1 00:00:00,002 --> 00:00:08,003 There's lots of other ways to think about this idea of how thinking about the 2 00:00:08,003 --> 00:00:16,303 question gets us to change our mindset and therefore take a different action. 3 00:00:16,304 --> 00:00:21,269 Let's take another example, imagine I ask you how often do you floss your teeth? 4 00:00:21,270 --> 00:00:26,887 And I gave you a scale from 0 to 9 times or more a day. 5 00:00:26,888 --> 00:00:31,437 Or I gave you a scale from 0 to 9 times or more a month. 6 00:00:31,438 --> 00:00:34,407 And I gave you one or the other of those scales. 7 00:00:34,408 --> 00:00:36,720 If you got the top scale what would you do? 8 00:00:36,720 --> 00:00:41,418 You would answer somewhere on the left. If I got you the bottom scale you'd answer 9 00:00:41,418 --> 00:00:44,410 somewhere more to the right. Unless of course you never floss. 10 00:00:44,410 --> 00:00:47,947 In which it would be, identical. And now what? 11 00:00:47,948 --> 00:00:53,560 Now you would not just stop there. You would infer something about your own 12 00:00:53,560 --> 00:00:56,305 hygiene habit. If you got the top scale you would say, 13 00:00:56,305 --> 00:00:57,180 whoa. My goodness. 14 00:00:57,180 --> 00:00:58,600 Look at me. I'm at the top. 15 00:00:58,600 --> 00:01:01,910 I'm at the left side of the scale. I'm not doing very well. 16 00:01:01,910 --> 00:01:04,530 I'm below the norm. And if you've got the bottom scale you 17 00:01:04,530 --> 00:01:07,834 would say, look at me. I'm at the top of my game, I'm way above 18 00:01:07,834 --> 00:01:10,896 the norm. Nobody is better than me, basically. 19 00:01:10,896 --> 00:01:16,046 Now again, if we did this and let you go, your opinion and understanding thought 20 00:01:16,046 --> 00:01:21,020 about this will basically decay over time. But what if just after feeling one of 21 00:01:21,020 --> 00:01:25,493 those scales, I asked you hey, I have a number here, should we call a dentist, 22 00:01:25,493 --> 00:01:29,800 should we call a hygienist, should we schedule an appointment for you. 23 00:01:29,800 --> 00:01:34,979 Now, your changing your momentary mindset could be translated into a decision and 24 00:01:34,979 --> 00:01:38,464 determine what happens. If you got the top scale, you would say, 25 00:01:38,464 --> 00:01:43,149 let's call now, let's make an appointment. And if you got the bottom scale you would 26 00:01:43,149 --> 00:01:46,789 say, well, no need to worry. I don't need to meet any doctor or any 27 00:01:46,789 --> 00:01:49,778 dentist. Now, I'll give you another example for the 28 00:01:49,778 --> 00:01:53,570 same thing. Imagine I was your financial adviser, and 29 00:01:53,570 --> 00:01:58,299 I asked you to think about retirement. And in one case I would ask you to think 30 00:01:58,299 --> 00:02:02,134 about the financial crisis and the days in which you lost lots of money, and how 31 00:02:02,134 --> 00:02:06,186 miserable those days were. In other case I would ask you to imagine 32 00:02:06,186 --> 00:02:09,724 how it would be like to retire to the Bahamas and golf, and fish, whatever, 33 00:02:09,724 --> 00:02:13,110 whatever you want. I kind of painted a nice picture of that. 34 00:02:13,110 --> 00:02:17,264 If I put you in one of those two mindsets and then I ask you how much risk do you 35 00:02:17,264 --> 00:02:22,890 want to take in your investment portfolio. You would make very different decisions. 