There's lots of other ways to think about this idea of how thinking about the
question gets us to change our mindset and therefore take a different action.
Let's take another example, imagine I ask you how often do you floss your teeth?
And I gave you a scale from 0 to 9 times or more a day.
Or I gave you a scale from 0 to 9 times or more a month.
And I gave you one or the other of those scales.
If you got the top scale what would you do?
You would answer somewhere on the left. If I got you the bottom scale you'd answer
somewhere more to the right. Unless of course you never floss.
In which it would be, identical. And now what?
Now you would not just stop there. You would infer something about your own
hygiene habit. If you got the top scale you would say,
whoa. My goodness.
Look at me. I'm at the top.
I'm at the left side of the scale. I'm not doing very well.
I'm below the norm. And if you've got the bottom scale you
would say, look at me. I'm at the top of my game, I'm way above
the norm. Nobody is better than me, basically.
Now again, if we did this and let you go, your opinion and understanding thought
about this will basically decay over time. But what if just after feeling one of
those scales, I asked you hey, I have a number here, should we call a dentist,
should we call a hygienist, should we schedule an appointment for you.
Now, your changing your momentary mindset could be translated into a decision and
determine what happens. If you got the top scale, you would say,
let's call now, let's make an appointment. And if you got the bottom scale you would
say, well, no need to worry. I don't need to meet any doctor or any
dentist. Now, I'll give you another example for the
same thing. Imagine I was your financial adviser, and
I asked you to think about retirement. And in one case I would ask you to think
about the financial crisis and the days in which you lost lots of money, and how
miserable those days were. In other case I would ask you to imagine
how it would be like to retire to the Bahamas and golf, and fish, whatever,
whatever you want. I kind of painted a nice picture of that.
If I put you in one of those two mindsets and then I ask you how much risk do you
want to take in your investment portfolio. You would make very different decisions.
If I just told you about all the misery of losing money you would say, I don't want
to experience this again. Let's be safe.
If I talk to you about all the wonderful things that you could do if you had enough
money to retire you would be willing to take much more risk.
Now, if I did these exercises and stopped there Nothing bad would happen because you
would forget over time. But if I took those two very different
opinions and now optimized your portfolio base on that.
Now I could change your outcome for the next year in terms of your returns.
Based on these arbitrary starting points. And if the next year, you came to see me,
would we start from scratch to thinking about your investment strategy?
Of course not. We would look at what we did last year.
We'd take that as a starting point and behave again and again and again.
And this is how a momentary mindset can translate not only into a decision.
But to a more and more and more decision over time.
There's another way to think about the extent to which we don't know our
preferences and how the choices we're being presented with are going to
influence what result. So consider the following case.
Imagine I'm offering you a great deal and I say, hey I can send you.
To 1 week for vacation in Rome, all expenses paid.
I'm paying for flight, I'm paying for hotel, I'm paying for breakfast every
morning. Or I can send you for a full paid, prepaid
vacation, I'm paying for everything, to Paris.
And they say, Rome or Paris? Now, some people have very strong
preferences. They love Rome, they hate Paris.
The other way around. But for most people this is a very
difficult decision. Which one do you want?
Which one is better?. Now imagine I added another choice to this
set. I said, free vacation in Rome, free
vacation in Paris or, having your car stolen.
Sounds like a crazy idea because in what universe, adding a undesirable option like
having your car stolen would influence Your choice between Rome and Paris.
It turns out there is a version like that. By the way, if you just add having your
car stolen, nobody wants that. But there's another version which we call
"Rome minus", and Rome minus is just like Rome.
It's a full week in Rome, all expenses paid.
Flight, hotel, breakfast every morning, but the breakfast doesn't include coffee.
You want coffee? It's 2 euros 50, and you're on your own.
Now, think what, what does this Rome minus does to the choices?
