard time seeing anyone else's perspective (again, witness the health care debate). The more time people spend with something, even before they actually buy it, the more attached they are. Our visit program is probably a good example of that philosophy. Our discussions about "trial" courses might be another example (take a summer course from JBU for "Free!" but the credit only counts if you come to JBU).

Chap. 8 - Keeping Doors Open: Options distract us, so while we might think we're happier having lots of choices, in fact, we are typically much worse off trying to keep all of our options on the table. I see it all the time on the faculty growth plans where faculty note that they really need to say "no" more frequently, but they have real difficulty doing so. Drucker's time studies show the same results for executives. And being willing to "abandon" is one of the hardest things to do as an organization.

Chap. 9 - The Effect of Expectations: We generally get what we think we're going to get, which is why the placebo effect is so powerful and why "presentation" matters so much in fine dining. In terms of education, for example, Harold Heie used to say that he had long thought that it was the faculty that attracted students to a university but after decades of experience, he had to conclude that it was the buildings. Having visited a few dozen campuses myself, I would have to concur.

Chap. 10 - The Power of Price: Another version of the expectations game is that if something costs a lot, we assume it will be better, and voila, it “actually” is. 50 cent aspirin works much better than 1 cent aspirin, even though they use the same ingredients. Hendrix concludes that they can keep raising their prices because the more expensive they are, the more people will think that they're really great, and the more that, in fact, the students will feel that they're getting a great education (they must be, right, because they're paying all of this money?).

Chap. 11 – The Content of our Character, Part I – Why We Are Dishonest: “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 to think 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.” Honor codes, for example, might work, but they have to be reiterated at “the moment we are tempted.”

Chap. 12 – The Content of our Character, Part II – Why Dealing with Cash Makes Us More Honest: Cheating, it turns out, is a lot easier when it’s one step or more removed from real, physical money. Interestingly, few seem to realize that this will be true and predict the same levels of cheating regardless of what the “payout” will be. All of this is why, perhaps, direct theft (burglaries and the like) are miniscule in dollar terms compared to exaggerated expense accounting, IRS fraud, etc. The author’s best guess as to why “hard cash” is different is all of the “sacred symbolism” on the bills themselves as well as the importance we as a society place on those bills.

Chap. 13 – Beer and Free Lunches: When people order food (or beer), the first person to order gets what he or she really wants (and enjoys it accordingly), but those later in the sequence will often choose food not because it’s what they want (or will like) but because it provides some social benefit (to show that they are “unique” in a culture that values uniqueness, for example). In short, people don’t always make rational decisions (the basic point of the book), so there are changes we can make that will indeed help everyone (provide a “free lunch”). The author mentions the “save more tomorrow” mechanism that the Nudge authors highlighted as being a great example (people commit today to save more of their paycheck for retirement in future years).

As you can probably tell, I liked the book, but since it’s on my Kindle, I don’t have a copy to give anyone. The downside of this new technology, huh?