Michael Jackson died of cardiac arrest on June 25, 2009. Recently, a hearing started regarding his former personal physician Conrad Murray.  In this hearing the physician is accused of involuntary manslaughter, negligence, and administration of a dangerous and unnecessary cocktail of medications that accelerated the superstar’s death.

While I won’t argue for the physician’s innocence, I do think we should ask – how common is the tendency to prescribe patients what they want? Is this a singular incident, a case of a drug-pushing “bad apple,” or could there be more general forces at play?

What I hear from my physician friends is that they feel tremendous pressure to please their patients, and they know that if they don’t give them what they want, some other physician will (or at least this is how they justify their overprescription).

A common case of this sort is the case of the influenza virus. When patients contract the flu, they go to their doctors, feeling miserable and begging for help. Doctors know that they shouldn’t prescribe anything for their viral patients (and that the best thing to do is nothing), but they feel a pressure to give the patients something as they walk out the door. And so, they prescribe antibiotics, which don’t treat the flu but do build up drug-resistant bacteria that may cause trouble in the future.

Doctors in this situation face a conflict of interest, between what the patient wants from them, what is good for their own wallet (to keep the patient happy), and what is the right medical thing to do.  Moreover, the situation is not perfectly clear because while it is unlikely that the patient has a bacterial infection (one where antibiotics could help) it is still possible – creating a gray zone of medical practice.

The thing about medical gray zones is that they become grayer, more blurred, when patients are more powerful or high-profile. The minute a doctor has a patient like Michael Jackson who is wealthy and used to getting his way, the pressure to succumb has to be much higher.

In thinking about Michael Jackson’s physician, consider this. It’s easy to find someone guilty and lay the blame solely on that individual, one man who shamefully deviated from the standard of care, but it’s much more challenging to put ourselves in his position and think about what we would have done if we were in his position. I suspect we too would have prescribed those meds.

P.S. I can’t believe that I am writing a blog about Michael Jackson

In today’s economy, consumers and financial institutions alike are constantly on the lookout for new ways to reduce spending. As you read this article, consider these questions: what cost-cutting habits has your organization developed, and are they rational? Do you recognize irrational or habitual spending tendencies in your own customers and members? If so, how can you help them make better decisions that lead to improved savings?

Money is an integral part of modern life. We constantly make decisions about whether we’re willing to pay for different products and, if so, how much we are willing to pay. In fact, we make decisions about money so often that we consider money to be a natural part of our environment.

However, money is a relatively recent invention, and despite its incredible economic usefulness it does come with its own set of problems. In particular, it turns out that decisions about money are often unintuitive and, in fact, quite difficult. Consider the following situation as an example: you are thirsty, tired, and annoyed and just want a cup of coffee. You see two coffee shops across the street from each other. One is a specialty coffee shop that sells handcrafted, designer coffee and the other is Dunkin’ Donuts, which sells standard, decent coffee. The price difference between the two options is $1.75 for your cup-a-joe. Now, how do you decide if the benefit of the handcrafted coffee drink is worth the additional $1.75?

What you should do (if you wanted to be rational about it) is consider all of the things that you could buy with that $1.75, now as well as in the future, and decide to buy the expensive coffee only if the difference between the two coffees is more valuable than all of those other possibilities.

But of course this computation would take hours, it is incredibly complex, and who even knows all the possible options to consider?

Heuristically Speaking

So what do we do when we need to make decisions but making them “correctly” is too time-consuming and difficult? We adopt simplifying rules, which academics call heuristics, and these heuristics provide us with actionable outcomes that might not be ideal but that help us to reach a decision. One of the heuristics we often use is to look at our own past behaviors, and if we find evidence of relevant past decisions, we simply repeat those.

In the case of coffee, for example, you might search your memory for other instances in which you visited regular or fancy coffee shops. Then you might assess which behavior is more frequent, and tell yourself, “If I’ve done Action X more than Action Y in the past, this must mean that I prefer Action X to Action Y” and as a consequence, you make your decision.