Here is what it does. When you think to yourself, when you say,
"Rome versus Paris," you say, "They are so different," different art, culture,
language, romance, food: Not sure. Now if you say Rome without coffee and
Paris. I'm not sure either, it's not as if the
coffee is a decisive factor. But when you have Rome without coffee and
Rome that comparison is very, very clear. Rome with coffee is much, much better than
Rome without coffee. And what happens now.
As Rome without coffees entering the set. It makes Rome with coffee looks better,
not just relative to Rome without coffee, but also better than Paris.
And what you can see is that when we add Rome without coffee.
People start choosing Rome. Now, it's also works for Paris, you add
Paris without coffee, people start choosing Paris.
And what this suggests is that when we add an option that is not desirable, it can
nevertheless change how people view the other option.
This is the relativity principle. Its the contrast between Rome- and Rome
that makes it so attractive. Here's another example for this.
Quiet a few years ago, one of my friends pointed out to me that there was these
websites of economists, and they had this offer.
And he said, look, look at this offer. I looked at it and it was really quite,
quite interesting. And here's the offer.
What would you like? Would you like to get a subscription for
the Economist.com for $59, the electronic version?
The print version for 125? Or both of them for 125?
Now when you read this, you say to yourself, why is the middle option there?
What possible thing could it do? Right, why would anybody want that?
Now by that time I already did all kinds of research on this Decoy Effect we call
it the asymmetric governance in the decoy effect.
So I was really happy to see this ad and I called The Economist and I have to say
that I was really hoping that they would say, oh, Dan, it's you, we're so happy,
we're so glad you called! We read one of your papers and we tried to
implement it! This was not the case.
In fact, I don't think they know they knew about my research and.
And they passed me from one person to another to another to another until
finally I get to the person in charge of their website.
And I say, could you please explain to me where did you get this idea, and would you
be willing to do some experiments with this?
And they said, of course, I'll get right back with you and this was, you know,
many, many years ago. I never heard from them again.
So I decide to do the experiment myself. I gave these particular sheets to a group
of MBA students and basically looked at what they wanted to choose, and here is
what we got. Few people wanted the online version, the
vast majority wanted the combo deal and thankfully no one wanted the wasted option
in the middle, nobody wanted to pay the same amount for less, great.
Now here's the thing, if you had three options and one of them had zero market
share, would you keep it. Of course not.
So for another group of students, I kicked the middle option out, I just presented
the top and the bottom. And what happened now, the market share
reversed. The thing that was the least desirable
became the most desirable, the thing that was the most desirable, became the least
desirable. Why?
Because the middle option, while being useless, in the sense that nobody wanted
it was nevertheless important because it defined the framework by which to evaluate
these options. Think for a second.
Is fifty nine dollars for the economies dot com for the online version is a good
deal or a bad deal? How would you know?
How would you think about it? Is the 125, $125 for the combo deal, a
good deal or a bad deal, compared to what? 60 letters?
50 letters in Newsweek? Or how is the comparison really going to
happen? So the middle option, while nobody wanted
it, it gave a framework to think about the two options.
In fact it gave you a framework to think about the bottom option.
Relative to $125 for the print version alone, $125 for both seems like a good
deal. In fact it makes it look.
Like you're getting the online version for free.
And this relative comparison makes something looks much, much better.
So there are 2 things here. The first one is to suggest that we just
don't know how to evaluate. It is really hard for us to evaluate.
And because of that option that we don't even choose Enter into our comparison
mindset, and can influence how we view the options and relative advantages end up
being important, decisive advantages. There's one more very interesting aspect
of relatively in prices that comes from Bob Frank's work, and his book the
Darwin's Economy. And in that book by the way, a book, Frank
argues that the, real godfather of modern economics say should not be Adam Smith.
He should be Darwin. And he gives the following analysis.
He said that imagine if you were a lion seal, and, and its the mating season.
And what happened is for lion seals, is you want to be the biggest one of the lot.
