Paris or Rome?

Well, I thought I was going to be talking about persuasion this week but apparently I was looking at my social psychology notes instead of my Beginners Guide to Irrationality but the two disciplines are inextricably linked anyway. In fact, I think social psychology and behavioural economics are so important for us all that they should both be taught as core subjects in school.

Instead of persuasion I’m actually sharing Dan Ariely’s thoughts on decision-making.

The decisions we make often aren’t the best for us, either in the short or long-term – a glass of water or a glass of wine, an apple or a bag of crisps, spend now or save for later. The choices we make are influenced by the choice sets laid out in front of us and often these choices are difficult to evaluate. In the open market we are often given weighted choices, choices which have asymmetric dominance – this is called the decoy effect.

Dan uses this holiday analogy to explain. You are offered an all-expenses paid trip to either Paris or Rome. Most of us who have been to either will have a favourite but suspend those thoughts an imagine you have no preference. You wouldn’t be sure which to choose. No imagine the same offer but if you choose Rome, coffee isn’t included in the deal. You probably still wouldn’t be sure. But, given the choice between Rome all-expenses or Rome minus coffee and you’d definitely choose Rome which then makes Rome all-expenses seem better than Paris all-expenses. The contrast makes the desirable option even more attractive.

Another example of this will be recognised by readers of the Financial Times or Wired magazine. Their subscriptions go something like this:

  • online subscription £59
  • print subscription £125
  • both online and print £125

In lab conditions 16% of people chose the web subscription, 84% choose the combination and no one chose just print. However if offered just web for £59 or both for £125, 68% chose web and 32% chose both.

By offering the print subscription it defined the framework to evaluate the options and it make it look like you’re getting the online version for free.

Anchors

Once a particular number is introduced it becomes the reference point from which prices are judged. The first decision we make becomes an anchor that influences future decisions. In the lab Dan tested this by making people think of the last two numbers of their social security number then asking how much they would be willing to pay for a bottle of wine. This with higher numbers were willing to pay significantly more than those with low numbers, and remember – those numbers were arbitrary.

The decisions we make are influenced by past decisions but unfortunately we remember our actions far better than our emotional states when we made the decision to act.

Learning from our mistakes

There are three main lessons we can take from behavioural economics:

  • we have many decision biases
  • we don’t have good intuition and don’t recognise our faults
  • we need to look to the results of experiments rather than using intuition

We should test government policies before implementing them, in the same way physicians have to test procedures and drugs.

We should work like computer hackers and break procedures down into discrete, exact steps and figure out which points are the best at which to intervene.

We should critically examine where improvements in behaviour can be made.

Doubt your intuitions.

Experiment more.

Tune of the Week

Ella Fitzgerald – Undecided

 

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