Predictably Irrational (18 page)

T
HE LESSON I
took away from my interferon treatment is a general one: if a particular desired behavior results in an immediate negative outcome (punishment), this behavior will be very difficult to promote, even if the ultimate outcome (in my case, improved health) is highly desirable. After all, that's what the problem of delayed gratification is all about. Certainly, we know that exercising regularly and eating more vegetables will help us be healthier, even if we don't live to be as old as the Delany sisters; but because it is very hard to hold a vivid image of our future health in our mind's eye, we can't keep from reaching for the doughnuts.

In order to overcome many types of human fallibility, I believe it's useful to look for tricks that match immediate, powerful, and positive reinforcements with the not-so-pleasant steps we have to take toward our long-term objectives. For me, beginning a movie—before I felt any side effects—helped me to sustain the unpleasantness of the treatment. As a matter of fact, I timed everything perfectly. The moment I finished injecting myself, I pressed the Play button. I suspect that had I hit Play after the side effects kicked in, I would not have been as successful in winning the tug-of-war. And who knows? Maybe if I had waited for the side effects to kick in before I started the movies, I would have created a negative association and would now enjoy movies less as a consequence.
*

O
NE OF MY
colleagues at Duke University, Ralph Keeney, recently noted that America's top killer isn't cancer or heart disease, nor is it smoking or obesity. It's our inability to make smart choices and overcome our own self-destructive behaviors.
¹⁰
Ralph estimates that about half of us will make a lifestyle decision that will ultimately lead us to an early grave. And as if this were not bad enough, it seems that the rate at which we make these deadly decisions is increasing at an alarming pace.

I suspect that over the next few decades, real improvements in life expectancy and quality are less likely to be driven by medical technology than by improved decision making. Since focusing on long-term benefits is not our natural tendency, we need to more carefully examine the cases in which we repeatedly fail, and try to come up with some remedies for these situations. (For an overweight movie lover, the key might be to enjoy watching a film while walking on the treadmill.) The trick is to find the right behavioral antidote for each problem. By pairing something that we love with something that we dislike but that is good for us, we might be able to harness desire with outcome—and thus overcome some of the problems with self-control we face every day.

CHAPTER
8
The High Price of Ownership

Why We Overvalue What We Have

A
t Duke University, basketball is somewhere between a passionate hobby and a religious experience. The basketball stadium is small and old and has bad acoustics—the kind that turn the cheers of the crowd into thunder and pump everyone's adrenaline level right through the roof. The small size of the stadium creates intimacy but also means there are not enough seats to contain all the fans who want to attend the games. This, by the way, is how Duke likes it, and the university has expressed little interest in exchanging the small, intimate stadium for a larger one. To ration the tickets, an intricate selection process has been developed over the years, to separate the truly devoted fans from all the rest.

Even before the start of the spring semester, students who want to attend the games pitch tents in the open grassy area outside the stadium. Each tent holds up to 10 students. The campers who arrive first take the spots closest to the stadium's entrance, and the ones who come later line up farther back. The evolving community is called Krzyzewskiville, reflecting the respect the students have for Coach K—Mike Krzyzewski—as well as their aspirations for victory in the coming season.

So that the serious basketball fans are separated from those without “Duke blue” running through their veins, an air horn is sounded at random times. At the sound, a countdown begins, and within the next five minutes at least one person from each tent must check in with the basketball authorities. If a tent fails to register within these five minutes, the whole tent gets bumped to the end of the line. This procedure continues for most of the spring semester, and intensifies in the last 48 hours before a game.

At that point, 48 hours before a game, the checks become “personal checks.” From then on, the tents are merely a social structure: when the air horn is sounded, every student has to check in personally with the basketball authorities. Missing an “occupancy check” in these final two days can mean being bumped to the end of the line. Although the air horn sounds occasionally before routine games, it can be heard at all hours of night and day before the really big contests (such as games against the University of North Carolina-Chapel Hill and during the national championships).

But that's not the oddest part of the ritual. The oddest part is that for the really important games, such as the national titles, the students at the front of the line still don't get a ticket. Rather, each of them gets a lottery number. Only later, as they crowd around a list of winners posted at the student center, do they find out if they have really, truly won a ticket to the coveted game.

AS
Z
IV
C
ARMON
(a professor at INSEAD) and I listened to the air horn during the campout at Duke in the spring of 1994, we were intrigued by the real-life experiment going on before our eyes. All the students who were camping out wanted passionately to go to the basketball game. They had all camped out for a long time for the privilege. But when the lottery was over, some of them would become ticket owners, while others would not.

