Wednesday, September 29, 2010

Takeaways from Predictably Irrational, Part II

I recently finished Dan Ariely's behavioral economics book, Predictably Irrational. You can read Dan's current writing at his blog. Here is part one in a multi-part series of my takeaways from the book. Here is the next part, focusing mostly on the different kinds of exchanges:

There are two worlds of interaction, the world of social norms and the world of market norms. An example of social norm is a friend helping a friend move a couch. Market norm would be hiring a professional mover.

There can be unexpected problems s in the world of market norms. It was the famous efficiency expert Frederick Taylor who said there is "hardly a competent workman can be found who does not devote a considerable amount of time to studying just how slowly he can work and still convince his employer that he is going at a good pace."

In fact, social norms can actually be more productive. There's a famous story (couldn't find a link) about an attempt to increase the amount of blood donation by paying givers. Surprisingly, less blood was donated. The good feelings that came with donating were replaced by a payment too low to compensate for the lost feelings.

The market and social worlds have a hard time existing together, because when combined the normal pattern of interaction become unclear. Remember my earlier post on loaning friends money? The example in the book was a story about a day care that charged a fine for parents for late pickups and actually got more late pickups (because people didn't feel guilty anymore). After they removed the charge, the late pickups increased even more (because people still didn't feel guilty and now didn't have to pay). Here's my earlier post on moral math.

However, gifts (not cash) can be a way to use market incentives within a social norm would. That's why blood donors get t-shirts and cookies. But be sure not to mention how much the goodies cost.

Another problem with market norms is they make you feel more self-reliant. Think about how helpful you are at home without pay, but how favors at work are bothersome. You assume other people are just as self-reliant as you making you less willing to help others.

This helps explain why businesses want to harness the power of social norms. It's why State Farm is a "good neighbor" and Johnson & Johnson is "the family company". It also helps explain why companies originally gave sick days, health insurance, and other employee perks. They are trying to make you loyal to them. The only problem is they expect you to treat them with the same loyalty. If you nickel and dime employees/customers after you've made them feel like family they treat you not like a greedy corporation, but a like a deceptive uncle.

These social norms are also important for the most valued members of our society. It would be expensive to pay people to run into burning buildings. Or to take down and armed mugger. Or to go to war. Yet firefighters, policemen, and soldiers are plentiful. It's not just because we pay them with money, but because we pay them with respect. They get parades, discounts, and drinks bought for them at bars.

I've always been skeptical of what Dan Ariely calls social norms in the marketplace, but this book showed me their value.

11 comments:

  1. You are blowing my mind. What made you read so much and so fast? The Harrison I know hates books; he used to read the summaries on Amazon and call it a day.

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  2. I assigned popular economics books to my AP Micro class, so I'm trying to read along with them.

    So far it's been fruitful. But don't give me too much credit, I still love a good short book summary.

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  4. "These social norms are also important for the most valued members of our society. It would be expensive to pay people to run into burning buildings. Or to take down and armed mugger. Or to go to war. Yet firefighters, policemen, and soldiers are plentiful. It's not just because we pay them with money, but because we pay them with respect. They get parades, discounts, and drinks bought for them at bars."

    You gotta be kidding me. No one becomes a policeman, a firefighter, or a soldier because they want to help people, or defend the innocent. No, they do it for parades, discounts, and drinks. Bullshit.

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  5. Sorry, I got a little carried away there. By "bullshit" I mean, "I respectfully disagree with you."

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  6. I agree, many don't do it for the community praise. However as someone who falls into that category (teacher) it helps you to keep going. You cannot deny the social nature of those jobs and the praise had not effect I don't think they'd happen.

    And it's okay to call things bullshit, sometimes they are. I just don't think this is.

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  7. Let me take another second to explain why I think this idea is so valuable to me. I've never liked the idea of treating certain jobs as heroes for the community. I see very little difference in what I do and what lawyers, salesmen, and engineers do. However, this book gave me a reason why there exists two different kinds of markets. That radically changed my opinion of celebrating what police, firefighters, and soldiers do.

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  8. "You cannot deny the social nature of those jobs and the praise had not effect I don't think they'd happen."

    Not sure what that means. If it means that I can't deny that if no one praised people for these jobs, they wouldn't get done--I can and do.

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  9. They wouldn't get done as well.

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  10. You're thinking about this backwards. People do not do these jobs because of the respect they afford. The respect is afforded because people do them.

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  11. But they would do them worse if there was no respect.

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You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.