When I was doing Dan Ariely’s Beginners Guide to Irrationality course on Coursera, there were lots of little Eureka moments and this was one of them. Human irrationality at its best or worst depending on how you look at it can be hilarious and embarrassing when someone like Dan points out some of the bad decisions we make every day. Luckily some of the ways to make us stop and think are covered in the course but better still for those of us who work in the public sector and depend on people making good decisions, some of it can be achieved without people realising that their behaviour has been subtly changed for the better.
Fairness and reciprocity
It’s easy for us to pay for something that requires conspicuous effort but much harder to pay for an expert who performs the job effortlessly. A good example of this would be a joiner, toiling over replacing a broken lock, huffing and puffing and taking a long time. Two streets down a better joiner does the same job but in half the time with much less obvious effort. Both charge for their services by the hour so we’re basically paying for or rewarding incompetence!
Our ideas about fairness are based on marginal cost rather than fixed cost – we are willing to pay more when we see the costs involved. Purchasing decisions should be based on weighing pleasure against price but we have difficulty calculating these trade-offs. Judgement of a fair price depends on perceived costs. Because determining value is so difficult we use shortcuts – like assessing the level of effort required to produce something.
Basically we get:
- happy when we make money
- really unhappy when we lose money
Loss aversion is the asymmetry around a neutral point, where losses are perceived at 2.5 times more powerful than gains. An example of this would be that sales people sell more when their commission is paid in advance because they don’t want to have to give the money back. Once you give people money they value it to a higher degree.
The endowment effect
This is when we adjust our level of ownership and that becomes the new baseline by which we judge gains and losses. When we know we are about to get a pay rise we think that it will sort out or debts, pay for better holidays, change our lives but once we have it we very quickly get used to it and nothing much about our lives changes.
Once ownership is established, people favour the object that they own, and when we own something we focus on what we would have to give up rather than what we could gain. After taking possession of an object people consider themselves the owner and like the object more, making it difficult to give up. A good example of this would be 30-day money back guarantees on things like sofas – once that sofa is in your front room you consider it yours and the chances are it won’t go back to the showroom.
Marketing and social norms
In some situations adding money to the equation makes things worse – imaging turning up at a dinner party and handing the host £20 instead of a great bottle of Chateauneuf Du Pape. Once financial motivation is added to the equation the social motivation disappears.
We live in a continuum between market norms and social norms. Imaging a work colleague’s car tyre blew and they phone you and asked for help. Would you help just because it’s someone you know? Yes – social norms. Would you help if they offered you £3? No – downright cheeky! Would you help if they offered you £300? Yes – market norms.
Gifts are in the social domain – if tell the recipient the value of the gift you violate social norms. Social norms often dictate when money is an appropriate gift for example a wedding or a birthday but it would be inappropriate as a get well gift or a thank you for looking after the dog while you were on holiday.
In the workplace this translates into the fact that the social benefits of things like health care or holiday schemes work better than cash commission.
Cash doesn’t build social capital whereas gifts create a greater sense of reciprocity. It is gifts rather than money that help nourish friendship.
Next time I’ll be looking at the price of free, micro payments and balancing money, time and happiness.
Tune of the week
Nouvelle Vague – The Killing Moon