The strategy of looking at our past behaviors and repeating them might seem at first glance to be very reasonable. However, it suffers from at least two potential problems. First, it can turn a few mediocre decisions into a long-term habit. For example, after we have gone to a fancy coffee shop three times in a row and paid a premium for the same coffee we could get elsewhere, we might continue with this strategy for a long time without reconsidering how much we are really willing to pay for coffee.

The second downfall is that when market conditions change, we are unlikely to revise our strategy. For example, if the price difference between the regular and fancy coffee used to be $0.25 and over the years has increased to $1.75, we might stay with our original decision even though the conditions that supported it are no longer applicable.

Examine old habits

In light of our current financial situation, many people these days are looking for places to cut financial spending. Once we understand how we use habits as a way to simplify our financial decision making, we can also look more effectively into ways to save money.

If we assume that our past decisions have always been sensible and reasonable then we should not scrutinize our long-term habits. After all, if we’ve done something for five years, it must be a great decision. But if we understand that long-term, repeated behaviors might reflect our habitual decision making in the face of complex financial decisions more than they reflect what is truly best for us, we might first examine our old habits and carefully consider whether they indeed make sense or not. We can examine our subscription to the ESPN Sports Package, our annual subscription to the opera, our yearly Disneyland vacation, or our monthly visit to the hairstylist.

By examining these habits — and quitting them when it makes sense to do so — we might actually discover ways in which we could reduce our spending on a long-term basis.

Yes, money is complex, and it is incredibly difficult for us to carefully examine (and re-examine) every purchasing decision we make. But the advantage of examining our habits is that it might lead us to create better ones that will benefit us for a long time.

May you have a happy and exciting new year,

Dan

This column first appeared at http://www.deluxeknowledgeexchange.com

The realization of how relative happiness is became very apparent to me some years ago when I was in the burn department.

One day a new patient came to the burn department — Miri, a teenage girl.  Miri was 17 and her boyfriend just informed her that he was leaving her for someone else.  As passionate as only teenagers can be, she went to the bathroom, slashed her wrists and poured bleach on them.  As luck had it, when she was brought into the emergency room, Dr. Batya Yafe was there, an amazing woman and specialist in both plastic surgery and microsurgery who was able to reconstruct Miri’s blood vessels and take care of the damaged skin on her wrists.

A few weeks later Miri was a functional teenager again, but with second degree burns on her wrists.  Relative to the rest of us, this was a relatively minor injury, but I am sure it was still very painful.  The first few weeks were a serious adjustment for her – switching from being an active teenager in love to a patient in the burn department surrounded by these awful smells and many people in tremendous agony is not easy for anyone and particularly not for an idealistic teenager.  The amazing thing was to see her a few weeks later and in the months to follow when she would come back to visit us.  She seemed like a new and altogether person.  She was happy, energetic, and with an appetite for life.

The scars that Miri carried on her wrists must have made her feel immensely different in the world outside the burn department, a constant reminder of her time spent in the burn department and the events that brought her there.  I also suspect that these scars acted as a permanent reminder of what could have been, and her relative fortune in life.  Was her newfound happiness related to the negative experience in the burn department?  I imagine that Miri’s injury and her weeks in the burn department adjusted her perspective on life.  Both the struggle she had with her burns, and the comparison to the other people in the burn department must have dwarfed her perceptions of her romantic trouble in comparison.

The burns on her wrists really helped Miri, and more generally I think that injuries that “work best” in giving people a new perspective on life are those that continuously act as a reminder of their relative happiness — even once the initial injury is over.  Miri’s wrists, or losing a leg, for example, are promising on these grounds because the loss can act as a permanent reminder. And so are deep burns (the superficial ones are not as good because they can disappear with time).  Lets be clear — I am not advocating burning people who are not very happy with their lives and letting them struggle with the pain and agony of burns, the slow recovery, and the comparison to other less fortunate individuals — but I do think that ironically such negative experiences can actually improve the outlook people have on life and their motivation for living.