36 00:02:22,890 --> 00:02:26,388 If I just told you about all the misery of losing money you would say, I don't want 37 00:02:26,388 --> 00:02:29,327 to experience this again. Let's be safe. 38 00:02:29,328 --> 00:02:32,838 If I talk to you about all the wonderful things that you could do if you had enough 39 00:02:32,838 --> 00:02:35,441 money to retire you would be willing to take much more risk. 40 00:02:35,441 --> 00:02:41,254 Now, if I did these exercises and stopped there Nothing bad would happen because you 41 00:02:41,254 --> 00:02:45,108 would forget over time. But if I took those two very different 42 00:02:45,108 --> 00:02:48,310 opinions and now optimized your portfolio base on that. 43 00:02:48,310 --> 00:02:52,297 Now I could change your outcome for the next year in terms of your returns. 44 00:02:52,298 --> 00:02:57,214 Based on these arbitrary starting points. And if the next year, you came to see me, 45 00:02:57,214 --> 00:03:01,060 would we start from scratch to thinking about your investment strategy? 46 00:03:01,060 --> 00:03:04,370 Of course not. We would look at what we did last year. 47 00:03:04,370 --> 00:03:07,520 We'd take that as a starting point and behave again and again and again. 48 00:03:07,520 --> 00:03:14,474 And this is how a momentary mindset can translate not only into a decision. 49 00:03:14,475 --> 00:03:18,547 But to a more and more and more decision over time. 50 00:03:18,548 --> 00:03:22,749 There's another way to think about the extent to which we don't know our 51 00:03:22,749 --> 00:03:27,009 preferences and how the choices we're being presented with are going to 52 00:03:27,009 --> 00:03:30,240 influence what result. So consider the following case. 53 00:03:30,240 --> 00:03:34,265 Imagine I'm offering you a great deal and I say, hey I can send you. 54 00:03:34,266 --> 00:03:38,810 To 1 week for vacation in Rome, all expenses paid. 55 00:03:38,810 --> 00:03:42,275 I'm paying for flight, I'm paying for hotel, I'm paying for breakfast every 56 00:03:42,275 --> 00:03:45,753 morning. Or I can send you for a full paid, prepaid 57 00:03:45,753 --> 00:03:49,477 vacation, I'm paying for everything, to Paris. 58 00:03:49,478 --> 00:03:53,112 And they say, Rome or Paris? Now, some people have very strong 59 00:03:53,112 --> 00:03:55,260 preferences. They love Rome, they hate Paris. 60 00:03:55,260 --> 00:03:58,058 The other way around. But for most people this is a very 61 00:03:58,058 --> 00:04:00,250 difficult decision. Which one do you want? 62 00:04:00,250 --> 00:04:04,420 Which one is better?. Now imagine I added another choice to this 63 00:04:04,420 --> 00:04:07,533 set. I said, free vacation in Rome, free 64 00:04:07,533 --> 00:04:11,260 vacation in Paris or, having your car stolen. 65 00:04:11,260 --> 00:04:16,726 Sounds like a crazy idea because in what universe, adding a undesirable option like 66 00:04:16,726 --> 00:04:21,680 having your car stolen would influence Your choice between Rome and Paris. 67 00:04:21,680 --> 00:04:26,095 It turns out there is a version like that. By the way, if you just add having your 68 00:04:26,095 --> 00:04:31,050 car stolen, nobody wants that. But there's another version which we call 69 00:04:31,050 --> 00:04:34,667 "Rome minus", and Rome minus is just like Rome. 70 00:04:34,668 --> 00:04:37,753 It's a full week in Rome, all expenses paid. 71 00:04:37,754 --> 00:04:42,459 Flight, hotel, breakfast every morning, but the breakfast doesn't include coffee. 72 00:04:42,460 --> 00:04:46,449 You want coffee? It's 2 euros 50, and you're on your own. 73 00:04:46,449 --> 00:04:50,618 Now, think what, what does this Rome minus does to the choices? 