An interesting story out of the BBC: one priest, Father Tim Jones, recently gave an incredibly provocative sermon where he offered controversial advice–to shoplift. His argument is basically that those who are less fortunate may often turn to illegal means: they can rob, they can become prostitutes, etc… Jones is arguing that of these “evils,” shoplifting, especially from large corporations, has the least impact on society, and thus, somehow, is the least immoral. Of course from a psychological standpoint this is our intuition. It is easy to do harm to large corporations because we think that we are spreading our damage out evenly among more individuals, and, moreover, those individuals are faceless people wearing suits. However, giving this more thought, we can also sense that if we were to allow this to happen as a society (or be more forgiving of poor people who steal from big corporations to get by), we could very quickly slip into a system of mutual distrust. Before you know it, we will all be having to have our bags checked at entrances and exits, with costs going up for everyone. On the whole, this might leave fewer people with jobs, and the cycle could continue to spiral out of control. As we know, many of the biggest financial blunders of the recent years had to do with tiny misjudgments that added up to larger and more catastrophic costs, with the resulting mutual distrust freezing credit and badly hurting the economy. One thing we must beware of is the allure of thinking that our tiny, seemingly inconsequential decisions won’t matter much in the long run. As history and research have shown us, it’s the little decisions that we gloss over that end up hurting us most in the end.

In a recent New Yorker article, James Surowiecki proposes that many people want to be forced to pay higher prices for gas.

Surowiecki starts by describing a very important observation made by Thomas Schelling about the N.H.L:

“At the time, players were allowed, but not required, to wear helmets, and most players chose to go helmet-less, despite the risk of severe head trauma. But when they were asked in secret ballots most players also said that the league should require them to wear helmets. The reason for this conflict, Schelling explained, was that not wearing a helmet conferred a slight advantage on the ice; crucially, it gave the player better peripheral vision, and it also made him look fearless. The players wanted to have their heads protected, but as individuals they couldn’t afford to jeopardize their effectiveness on the ice. Making helmets compulsory eliminated the dilemma: the players could protect their heads without suffering a competitive disadvantage. Without the rule, the players’ individually rational decisions added up to a collectively irrational result. With the rule, the outcome was closer to what players really wanted.”

In the rest of the article, Surowiecki tries to make the case that we all feel the same about cars with higher fuel-economy — and that we want to be forced into this situation.

I am not sure I agree.  There are clearly situations where we want to be forced into a better social equilibrium (for example, I want other people to drive safer), but this strikes me more as a situation that we want others to start driving more fuel efficient cars and less about a social coordination.

What do you think?

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…)

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….).

For a long time it was difficult to make the argument that people might behave irrationally from time to time.  Sure we could demonstrate different irrationalities with experiments, but people would always tell me “clearly when it comes to important decisions like the stock market people will be perfectly rational!”

I didn’t think so, but it is hard to experiment with the stock market.

Sadly, the recent events have shown that the market is not as rational as we might hope, and making the case for irrationality is now rather trivial.  It is an expensive lesson, but when David Brooks from the NYT makes the case for behavioral economics, I think we have arrived. 

Maybe the most irrational tendency of them all is our belief that we are rational!

I just hope this would have been a cheaper lesson.
Sadly yours

Dan

Jake is about to chip onto the green at his local golf course when a long funeral procession passes by. He stops in mid swing, doffs his cap, closes his eyes and bows in prayer. His playing companion is deeply impressed. “That’s the most thoughtful and touching thing I’ve ever seen,” he says. Jake replies, “Yeah, well, we were married 35 years.”

Who do you think will find this joke more funny liberals or conservatives? (more…)