The question was this: would the students who had won tickets—who had ownership of tickets—value those tickets more than the students who had not won them even though they all “worked” equally hard to obtain them? On the basis of Jack Knetsch, Dick Thaler, and Daniel Kahneman's research on the “endowment effect,” we predicted that when we own something—whether it's a car or a violin, a cat or a basketball ticket—we begin to value it more than other people do.

Think about this for a minute. Why does the seller of a house usually value that property more than the potential buyer? Why does the seller of an automobile envision a higher price than the buyer? In many transactions why does the owner believe that his possession is worth more money than the potential owner is willing to pay? There's an old saying, “One man's ceiling is another man's floor.” Well, when you're the owner, you're at the ceiling; and when you're the buyer, you're at the floor.

To be sure, that is not always the case. I have a friend who contributed a full box of record albums to a garage sale, for instance, simply because he couldn't stand hauling them around any longer. The first person who came along offered him $25 for the whole box (without even looking at the titles), and my friend accepted it. The buyer probably sold them for 10 times that price the following day. Indeed, if we always overvalued what we had, there would be no such thing as
Antiques Roadshow
. (“How much did you pay for this powder horn? Five dollars? Well, let me tell you, you have a national treasure here.”)

But this caveat aside, we still believed that in general the ownership of something increases its value in the owner's eyes. Were we right? Did the students at Duke who had won the tickets—who could now anticipate experiencing the packed stands and the players racing across the court—value them more than the students who had not won them? There was only one good way to find out: get them to tell us how much they valued the tickets.

In this case, Ziv and I would try to buy tickets from some of the students who had won them—and sell them to those who didn't. That's right; we were about to become ticket scalpers.

T
HAT NIGHT WE
got a list of the students who had won the lottery and those who hadn't, and we started telephoning. Our first call was to William, a senior majoring in chemistry. William was rather busy. After camping for the previous week, he had a lot of homework and e-mail to catch up on. He was not too happy, either, because after reaching the front of the line, he was still not one of the lucky ones who had won a ticket in the lottery.

“Hi, William,” I said. “I understand you didn't get one of the tickets for the final four.”

“That's right.”

“We may be able to sell you a ticket.”

“Cool.”

“How much would you be willing to pay for one?”

“How about a hundred dollars?” he replied.

“Too low,” I laughed. “You'll have to go higher.”

“A hundred fifty?” he offered.

“You have to do better,” I insisted. “What's the highest price you'll pay?”

William thought for a moment. “A hundred seventy-five.”

“That's it?”

“That's it. Not a penny more.”

“OK, you're on the list. I'll let you know,” I said. “By the way, how'd you come up with that hundred seventy-five?”

William said he figured that for $175 he could also watch the game at a sports bar, free, spend some money on beer and food, and still have a lot left over for a few CDs or even some shoes. The game would no doubt be exciting, he said, but at the same time $175 is a lot of money.

Our next call was to Joseph. After camping out for a week Joseph was also behind on his schoolwork. But he didn't care—he had won a ticket in the lottery and now, in a few days, he would be watching the Duke players fight for the national title.

“Hi, Joseph,” I said. “We may have an opportunity for you—to sell your ticket. What's your minimum price?”

“I don't have one.”

“Everyone has a price,” I replied, giving the comment my best Al Pacino tone.

His first answer was $3,000.

“Come on,” I said, “That's way too much. Be reasonable; you have to offer a lower price.”

“All right,” he said, “twenty-four hundred.”

“Are you sure?” I asked.

“That's as low as I'll go.”

“OK. If I can find a buyer at that price, I'll give you a call. By the way,” I added, “how did you come up with that price?”

“Duke basketball is a huge part of my life here,” he said passionately. He then went on to explain that the game would be a defining memory of his time at Duke, an experience that he would pass on to his children and grandchildren. “So how can you put a price on that?” he asked. “Can you put a price on memories?”

William and Joseph were just two of more than 100 students whom we called. In general, the students who did not own a ticket were willing to pay around $170 for one. The price they were willing to pay, as in William's case, was tempered by alternative uses for the money (such as spending it in a sports bar for drinks and food). Those who owned a ticket, on the other hand, demanded about $2,400 for it. Like Joseph, they justified their price in terms of the importance of the experience and the lifelong memories it would create.

