Why do we buy a Toyota Prius but do not take as much care to make our homes more efficient?Don’t misunderstand me, I have nothing but admiration for the Toyota Prius. But let’s look at the numbers. Switching from a standard midsize car to the Prius can reduce CO2 emissions from 7.5 tons to 4.4 tons per year (a 3.1 savings).But consider this: A standard four-bedroom house occupied by four people in Massachusetts can produce 53 tons of CO2 a year. What if we took steps to make the home’s heating and cooling system more efficient, installed efficient lighting, used ENERGY STAR appliances, and took steps to reduce energy used for hot water? If we made all these changes, the same house could produce 30 tons of CO2 a year (savings of 23 tons).So why do we buy and proudly drive the Prius but do not spend nearly as much on making our home more efficient? (more…)

Ask people if they’d like a 15-cent Lindt truffle or a one-cent Hershey’s Kiss, and 73% buy the truffle. Drop a penny off the price of each – a 14 cent truffle or a free Hershey’s Kiss – and only 31% choose the Lindt. Is eating the chocolate you don’t really want worth saving a penny? Probably not. But in the economics of life, we often show bad judgment, like allotting too much value to things that are free. In Predictably Irrational, behavioral economist Dan Ariely goes for a fascinating romp through the science of decision-making that unmasks the ways that emotions, social norms, expectations and context lead us astray. Mixing anecdote and social-science experiment, he illustrates common problems, like the tendency to keep our options open, even when one is demonstrably better. Consider the MIT student who has a horrible time committing to one of her two suitors – despite her clear preference for one of them. And relativity gets us time and again: coffee in a nice setting tastes better; a person looks more attractive once a similar but less good-looking person enters the room. Understanding these irrationalities, Ariely writes, is the first step in overcoming them.

From time to time people ask me about the relationship between Predictably Irrational and Freakonomics.

To start with, Freakonomics has a single-word title, and one that is the authors’ own creation — which clearly shows that Levitt and Dubner are more imaginative and creative.

Titles aside, the fundamental difference is that whereas Freakonomics shows how the world works according to the principles of rationality, particularly in places where we don’t expect it (real-estate brokers, Sumo wrestlers, teachers, etc.). Predictably Irrational is about our irrationalities — the places where people think they behave rationally but, in fact, don’t. From this perspective, you might want to consider Predictably Irrational to be a stepbrother of Freakonomics — examining how the world works (in places where we expect rationality), according to the principles of irrationality. (more…)

The nights in the burn department were always difficult, and many of the patients would regularly ask (beg) for more painkillers to help them fall sleep. One afternoon I overheard the doctors tell the nurses not to give a certain patient any more morphine. A few hours later, when the same patient started begging for painkillers I saw the nurse go to her room with an injection and a few seconds later the patient quietly went to sleep. When the nurse stopped by my room, I asked her about it and with a smile she told me that she had given the patient IV fluid.This was the first time I experienced (secondhand) the power of placebo. I am not sure if they ever treated me with the same method, but it is certainly possible.Years later I became even more impressed with placebos when I learned that a placebo for pain has a very clear physiology. When we expect to get pain relief, our brain secretes a substance that is very much like morphine and this substance makes the pain go away. This means that even if the injection contains no painkiller we can still get pain relief courtesy of our own brain.Yesterday we published a study in The Journal of the American Medical Association about placebos. In this study we showed that when people get more expensive painkillers (placebos in our case) they expect a lot and get a lot of pain relief, but when the price of these pills is discounted, the expectations are lowered and so is their efficacy. As it turns out, with painkillers, we sometimes get what we pay for.For a story in the NYT see this link

The NYT just reported a paper by a few of my friends about soccer. The basic analysis is that during penalty kicks, goalies should stay in the middle more often than they currently do. The question, of course, is why do they so often jump to one side or the other, when it might be better to stay in the middle.

There might be many reasons for this but one thing that I am curious about is whether one reason is that not doing anything just seems wrong to the goalies. Imagine for example a highly paid stock broker that is trading on a day where there is not much news — would that broker feel the need to trade a lot just to justify his salary to himself and maybe to others? Wold he feel guilty just sitting and doing nothing (even when this is the right thing to do) and as a consequence over-trade?

I am not sure if the “idle hands” intuition is correct, but it does sound like an idea that deserves an experiment. Maybe an experiment where we pay some subjects a small amount of money for trading and others get much more money, and we see if the amount that they get changes their need to trade — even when there is no real reason to trade . . . Anyone want to predict the results?

In one of our projects, Kristina Shampanier, Nina Mazar, and I examined whether our reaction to Free! is just a rational reaction to a low price (a very low price) or if it is an irrational overreaction to Free! We carried out a set of experiments in which we measured not only what people chose but also what they gave up in the process. By doing so we were able to show that Free! can tempt us so much that we are willing to forgo a really good deal for a mediocre one simply because it is Free! For now let’s skip the experiments and consider the following thought-experiment:

Consider how long you would be willing to stand in line for a free Ben & Jerry’s ice cream cone. Let’s assume that your answer is 20 minutes and that the cost of a Ben & Jerry’s ice cream cone is $1.45. Now answer this: would you be willing to stand in line for 20 minutes for $1.45 in cash? No way.

This is exactly what the experiments showed; when something is Free! we get excited and as a consequence we are willing to give up better deals — not to mention our time, money, etc.

For the original paper see this link.

For a story about this in the New Yorker see this link.

DAN ARIELY TALKS WITH KATE FILLION ABOUT WHY SO MANY ECONOMISTS UNDERSTAND SO LITTLE, AND HOW A BURN UNIT CHANGED HIS LIFEQ: What exactly is a behavioural economist?

A: Much of standard economic analysisassumes rationality. If you ask a standard economist why people don’t saveenough money, they’d say it’s a meaningless statement; people are reasonable,they know what they’re doing–they might not be saving a lot because maybe theydon’t have enough resources right now, maybe they want to check out how itwould feel to live with their kids at retirement, maybe they really want totest out the bounds of social security. Behavioural economists, though, believethat people make all kinds of irrational mistakes, and we try to analyze themin order to create opportunities to help people out. For instance, have youever gone to a restaurant wanting to watch your diet, but when the waiter camewith a tray of desserts, you succumbed to temptation?

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The next time you’re juggling options — which friend to see, whichhouse to buy, which career to pursue — try asking yourself thisquestion: What would Xiang Yu do?

Xiang Yu was a Chinese general in the third century B.C. who tookhis troops across the Yangtze River into enemy territory and performedan experiment in decision making. He crushed his troops’ cooking potsand burned their ships.

He explained this was to focus them onmoving forward – a motivational speech that was not appreciated by manyof the soldiers watching their retreat option go up in flames. But General Xiang Yu would be vindicated, both on the battlefield and inthe annals of social science research.

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If I did not know that the people around me were talking about Obama, I would have guessed that I was among a group of excited fans, infatuated with a rock singer, or a movie star. In fact, when I ask Obama supporters about how they expect him to fare against other US presidents, their general answer is that he is likely to be the best president of all time (some think he will be second to JFK). (more…)

Try, one day, to walk up to someone, maybe up to many people, and tell them that you think they have made a mistake in their most recent decision. You can even try to sugar-coat it by telling them that the reason for this mistake is not because they are stupid or negligent, but because this is just the way they are wired — just the way their brain works. (more…)