74 00:04:50,619 --> 00:04:55,072 Here is what it does. When you think to yourself, when you say, 75 00:04:55,072 --> 00:04:59,628 "Rome versus Paris," you say, "They are so different," different art, culture, 76 00:04:59,628 --> 00:05:05,098 language, romance, food: Not sure. Now if you say Rome without coffee and 77 00:05:05,098 --> 00:05:07,522 Paris. I'm not sure either, it's not as if the 78 00:05:07,522 --> 00:05:11,566 coffee is a decisive factor. But when you have Rome without coffee and 79 00:05:11,566 --> 00:05:16,400 Rome that comparison is very, very clear. Rome with coffee is much, much better than 80 00:05:16,400 --> 00:05:18,894 Rome without coffee. And what happens now. 81 00:05:18,895 --> 00:05:25,129 As Rome without coffees entering the set. It makes Rome with coffee looks better, 82 00:05:25,129 --> 00:05:30,550 not just relative to Rome without coffee, but also better than Paris. 83 00:05:30,550 --> 00:05:33,724 And what you can see is that when we add Rome without coffee. 84 00:05:33,725 --> 00:05:37,796 People start choosing Rome. Now, it's also works for Paris, you add 85 00:05:37,796 --> 00:05:41,221 Paris without coffee, people start choosing Paris. 86 00:05:41,222 --> 00:05:47,104 And what this suggests is that when we add an option that is not desirable, it can 87 00:05:47,104 --> 00:05:51,285 nevertheless change how people view the other option. 88 00:05:51,286 --> 00:05:57,766 This is the relativity principle. Its the contrast between Rome- and Rome 89 00:05:57,766 --> 00:06:02,082 that makes it so attractive. Here's another example for this. 90 00:06:02,083 --> 00:06:07,419 Quiet a few years ago, one of my friends pointed out to me that there was these 91 00:06:07,419 --> 00:06:11,114 websites of economists, and they had this offer. 92 00:06:11,115 --> 00:06:14,967 And he said, look, look at this offer. I looked at it and it was really quite, 93 00:06:14,967 --> 00:06:17,420 quite interesting. And here's the offer. 94 00:06:17,420 --> 00:06:21,393 What would you like? Would you like to get a subscription for 95 00:06:21,393 --> 00:06:25,416 the Economist.com for $59, the electronic version? 96 00:06:25,417 --> 00:06:30,035 The print version for 125? Or both of them for 125? 97 00:06:31,100 --> 00:06:35,337 Now when you read this, you say to yourself, why is the middle option there? 98 00:06:35,338 --> 00:06:40,120 What possible thing could it do? Right, why would anybody want that? 99 00:06:40,120 --> 00:06:44,345 Now by that time I already did all kinds of research on this Decoy Effect we call 100 00:06:44,345 --> 00:06:47,399 it the asymmetric governance in the decoy effect. 101 00:06:47,400 --> 00:06:51,576 So I was really happy to see this ad and I called The Economist and I have to say 102 00:06:51,576 --> 00:06:55,606 that I was really hoping that they would say, oh, Dan, it's you, we're so happy, 103 00:06:55,606 --> 00:06:59,603 we're so glad you called! We read one of your papers and we tried to 104 00:06:59,603 --> 00:07:01,714 implement it! This was not the case. 105 00:07:01,714 --> 00:07:05,744 In fact, I don't think they know they knew about my research and. 106 00:07:05,745 --> 00:07:09,790 And they passed me from one person to another to another to another until 107 00:07:09,790 --> 00:07:12,630 finally I get to the person in charge of their website. 108 00:07:12,630 --> 00:07:16,388 And I say, could you please explain to me where did you get this idea, and would you 109 00:07:16,388 --> 00:07:18,510 be willing to do some experiments with this? 110 00:07:18,510 --> 00:07:21,603 And they said, of course, I'll get right back with you and this was, you know, 111 00:07:21,603 --> 00:07:24,343 many, many years ago. I never heard from them again. 