29
Nov 09

Predictably Irrational

Predictably Irrational by Dan Ariely is an exploration of human behavior which diverts from the logic. Consistently. For example, imagine yourself shopping for a brand new suit and, for whatever reason, a new pen, maybe to accompany your suit. You see the $15 pen, but then remember that you saw the same pen in a different store for $7. The store is not that far (15 minute drive) and you decide that it’s totally worth it to postpone the purchase of the pen and drive by another store to save $8. Then you take a look at the suit. It’s $1,000, but then somehow you recall that a similar one. Same story – the store is 15 minutes away, and it’s $992 there, $8 cheaper.

Most people when faced with these two options will definitely purchase the pen at another store, but will forego a 15-minute drive to purchase the $992 suit. Relatively the savings are different: it’s more than a 50% on the pen, and a tiny sub-percentage point discount on the suit. Nevertheless, in a nutshell in both cases you stand to save $8 by driving 15 minutes. As a rational human, once you decide that a 15-minute drive is worth $8 in savings, you should accept that as an absolute rule. Nevertheless humans behave consistently irrational when faced with such choice in psychological studies conducted by Dan Arieli.

So what are other examples of inconsistent behavior from Predictably Irrational?

  1. When faced with the following choices for magazine subscription: $59 for digital edition, $125 for print edition, and $125 for digital+print edition, 84% opted in for the third option. Well, why not, you get digital+print for the same price as print, practically a steal. However, when the middle option is removed, people overwhelmingly (68%) chose the digital subscription. Comparing a $59 digital subscription with $125 print+digital made people wonder whether they reallyneed print subscription at all. Just having a middle option that will never be selected for obvious reasons boosted magazine’s top-of-the-line product. The magazine in question is Economist.
    • Relativity also leads to unexpected results. SEC told public companies that by 1993 they were obliged to disclose the top executives’ pay. Ideally, this would make companies more responsible to shareholders and even out the outrageous executive paychecks. In 1976 a CEO was paid 36 times the average worker pay. Net result? By 1993 the CEO pay was at 131 times average worker pay. Exposing the fat cats did not cause expected shareholder outrage, it encouraged other CEOs to demand higher pay, since now they had hard data telling them they were underpaid.
  2. Having two somewhat similar options together with dissimilar one will make people choose a better deal among similar options. Assuming that you’ve never been to Africa and have no emotional attachment to geographical locations there (choose something neutral to you if you do), what would you rather choose if I gave you a choice of (a) a free trip to Zanzibar that includes a free breakfast, (b) free trip to Zimbabwe without a free breakfast, (c) free trip to Zimbabwe with free breakfast. Most people in psychological studies consistently chose option C. Our brain is wired to compare equals, and comparing A and C without specific knowledge of locations seems like a lost cause. Comparing B and C, however, is a no-brainer – you get a free breakfast or you don’t. C is such an obvious choice, the brain shortcuts, and before long option A is out of the picture.
    • Marketing technique that utilizes this knowledge is called a decoy. Williams-Sonoma accidentally discovered it by adding another, more expensive, product to its breadmaker line. Prior to this breadmakers did not sell very well, being completely new product. When a more expensive machine was added, the original version seemed like a bargain, and also customers felt that since this was a line, not a one-off product, it must be something worth researching. Sales of the original breadmaker nearly doubled.
  3. In one study participants were asked to write down the last 2 digits of their social security number, and then write an estimated price they would pay for a bunch of unrelated items. Box of Belgian chocolates, bottle of wine, a wireless keyboard – the items were intentionally random so that most people would have a vague idea of what they cost in real world. By asking participants to write down their social security digits, researchers were hoping to prime the mind. The technique worked – people whose social security #s ended with 00-20 overall bid significantly less for the items than those with 80-99 as the first number on the list. The point is not that people with high social security numbers pay more, but the fact that making a person think about the number impacts the decision-making process, if this process involves choosing random numbers.