So, as we plan for 2011 maybe we can find ways to be happy without any serious injuries.

Happy new year

Dan

A few months ago I got to visit Woods Hole (a fantastic place by the way) when they were having their TEDx event — and here is my talk.

One of the challenges of human life is knowing that what’s good for us in the long term often doesn’t seem good for us right now. Dieting, for example, is not very fun now, but good for us in the future; the same goes for saving money or submitting to preventive medical tests. When we face such tradeoffs, we often focus on the short-term rather than our long-term goals, and in the process we get ourselves into trouble.

But wait! There is hope. By understanding where we fall short, there are methods we can use to overcome our natural (and less than desirable) inclinations.

We just created a new facebook game called “Friend Measure”

The basic idea is that once a week we will post a question.  The question this week is:

Would you date your friend’s ex a month after they broke up?

After you answer the weekly question, we ask you to pick some of your friends and predict how they will answer the same question. Next, they will be asked to answer the question (and also predict your answer).

After you and your friends have answered the question, you will get one score of how well you know your friends in general and other scores of how well you know each of your friends (and how well they know you).

Looking forward to your feedback, and if you want to suggest questions that we should ask in the weeks to come just send the suggestions to irrationallyyours@gmail.com

“Friend Measure”

Dan

I recently had an interesting meeting with a locksmith:

As I mention in the video, what’s really interesting is that this locksmith was penalized for getting better at his profession. He was tipped better when he was an apprentice and it took him longer to pick a lock, even though he would often break the lock! Now that it takes him only a moment, his customers complain that he is overcharging and they don’t tip him. What this reveals is that consumers don’t value goods and services solely by their utility, benefit from the service, but also a sense of fairness relating to how much effort was exerted.

Now imagine how much more people would pay if they knew the effort that goes into all kinds of products and services?

How do we decide how much we are willing to pay for things?

Let’s take black pearls as an example:

The interesting thing about black pearls is that when they were first introduced to the market there was essentially no way to gauge how much they were worth: were they worth more or less than white pearls? Most people instinctually believed that white pearls were still more desirable. But then the black pearl discoverers had an lucrative insight: take these unfamiliar black pearls to a famous jeweler and have them displayed next to the more precious gems: rubies, sapphires, and so on. The result still lives with us today: black pearls are now worth more than white pearls.

Dear Readers,

And as always, many thanks for all your help.

Dan

Here is a letter I got last week:

Dear Professor Ariely,

I have something of a story that intrigued me along the lines of your ‘dishonesty’ experiments. My wife’s cousin (I’ll call her Mary) is generally a nice, honest person. She and her fiancé found an iPhone on vacation. They decided to keep the phone, a nice item of value. Soon after, the owner started calling repeatedly (his name comes up on the screen). Mary chose to not answer the phone. After many calls were unanswered, the calls stopped. Mary kept the phone.

Mary’s situation is special because it is an instance where the lost object can ‘communicate’ with the finder and ‘ask’ to be returned. To what extent and to how long would the average person wait before answering? Would they directly refuse to return the item, or demand compensation?

What if you could rig a phone to deliver a series of text messages that become increasingly personal? Would the finder then feel more connected to the owner, feel empathy, and be more likely to return the phone?

As a side note, the owner of the iPhone was able to remotely shut down the phone so nobody could benefit. The unfortunate outcome is a lost phone. The upside is the empowerment given to the owner, who as a last resort just stops the functionality.

What do you think?

Jack

———————————————————————–

Dear Jack,

I think that there are two very interesting points here:

The first is that Mary probably realized that if she answered the phone she would feel obligated to return the iPhone to its owner. And since she did not want to give it up, she simply did not answer the phone. This act is in essence a very sad type of self-control.  Generally we try to exert self-control when we want to assure that we will behave well (save money, take medications, not procrastinate), but here Mary was trying to avoid the temptation that would have made her behave in a kind way.

The second interesting idea is that people are more likely to return items that are more personal. Text messages are one extreme example of this principle, but maybe it would also work for wallets with pictures, books with names, cloths with initials, etc.