112 00:07:24,343 --> 00:07:30,006 So I decide to do the experiment myself. I gave these particular sheets to a group 113 00:07:30,006 --> 00:07:35,466 of MBA students and basically looked at what they wanted to choose, and here is 114 00:07:35,466 --> 00:07:39,220 what we got. Few people wanted the online version, the 115 00:07:39,220 --> 00:07:44,878 vast majority wanted the combo deal and thankfully no one wanted the wasted option 116 00:07:44,878 --> 00:07:49,502 in the middle, nobody wanted to pay the same amount for less, great. 117 00:07:49,502 --> 00:07:53,410 Now here's the thing, if you had three options and one of them had zero market 118 00:07:53,410 --> 00:07:56,507 share, would you keep it. Of course not. 119 00:07:56,508 --> 00:08:00,736 So for another group of students, I kicked the middle option out, I just presented 120 00:08:00,736 --> 00:08:04,079 the top and the bottom. And what happened now, the market share 121 00:08:04,079 --> 00:08:07,362 reversed. The thing that was the least desirable 122 00:08:07,362 --> 00:08:11,571 became the most desirable, the thing that was the most desirable, became the least 123 00:08:11,571 --> 00:08:12,614 desirable. Why? 124 00:08:12,614 --> 00:08:18,114 Because the middle option, while being useless, in the sense that nobody wanted 125 00:08:18,114 --> 00:08:23,936 it was nevertheless important because it defined the framework by which to evaluate 126 00:08:23,936 --> 00:08:27,280 these options. Think for a second. 127 00:08:27,280 --> 00:08:32,870 Is fifty nine dollars for the economies dot com for the online version is a good 128 00:08:32,870 --> 00:08:35,747 deal or a bad deal? How would you know? 129 00:08:35,748 --> 00:08:42,100 How would you think about it? Is the 125, $125 for the combo deal, a 130 00:08:42,100 --> 00:08:47,834 good deal or a bad deal, compared to what? 60 letters? 131 00:08:47,834 --> 00:08:51,926 50 letters in Newsweek? Or how is the comparison really going to 132 00:08:51,926 --> 00:08:54,800 happen? So the middle option, while nobody wanted 133 00:08:54,800 --> 00:08:57,820 it, it gave a framework to think about the two options. 134 00:08:57,820 --> 00:09:01,600 In fact it gave you a framework to think about the bottom option. 135 00:09:01,600 --> 00:09:08,089 Relative to $125 for the print version alone, $125 for both seems like a good 136 00:09:08,089 --> 00:09:10,114 deal. In fact it makes it look. 137 00:09:10,115 --> 00:09:12,260 Like you're getting the online version for free. 138 00:09:12,260 --> 00:09:17,237 And this relative comparison makes something looks much, much better. 139 00:09:17,238 --> 00:09:21,092 So there are 2 things here. The first one is to suggest that we just 140 00:09:21,092 --> 00:09:25,450 don't know how to evaluate. It is really hard for us to evaluate. 141 00:09:25,450 --> 00:09:31,885 And because of that option that we don't even choose Enter into our comparison 142 00:09:31,885 --> 00:09:38,617 mindset, and can influence how we view the options and relative advantages end up 143 00:09:38,617 --> 00:09:45,295 being important, decisive advantages. There's one more very interesting aspect 144 00:09:45,295 --> 00:09:50,968 of relatively in prices that comes from Bob Frank's work, and his book the 145 00:09:50,968 --> 00:09:56,055 Darwin's Economy. And in that book by the way, a book, Frank 146 00:09:56,055 --> 00:10:02,191 argues that the, real godfather of modern economics say should not be Adam Smith. 147 00:10:02,191 --> 00:10:07,282 He should be Darwin. And he gives the following analysis. 148 00:10:07,282 --> 00:10:12,189 He said that imagine if you were a lion seal, and, and its the mating season. 149 00:10:12,190 --> 00:10:16,940 And what happened is for lion seals, is you want to be the biggest one of the lot. 150 00:10:16,940 --> 00:10:21,570 Because the biggest lion seal get all the females, virtually all the females. 