  4. Offering the item for free has a huge impact, even when the alternative is not that expensive. Arieli set up a stand offering two kinds of treats – Lindt truffles for 15c and Hershey kisses for 1c. The price difference was huge, but most people nevertheless seemed to appreciate Swiss chocolates over Pennsylvanian sugar-and-cocoa-butter concoction – 73% chose Lindt truffles. So another test the book author ran was selling Lindt truffles for 14c and giving Hershey’s kisses away at 0c. The relative difference was still 14c, but this time 69% of the customers chose the kiss. It’s not that 1c previously broke their budget, and all of a sudden a 0c kiss offered huge savings to hungry students. Faced with two paid choices, participants were forced to make a judgement, and in this case went for a more expensive, but higher-quality item. Faced with FREE, participants forgot all about the relative taste differences between Lindt and Hershey product, and overwhelmingly acted on instinct.
    • When Amazon was testing free shipping promotion in different countries, Amazon France did not expect any real change. After all, the French site has been charging customers 1 franc if their shopping cart when over a certain amount. It’s a modern-day equivalent of 20c, what difference could it make, if your shopping cart had to be over $25, where Amazon currently allows you to ship for free? However, going from 1 franc to 0 francs was dramatic.
  5. Setting deadlines works, and having external deadlines seems to work better. The author experimented with 3 of the classes he taught. Class A had specific deadlines on when the papers should be submitted – week 4, week 8 and week 12. Class B was free to choose its own deadlines, but it had to be done in writing – each student was asked to commit to submitting a paper by a certain week, even if the commitment involved writing ‘week 12’ for each one of the three papers. The third class had no deadlines at all, except for the fact that by the end of the course the instructor wanted to have a set of all 12 papers. Which of the classes got better final grades? It was just in the order they were listed – A did best on the exam, followed by B, followed by C.
  6. Accessories matter. The researcher has set up a coffee tasting station by giving away free coffee, which could be complemented with a variety of condiments – sugar, cream, nutmeg, cinnamon, etc. The additives were placed in Styrofoam cups with hand-written notes indicating what they were. The students were then asked the rate the quality of the coffee, supposedly for a new coffee shop that was planning to open its doors to MIT students. Second test involved brewing precisely the same coffee, except this time the condiments were placed in glass-and-steel containers on a nice looking tray with pre-printed labels. Students consistently gave the second coffee much better rating, even though the contents of the pot or the variety of condiments did not change.
  7. People have different expectations for products with various prices. Researchers conducted the experiments where a group of participants was exposed to a new pharmaceutical in a very professional environment – lab coats, brochures, and all. The experimental drug, they were told, was a pain reliever, so to conduct practical tests, they would produce an electrical shock of increasing voltage until the participant pressed the button indicating they’ve reached their maximum pain tolerance level. Price for the new drug? $2.50 a pop. To test the efficiency, the researchers first asked the participants to experience pain with no drug intake, and then undergo the same test. 100% of respondents claimed the pain was relieved and hence medication worked. The same drug was then tested on a different group of people, who accidentally (via a brochure on the table) found out the drug was 10c a pop. In this test, only half of those people claimed the pain reliever worked. The drug? In both cases Vitamin C.
  8. People order differently in public and in private. When groups of people were offered a list of beers to choose from, there was inevitably more variety in the orders than when everybody was handed a menu to write on. Hearing choices of others makes people want to express their individuality, and sometimes they tend to order their 2nd or 3rd choices after hearing what people before them have ordered. Whenever asked in private, the individuals were lacking the information on others’ choices and always went for their first choice.

Believe it or not, Predictably Irrational is available at Amazon.


20
May 09

How human brain judges popularity

Wall Street Journal today describes the work of Matthew Salganik and Duncan J. Watts (published in Social Psychology Quarterly in December 2008) on researching herd mentality with popularity rankings. 12,000 volunteers were given 48 random fairly obscure songs, and asked to rate them. To help things out, popularity rankings were provided. Except that a certain group saw the popularity ranking in exactly reverse order – least popular songs appearing on top. You’d think that good songs would still win based on their merit, right?

The prior No. 1 began making a comeback on the new top dog, but the former No. 47 maintained its comfortable lead on the old No. 2, buoyed by its apparent popularity. Overall, the study showed that popularity is both unstable and malleable.

