Can it be that adding food makes people believe they are eating less?

A recent study by Brian Wansink and Pierre Chandon report that this can indeed be the case (this version of the study was done with John Tierney of the NYT)

Half of the people were shown pictures of a meal consisting of an Applebee’s Oriental Chicken Salad and a 20-ounce cup of regular Pepsi and they were asked to estimate the amount of calories in the entire meal. The other participants were shown the same salad and drink plus two Fortt’s crackers prominently labeled “Trans Fat Free.” The crackers added 100 calories to the meal, but given that they were “diet” how will their presence influence the estimated amount of calories in the entire meal?

The first group estimated that the meal contained 1,011 calories, which was a little high. The meal actually contained 934 calories — 714 from the salad and 220 from the drink.  But, the second group  estimated the total amount of calories to go down.  Now the average estimate for the whole meal was only 835 calories — 199 calories less than the actual calorie count, and 176 calories less than the average estimate by the other group for the same meal without crackers.

The original study was interpreted as a halo effect of items labeled as diet.  I suspect that this is correct, but I think that it is also possible that people have a hard time computing totals and that instead they compute averages – which makes the estimation when the crackers are present to be lower.

Dear Irrational,

I am a partner in an asset management company whose purpose is to manage investments for individuals, families, and foundations.  The principles of Predictably Irrational made me think about the effectiveness of each component in our investment process.  My end in mind is: 1) to identify failure ingredients in my investment process and 2) engineer out their removal.
My question follows:

Is ‘falling in love’ with an investment hazardous to one’s financial health? Does ‘falling in love’ with an investment result in predictable behaviors (in me) that lower (or negate) what would otherwise have been an excellent investment performance?

——-

Dear Investor,
We have not done any research directly on this question.  Nevertheless, I suspect that the answer is that we do get attached to investments, that it is not good for us, and that it has the potential to influence our judgment for the worse.

First, regarding ‘falling in love’ with an investment; I think that we would.  What we know about the endowment (ownership) effect is that people tend to fall in love with anything they happen to own (mugs, pens, cars, kids).  Once we have something, it becomes ours and we perceive it as special. As a consequence, we value it more.  I suspect that the same could occur with investments.
On top of that, in the current economy people are feeling like they are in a losing situation (if you don’t feel this way look at your retirement account) but losses in the stock market are not psychologically realized until they are truly realized.  So in people’s desire to hold on to what they have you might suspect that in this economy there is going to be an even stronger tendency to ‘fall in love’ with an investment.
Why is this not good for us?  Because the expected value of investment options are about their future potential and the past is just water under the bridge.

The good news is that you can do something about it, and advise your clients to do the same.  Imagine that at the start of every month you don’t look at your portfolio and instead you design your strategy and market positions as if you started from scratch.  The idea is that if you start from scratch you have a clean past with no commitments to past decisions.  I am not sure if the ‘falling in love’ with an investment sentiment will go away completely but I think this way it will be less powerful.
Irrationally yours
Dan

I wrote this about 8 months ago — but it makes particular sense right now ….

—

If (as is often the case) talking about sex makes people more interested in having it, does that mean that the current talk about a recession could actually be creating one? Well, maybe.

Or so one general finding of behavioral economics would have us believe. With all this chatter about a recession, consumers might, for example, hold off on buying that new dishwasher because of the “bad economy,” or pass up the more expensive restaurant because “we’re in a recession.” Without any discussion about recession, we’re unlikely to change our pattern of behavior. But talking about it can be a force that affects our decisions and alters our consumption habits.What makes me think that we’re such creatures of habit? Consider the experience of eating a Godiva truffle: The chocolate is melting in your mouth, the aroma penetrates your nose, there is a small nut inside. . . . Now think about this familiar experience and try to determine how much it’s worth to you. A quarter? $0.50? $0.75? $1.25? $2.50? While the experience of eating a truffle is very familiar, figuring out what we would be willing to pay for it proves difficult. So what do we do when we make purchasing decisions? (more…)

From the NYT op-ed
BY withholding bonuses from their top executives, Goldman Sachs and UBS may soften negative reaction from Congress and the public if their earnings reports in December are poor, as is expected. But will they also suffer because their executives, lacking the motivation that big bonuses are thought to provide, will not do their jobs well? (more…)

I have experiments …

Dear Irrational,

Congratulations on being selected as one of Fortune’s 10 new gurus of the year.

My question to you is how do I get my son to call me more frequently?  Any advice on this?
Yours

Yoram

————————
Dear Aba (father in Hebrew),

I suspect that guilt could work as one of the best ways to increase phone call frequency — so I would try that first.  Also it would help if you would answer your cell phone more frequently…

Anyway, I just got home after being away for 5 days, so I will call you tomorrow.

Love

Dan

Burns are a particularly nasty and painful type of injury: the nerve endings are damaged, skin regrows tougher and tighter, and on top of this patients have to also deal with physical therapy.

A new game, called Snow World gets burn patients to play a 3D computer game in which move along a snowy path and fire snowballs at nonmoving target.  What are the effects of this game?  A recent report shows that patients playing the game report feeling less pain when playing, and more impressively also get a greater range of motion in their burnt limbs as their muscles relaxed. Finally, they also get less pain medication was also required, meaning patients were lucid for longer periods of time.

This is just great — and I wish I had this game when I was in hospital.  Maybe we can find games for other issues as well (eliminating the pain of social rejection, losing money in the stock market….).

As it turns out Predictably Irrational was selected by Amazon’s customers as their favorite book for 2008 in the category of Business & Investing. 

It was also selected as #23 in customer favorites across all categories.

I can’t tell you how happy this makes me.
Irrationally yours

Dan

Today was an interesting customer service day. First, our cable (phone, internet and TV) stopped working. I got on the neighbors network and requested a technician from Time Warner. I was told that someone would come the next day and that they would call 30 minutes before they arrived and if we did not answer the phone they would not show up and we would have to call to reschedule the service visit. I tried to point out that the reason I need someone is that I don’t have a working phone, but this was lost on them.

When I got to the office I called the mortgage company. Our mortgage was just sold from one bank to another, and I called to make sure that they applied the first payment correctly. Yes, they got the payment but they did apply it to the mortgage. Why? I have no idea and they did not know either – so they asked me to call back in a few days to see if something had changed. Reluctantly I agreed, and then the customer service person asked me if all my questions were answered. “Are you joking?” I asked. “I had one question and you told me to call back.” You are correct,” she said, “did I answer all your questions?” “What do you think” I asked. “I guess we didn’t.” she said.

I am sure looking forward to calling them again in a few days.

Some thoughts about Globalization