151 00:10:21,570 --> 00:10:26,259 The second one gets a few, but it's mostly about the biggest lion seal gets all the. 152 00:10:26,260 --> 00:10:29,630 All the females and all the ability to reproduce their genes. 153 00:10:29,630 --> 00:10:35,964 So what happens in this world? You want to be slightly bigger than other 154 00:10:35,964 --> 00:10:39,098 lion seals. Now, do you care how big everybody is? 155 00:10:39,098 --> 00:10:42,188 No. But in relative terms, you just want to be 156 00:10:42,188 --> 00:10:45,563 slightly bigger. Now the reality is that with lion seals, 157 00:10:45,563 --> 00:10:49,803 this is a really sad thing. Because as each one of them, struggle to 158 00:10:49,803 --> 00:10:54,702 be slightly higher, slightly bigger than the other, they become incredibly large 159 00:10:54,702 --> 00:10:59,388 and they are so large these days that they die at young age from all kinds of heart 160 00:10:59,388 --> 00:11:04,358 problems and vascular problems and they also sometimes crash the females when they 161 00:11:04,358 --> 00:11:07,913 copulate. And if you think about its race to the top 162 00:11:07,913 --> 00:11:11,836 that is perfectly sensible for each lion seal, right? 163 00:11:11,836 --> 00:11:15,668 If you're the second largest lion seal you're not going to rest until you become 164 00:11:15,668 --> 00:11:18,970 the biggest. But nevertheless its destructive for the 165 00:11:18,970 --> 00:11:24,340 whole environment for the whole ecosystem. My grandfather was an economist he, used 166 00:11:24,340 --> 00:11:27,133 to work for the U.N. Developing tax system. 167 00:11:27,134 --> 00:11:32,394 For developing countries and he explained to me once, when I was very young, what is 168 00:11:32,394 --> 00:11:35,098 inflation. And he said, imagine that you're in a 169 00:11:35,098 --> 00:11:39,445 concert, a musical concert and everybody's sitting and everybody's enjoying the 170 00:11:39,445 --> 00:11:41,610 music. All of a sudden the people in the from 171 00:11:41,610 --> 00:11:45,438 row, stand up and then the people in the second row have to stand up and the people 172 00:11:45,438 --> 00:11:48,170 in the third row and soon enough everybody has to stand. 173 00:11:48,171 --> 00:11:52,010 At the end of the day everybody sees just the same as they, when they were sitting 174 00:11:52,010 --> 00:11:56,508 down, but everybody is more uncomfortable. And this was his explanation of inflation, 175 00:11:56,508 --> 00:11:58,930 and if you think about it that's what happens. 176 00:11:58,930 --> 00:12:03,962 When everybody just worries about their own relative position, there's a chance 177 00:12:03,962 --> 00:12:07,222 for destroying the whole eh, Eco, Eco-system. 178 00:12:07,222 --> 00:12:12,066 And Robert Frank also shows that this is what has happened, one of the things that 179 00:12:12,066 --> 00:12:16,817 happened in the housing market in the U.S. So imagine that you're a, a young couple 180 00:12:16,817 --> 00:12:21,037 and you have a couple of kids, and you want your kids to go to good schools. 181 00:12:21,038 --> 00:12:23,730 If you're in the U.S., how do you get kids to go to good school? 182 00:12:23,730 --> 00:12:27,822 You go to a good neighborhood, because neighborhoods are the ones that are 183 00:12:27,822 --> 00:12:32,178 funding local schools, so the easiest way to get into a good school is to go into a 184 00:12:32,178 --> 00:12:34,100 Good neighborhood. So what you're doing? 