Look for page 338 of that PDF document if you want to read the details of the experiment.

Another research Carl Bialik points to is Observational Learning: Evidence from a Randomized Natural Field Experiment by Hongbin Cai, Yuyu Chen, and Hanming Fang out of Duke that gave customers of Chinese restaurants a “most popular items” list when they were ordering off the menu:

We find that, depending on the specifications, the demand for the top 5 dishes is increased by an average of about 13 to 20 percent when the top 5 popularity rankings are revealed to the customers; in contrast, being merely mentioned as some sample dishes does not significantly boost their demand. Moreover, we find some modest evidence that the observational learning effect is stronger among infrequent customers, and that customers’ subjective dining experiences are improved when presented with the information about the top choices by other consumers, but not when presented with the names of some sample dishes.


27
Aug 08

Book review: 13 things that don’t make sense by Michael Brooks

13 things that dont make sense 13 things that don’t make sense by Michael Brooks is a pretty interesting look into the world of scientific discoveries, or lack thereof. Because, you see, there are quite a few commonplace things that we take for granted, but cannot quite explain from the scientific point of view. Sure, you’ll say, it must be some extra-hard scientific stuff, a formula understandable only by an army of advanced PhDs who spend their lives figuring out these ultra-complicated tasks.

Well, not quite. It turns out that life itself is quite a mystery from the scientific point of view.