Because the biggest lion seal get all the females, virtually all the females.
The second one gets a few, but it's mostly about the biggest lion seal gets all the.
All the females and all the ability to reproduce their genes.
So what happens in this world? You want to be slightly bigger than other
lion seals. Now, do you care how big everybody is?
No. But in relative terms, you just want to be
slightly bigger. Now the reality is that with lion seals,
this is a really sad thing. Because as each one of them, struggle to
be slightly higher, slightly bigger than the other, they become incredibly large
and they are so large these days that they die at young age from all kinds of heart
problems and vascular problems and they also sometimes crash the females when they
copulate. And if you think about its race to the top
that is perfectly sensible for each lion seal, right?
If you're the second largest lion seal you're not going to rest until you become
the biggest. But nevertheless its destructive for the
whole environment for the whole ecosystem. My grandfather was an economist he, used
to work for the U.N. Developing tax system.
For developing countries and he explained to me once, when I was very young, what is
inflation. And he said, imagine that you're in a
concert, a musical concert and everybody's sitting and everybody's enjoying the
music. All of a sudden the people in the from
row, stand up and then the people in the second row have to stand up and the people
in the third row and soon enough everybody has to stand.
At the end of the day everybody sees just the same as they, when they were sitting
down, but everybody is more uncomfortable. And this was his explanation of inflation,
and if you think about it that's what happens.
When everybody just worries about their own relative position, there's a chance
for destroying the whole eh, Eco, Eco-system.
And Robert Frank also shows that this is what has happened, one of the things that
happened in the housing market in the U.S. So imagine that you're a, a young couple
and you have a couple of kids, and you want your kids to go to good schools.
If you're in the U.S., how do you get kids to go to good school?
You go to a good neighborhood, because neighborhoods are the ones that are
funding local schools, so the easiest way to get into a good school is to go into a
Good neighborhood. So what you're doing?
You're trying to push yourself into the get to the best neighborhood, you can.
You're kind of extending your economic ability to the highest amount you can in
order to get to the best, district that you can.
And now, what you have done. You've done that.
What are the consequences? As he shows, there's, increased domestic
violence. Divorce and of course bankruptcy.
And here's the notion, the moment we create a system, where everybody try to
just fight a little bit harder to get just a little bit above, we can give people the
ability to destroy not just themselves but the whole ecosystem.
I want to show you one more example of this.
This was a study with physical attraction. Often when you see somebody face to face,
you have an immediate feeling of whether you're attracted to them or not.
So we want to study whether this same effect also happen in physical attraction.
So we took pictures of students. In this eh, illustration here, I'm not
showing you students, I'm showing you computer images.
But in the experiment, that were, they were.
Students, and we asked people, who would you like to date?
Would you like to date Jerry, or would you like to date Tom?
And so some people, we took Photoshop and we made Jerry slightly uglier.
And we asked people, who do you want to date, Jerry, ugly Jerry, or Tom?
And other people, we asked, do you want to date Jerry, Tom, or ugly Tom?
And the question what, we had was whether ugly Jerry would help disproportionally
Jerry, and would ugly Tom disproportionately help Tom, and this was
indeed what we found out. Now these results have two very
straightforward, simple implications. The first one is that if you ever go bar
hopping, who do you want to take with you? Who is the ideal wing man or wing woman?
Now you know. It's somebody who is similar to you but
slightly less attractive. That's kind of the optimal approach.
And the second thing is, that if somebody asks you to come with them as their wing
man or wing woman, now you know how they think about.
I should point one more thing, I got a letter from this woman at Cornell who said
that after reading this information she started using this approach, she started
taking her roommate with her because she thought she was a slightly less attractive
version of her. And she went from her from party to party
to party in, at Cornell. And it worked very well by her accord.
The only thing was after a few months she decided to tell her friend why she was
carrying her with her to all these parties, which of course backfired.
So if you're doing this trick don't tell the person, about that.