185 00:12:34,100 --> 00:12:37,940 You're trying to push yourself into the get to the best neighborhood, you can. 186 00:12:37,940 --> 00:12:42,626 You're kind of extending your economic ability to the highest amount you can in 187 00:12:42,626 --> 00:12:45,440 order to get to the best, district that you can. 188 00:12:45,440 --> 00:12:47,350 And now, what you have done. You've done that. 189 00:12:47,350 --> 00:12:51,630 What are the consequences? As he shows, there's, increased domestic 190 00:12:51,630 --> 00:12:55,977 violence. Divorce and of course bankruptcy. 191 00:12:55,978 --> 00:13:01,219 And here's the notion, the moment we create a system, where everybody try to 192 00:13:01,219 --> 00:13:06,863 just fight a little bit harder to get just a little bit above, we can give people the 193 00:13:06,863 --> 00:13:11,437 ability to destroy not just themselves but the whole ecosystem. 194 00:13:11,438 --> 00:13:13,389 I want to show you one more example of this. 195 00:13:14,600 --> 00:13:18,888 This was a study with physical attraction. Often when you see somebody face to face, 196 00:13:18,888 --> 00:13:23,043 you have an immediate feeling of whether you're attracted to them or not. 197 00:13:23,043 --> 00:13:27,827 So we want to study whether this same effect also happen in physical attraction. 198 00:13:27,828 --> 00:13:31,148 So we took pictures of students. In this eh, illustration here, I'm not 199 00:13:31,148 --> 00:13:33,700 showing you students, I'm showing you computer images. 200 00:13:33,700 --> 00:13:35,735 But in the experiment, that were, they were. 201 00:13:35,736 --> 00:13:39,550 Students, and we asked people, who would you like to date? 202 00:13:39,550 --> 00:13:43,347 Would you like to date Jerry, or would you like to date Tom? 203 00:13:43,348 --> 00:13:47,697 And so some people, we took Photoshop and we made Jerry slightly uglier. 204 00:13:47,698 --> 00:13:51,956 And we asked people, who do you want to date, Jerry, ugly Jerry, or Tom? 205 00:13:51,956 --> 00:13:56,439 And other people, we asked, do you want to date Jerry, Tom, or ugly Tom? 206 00:13:56,440 --> 00:14:01,669 And the question what, we had was whether ugly Jerry would help disproportionally 207 00:14:01,669 --> 00:14:05,716 Jerry, and would ugly Tom disproportionately help Tom, and this was 208 00:14:05,716 --> 00:14:09,156 indeed what we found out. Now these results have two very 209 00:14:09,156 --> 00:14:14,170 straightforward, simple implications. The first one is that if you ever go bar 210 00:14:14,170 --> 00:14:20,487 hopping, who do you want to take with you? Who is the ideal wing man or wing woman? 211 00:14:20,488 --> 00:14:24,198 Now you know. It's somebody who is similar to you but 212 00:14:24,198 --> 00:14:27,900 slightly less attractive. That's kind of the optimal approach. 213 00:14:27,900 --> 00:14:32,196 And the second thing is, that if somebody asks you to come with them as their wing 214 00:14:32,196 --> 00:14:35,089 man or wing woman, now you know how they think about. 215 00:14:37,250 --> 00:14:41,873 I should point one more thing, I got a letter from this woman at Cornell who said 216 00:14:41,873 --> 00:14:46,634 that after reading this information she started using this approach, she started 217 00:14:46,634 --> 00:14:51,464 taking her roommate with her because she thought she was a slightly less attractive 218 00:14:51,464 --> 00:14:55,216 version of her. And she went from her from party to party 219 00:14:55,216 --> 00:14:59,792 to party in, at Cornell. And it worked very well by her accord. 220 00:14:59,792 --> 00:15:03,576 The only thing was after a few months she decided to tell her friend why she was 221 00:15:03,576 --> 00:15:07,110 carrying her with her to all these parties, which of course backfired. 222 00:15:07,110 --> 00:15:11,753 So if you're doing this trick don't tell the person, about that.