  1. Life. In theory life in the universe appeared when electric currents went through the masses of hydrogen, ammonia, water and methane, therefore creating something animate out of a set of inanimate chemicals. In practice, for a few decades the scientists have been trying to achieve a similar effect on a smaller scale, but so far no one has been able to produce the Holy Grail – turning something lifeless into something that is actually live, such as a single-cell organism. The life itself, it seems, is a scientific anomaly that should not happen in this Universe according to the existing laws of chemistry.
  2. Death. You’ve heard it before: two things you cannot avoid in life are death and taxes. Well, this is a very human-centric view of things, as it turns out there’s a variety of species (most of them vertebrates) that only get better with age. Some turtles, it seems, only get healthier and produce more children with age. Moreover, scientists are aware only of non-natural causes of their deaths – being run over by a truck or attacked by a bird. Are those turtles immortal, or are we observing just a small stage of their lifecycles (which could eclipse ours by generations)?
  3. Dark matter. It’s not embarrassing for scientists to admit they don’t know something. After all, there are plenty of little details that remain unknown in many branches of science. So not knowing what constitutes dark matter would be an acceptable excuse, if it weren’t for the fact that dark matter comprises 96% of the Universe. We know that the Universe keeps expanding, but we cannot quite describe how and what happens to the space that used to be compacted previously. Dark matter is the giant elephant in the room in discussions related to astronomy or physics – we don’t know what it is, we’ve never seen it, and only infer its existence, yet roughly speaking it’s a major ingredient in the Universe we live in.
  4. Varying constants. Physical constants are warm and fuzzy. We don’t know why they have the value they have, but we always substitute them into our equations and formulas, relying on decades of scientific research behind us, and the fact that they are, well, constants. However, there’s a fairly determined group of scientists that is looking into certain scientific constants and finding that their values have changed as the Universe aged. Determined might be an understatement, as anyone willing to travel to Gabon and mess with uranium there is certainly dedicated. What they’re finding is that the constants describing nuclear reactions were different two billion years ago compared to current constants.
  5. Newton’s inverse square law. In 1994 scientists at Los Alamos National Laboratory figured out they had a bug with Pioneer probes. Contrary to the Newton’s inverse square law, the Pioneers were drifting off course. They hired Slava Turyshev out of Jet Propulsion Lab to investigate the small bug, which was most likely to blame on some contamination or error in Pioneer design. 14 years later the bug still stands unresolved. Together with NASA the scientists have gone through heaps of papers figuring out what could go wrong, and the answer is still up in the air. If unresolved, the Pioneer trajectory might become the first evidence that it’s time to rethink Newton’s inverse square law.
  6. Homeopathy. When it works, you hear all about it. Homeopathy is almost like religion, in the sense that it attracts either staunch believers, or extreme sceptics. The idea of diluting a certain ingredient with copious amounts of water doesn’t sit well with the majority of chemists, who point out that such small proportions call for a chance of the entire solution being water. Nevertheless, in Brooks’ book there’s an attempt at the explanation of what might be causing homeopathic effect – changes in molecular structure of water depending on the chemicals that it’s been in contact with, even if the chemicals have been filtered out. However, it’s still an attempt at best, since the scientific experiments that do achieve positive results are generally not reproducible.
  7. Placebo effect. Perhaps related to the previous thing we don’t understand, placebo effect has some interesting features. The patient knowing or suspecting that they might be receiving a placebo behaves differently than those without any knowledge. Are we comforted by the sight of people in white robes and our local pharmacist dealing out the regular dose of medication? Or does body start producing entirely different set of hormones with mind suspecting that the recovery process is near. Placebo, if figured out, might become a huge money saver with the current drug prices, and hence attracts scientific research. The only thing missing? A definitive conclusion on the placebo effect.
  8. Free will. A certain amount of human ideology rests on the idea of free will. So the idea of the body just reacting to some responses outside of the brain is uncomfortable. But picture this. You’re in bed, it’s time to get up, yet you want to spend a few more minutes in bed. Your conscious mind is sending the signals for the body to get vertical, and yet at some point, probably between the thoughts of pending shower and commute to work, you get up. The final decision done by something unconscious, something you don’t really have control over. While your conscious mind can submit an application to this unknown organ and request something happening, the body movements and behavior are triggered by something that is still largely unknown for science.
  9. Cold fusion. It became one of the most ridiculous scientific ideas to get associated with, and no scientist would touch it nowadays with a 40-foot pole, since it brings the stigma. However, as some point out, peer pressure is pathway to missing out on some potential innovations in the field. What’s currently reproducible is the effect of cold fusion on a plastic called CR39. Placed by a piece of depleted uranium, CR39 shows similar patterns of radiation as placed into a cold fusion experiment.
  10. Life on Mars. The Viking probes were declared to contain no evidence of life on Mars. The only person in the room who disagreed with the announcement was a bacteriological researcher, who came up with a clever idea of detecting life (fart reference coming soon). By adding radioactive isotopes to the nutrients fed into the foreign soil, the researchers would get any evidence of carbon-based life to produce gas (there it is), and by the virtue of having the food injected with isotopes, the Geiger counter would go ballistic, and hence you could validate existence of life in the soil, even if other tests came negative.
  11. WOW signal. One would argue that scientists at SETI (Search for Extra-Terrestrial Intelligence) have a pretty monotonous job. They’re waiting for a signal on 1420 MHz frequency. Why 1420? That’s the frequency of hydrogen, the most prevalent element in the Universe, so hopefully those extra-terrestrials will arrive at the same idea when sending the signal. So far no signal has arrived. Except on August 15th, 1977, when the signal came. It was very distinct, and caused Jerry Ehman to write "Wow!" on the margin of the printout. The signal never repeated, and the SETI folks have not heard anything similar since then.
  12. Mimivirus is an interesting virus that does not seem to affect humans, except for the unique cases, when it actually does. It’s the virus that fight cancer cells among others, and hence draws a great deal of research attention.
  13. Sex. If you’ve read this far, here’s a bonus entry. Yes, sex is one of those things that scientists do not quite understand (insert a proper nerd joke here). Looking at overall picture, the animal kingdom provides a great variety of alternative means of reproduction, that are much more efficient as far as number of offspring and the quality of gene preservation. A number of reptiles and fish are all-female or all-unisex species, copying themselves for the purposes of reproduction. Moreover, a number of species, like water fleas, can reproduce either sexually or asexually. You’d think that the species produced through asexual reproduction would be somehow inferior to the ones that appeared as a result of a sexual act, but there’s no solid scientific data to prove that or the opposite. What remains enigmatic is that if asexual reproduction would provide you with 2x the population compared to sexual (and that leaves out the time and energy spent on finding a mate, taking her to dinners and consequent ring shopping), why didn’t the entire animal world switch to asexual, as it’s obviously a more efficient process.