Not sure if this helps, but maybe we could learn something from Mary’s behavior.  And for sure don’t leave any valuables unattended during thanksgiving.

Irrationally yours

Dan

I have recently been asking people around me what they think makes a good gift.  And I don’t mean specific items like sunglasses or one of my books (which are all excellent ideas); I was looking to find some of the basic principles and characteristics of good gifts.  One of the best answers I’ve gotten so far is this: “A good gift is something that someone really wants, but feels guilty buying it for themselves.”  What is interesting about this answer is that the ideal gift from this perspective is not about getting the person something that they can’t afford, or something that they have no idea that they want – it is all about alleviating guilt connected with the purchase of a highly desirable (yet guilt invoking) item.  So, lets consider two ways in which good gifts can eliminate guilt:

Case 1* Imagine that you are walking by a storefront and you notice a beautiful coat that is just the right cut and color.  You walk in to check it out, and up close it is even more beautiful.  But then, you look at the price tag and you discover that it is about twice as expensive as you originally guessed, and after 30 seconds of painful deliberation you decide that you can’t possibly justify paying so much for a coat – and you go on your way.  When you get home, you find out that your significant other has purchased that same exact coat for you … from your joint checking account.  Now, ask yourself how you would feel about this. Would you say a) “Honey, this is very nice of you, but I have weighted the costs and benefits earlier and decided that this coat is not worth the money — so please take it back immediately” or b) “Thank you so much, I love it, and I love you!”  I suspect that the answer is b. Why? Because by getting you the expensive coat, your significant other got you what you wanted without making you contemplate the guilt associated with the purchase.

Case 2** Imagine that you have just finished a fantastic meal and have the option to pay with cash or with a credit card.  Which one will “hurt” a bit more?  You probably think that paying with cash will be a more miserable way of spending your money – but why?  Because, as Drazen Prelec and George Loewenstein show, when we couple payment with consumption, the result is a reduction in happiness. When we pay with a credit card the timing of the consumption of the food and the agony of the payment occur at different points in time, and this separation allows us to experience a higher level of enjoyment (at least until we get the bill).

To think some more about this example, imagine that I own a restaurant and I realize that on average people eat 50 bites and pay $50.  One day you come to my restaurant and I tell you that because I like you so much I will give you a great price and charge you half price – only 50¢ per bite. In addition, I will also charge you only for the bites you eat, and you will not have to pay for the bits that you don’t eat.  What I will do is serve you your food and stand next to you with my notebook open and mark in it each bite you take.  At the end of the meal I will charge you 50¢ for every bite you took.  I think you will agree that this would be a fantastically cheap meal relative to the regular price, but I also suspect you will agree that the process will not be much fun.  Most likely, every time you take a bite you will be thinking “is this worth it?” and in the process not enjoy the meal at all.  Woody Allen might have said it best in the Manhattan taxi ride when he turns to his date to say, “You look so beautiful, I can hardly keep my eyes on the meter.”

The lesson here is that when the timing of consumption and payment are close together, the experience ends up being much less pleasurable. From this perspective you can think about gift certificates for iTunes, drinks, movies, etc. as gifts that not only get people to experience something new, but also get them to experience something guilt-free, and without the pain of paying.

In summary, I think that the best gifts circumvent guilt in two key ways: by eliminating the guilt that accompanies extravagant purchases, and by reducing the guilt that comes from coupling payment with consumption. The best advice on gift-giving, therefore, is to get something that someone really wants but would feel guilty buying otherwise.

May this be a joyful gift-giving season – and in case you want to get me something, I love gadgets, but feel extremely guilty buying them.

Dan Ariely

A shorter version of this post has appeared at the WSJ

[* This example is based on a paper by Dick Thaler, “Mental Accounting and Consumer Choice,” Marketing Science, 1985]

[** This example is based on a paper by Drazen Prelec and George Loewenstein, “The Red and the Black: Mental Accounting of Savings and Debt,” Marketing Science, 17(1), 4-28, 1998]