What was really surprising, though, was that in all our phone calls, not a single person was willing to sell a ticket at a price that someone else was willing to pay. What did we have? We had a group of students all hungry for a basketball ticket before the lottery drawing; and then, bang—in an instant after the drawing, they were divided into two groups—ticket owners and non–ticket owners. It was an emotional chasm that was formed, between those who now imagined the glory of the game, and those who imagined what else they could buy with the price of the ticket. And it was an empirical chasm as well—the average selling price (about $2,400) was separated by a factor of about 14 from the average buyer's offer (about $175).

From a rational perspective, both the ticket holders and the non–ticket holders should have thought of the game in exactly the same way. After all, the anticipated atmosphere at the game and the enjoyment one could expect from the experience should not depend on winning a lottery. Then how could a random lottery drawing have changed the students' view of the game—and the value of the tickets—so dramatically?

O
WNERSHIP PERVADES OUR
lives and, in a strange way, shapes many of the things we do. Adam Smith wrote, “Every man [and woman] . . . lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.” That's an awesome thought. Much of our life story can be told by describing the ebb and flow of our particular possessions—what we get and what we give up. We buy clothes and food, automobiles and homes, for instance. And we sell things as well—homes and cars, and in the course of our careers, our time.

Since so much of our lives is dedicated to ownership, wouldn't it be nice to make the best decisions about this? Wouldn't it be nice, for instance, to know exactly how much we would enjoy a new home, a new car, a different sofa, and an Armani suit, so that we could make accurate decisions about owning them? Unfortunately, this is rarely the case. We are mostly fumbling around in the dark. Why? Because of three irrational quirks in our human nature.

The first quirk, as we saw in the case of the basketball tickets, is that we fall in love with what we already have. Suppose you decide to sell your old VW bus. What do you start doing? Even before you've put a
FOR SALE
sign in the window, you begin to recall trips you took. You were much younger, of course; the kids hadn't sprouted into teenagers. A warm glow of remembrance washes over you and the car. This applies not only to VW buses, of course, but to everything else. And it can happen fast.

For instance, two of my friends adopted a child from China and told me this remarkable story. They went to China with 12 other couples. When they reached the orphanage, the director took each of the couples separately into a room and presented them with a daughter. When the couples reconvened the following morning, they all commented on the director's wisdom: Somehow she knew exactly which little girl to give to each couple. The matches were perfect. My friends felt the same way, but they also realized that the matches had been random. What made each match seem perfect was not the Chinese woman's talent, but nature's ability to make us instantly attached to what we have.

The second quirk is that we focus on what we may lose, rather than what we may gain. When we price our beloved VW, therefore, we think more about what we will lose (the use of the bus) than what we will gain (money to buy something else). Likewise, the ticket holder focuses on losing the basketball experience, rather than imagining the enjoyment of obtaining money or on what can be purchased with it. Our aversion to loss is a strong emotion, and as I will explain later in the book, one that sometimes causes us to make bad decisions. Do you wonder why we often refuse to sell some of our cherished clutter, and if somebody offers to buy it, we attach an exorbitant price tag to it? As soon as we begin thinking about giving up our valued possessions, we are already mourning the loss.

The third quirk is that we assume other people will see the transaction from the same perspective as we do. We somehow expect the buyer of our VW to share our feelings, emotions, and memories. Or we expect the buyer of our house to appreciate how the sunlight filters through the kitchen windows. Unfortunately, the buyer of the VW is more likely to notice the puff of smoke that is emitted as you shift from first into second; and the buyer of your house is more likely to notice the strip of black mold in the corner. It is just difficult for us to imagine that the person on the other side of the transaction, buyer or seller, is not seeing the world as we see it.

O
WNERSHIP ALSO HAS
what I'd call “peculiarities.” For one, the more work you put into something, the more ownership you begin to feel for it. Think about the last time you assembled some furniture. Figuring out which piece goes where and which screw fits into which hole boosts the feeling of ownership.

In fact, I can say with a fair amount of certainty that pride of ownership is inversely proportional to the ease with which one assembles the furniture; wires the high-definition
television to the surround-sound system; installs software;
or gets the baby into the bath, dried, powdered, diapered, and tucked away in the crib. My friend and colleague Mike Norton (a professor at Harvard) and I have a term for this phenomenon: the “Ikea effect.”

Another peculiarity is that we can begin to feel ownership even before we own something. Think about the last time you entered an online auction. Suppose you make your first bid on Monday morning, for a wristwatch, and at this point you are the highest bidder. That night you log on, and you're still the top dog. Ditto for the next night. You start thinking about that elegant watch. You imagine it on your wrist; you imagine the compliments you'll get. And then you go online again one hour before the end of the auction. Some dog has topped your bid! Someone else will take your watch! So you increase your bid beyond what you had originally planned.