The Social Animal (28 page)

Classical economists readily concede that this sort of person doesn’t actually exist. But they argue that this caricature is close enough to reality to allow them to build models that accurately predict real human behavior. Moreover, the caricature allows them to build rigorous mathematical models, which are the measures of true genius in the economics profession. It allows them to turn economics from a soft squishy muddleheaded field like psychology into a hard, rigorous, and tough-minded field like physics. It allows them to formulate laws that govern the study of behavior, and wield the mighty powers of numbers. As M. Mitchell Waldrop put it, “Theoretical economists use their mathematical prowess the way great stags of the forest use their antlers: to do battle with one another and to establish dominance. A stag who doesn’t use his antlers is nothing.”

Behavioral economists argue that the caricature is not accurate enough to produce reliable predictions about real events. Two psychologists, Daniel Kahneman and Amos Tversky, were the pioneers. Then their insights were picked up by economists proper: including Richard Thaler, Sendhil Mullainathan, Robert Schiller, George Akerlof, and Colin Camerer. These scholars investigate cognition that happens below the level of awareness. Rationality is bounded by emotion. People have a great deal of trouble exercising self-control. They perceive the world in biased ways. They are profoundly influenced by context. They are prone to groupthink. Most of all, people discount the future; we allow present satisfaction to blot out future prosperity.

As Dan Ariely writes in his book
Predictably Irrational
, “If I were to distill one main lesson from the research described in this book, it is that we are pawns in a game whose forces we largely fail to comprehend. We usually think of ourselves as sitting in the driver’s seat, with ultimate control over the decisions we make and the direction our life takes; but, alas, this perception has more to do with our desires—with how we want to view ourselves—than with reality.”

Behavioral economists argue that stray intuitions, such as a sense of fairness, have powerful economic effects. Pay scales are not only set by what the market will bear. People demand salaries that seem fair, and managers have to take these moral intuitions into account when setting pay scales.

Behavioral economists look for the ways real human beings depart from the rational ideal. There is peer pressure, overconfidence, laziness, and self-delusion. People sometimes take out extended warranties when they buy appliances even though these warranties almost never justify the cost. Health officials in New York thought that if they posted calorie information near the menu boards at fast-food restaurants, people might eat more healthily. In fact, diners actually ordered slightly more calories than before the law went into effect.

Classical economists often believe that economies as a whole tend toward equilibrium, but behavioral economists are more likely to analyze the way shifts in the animal spirits—in confidence, trust, fear, and greed—can lead to bubbles, crashes, and global crises. If the fathers of classical economics knew what we know now about the inner workings of the human mind, some behavioral economists argue, there is no way they would have structured the field as it is.

Behavioral economics came much closer to explaining the reality Erica saw around her every day. She also recognized immediately that this field offered her a way to describe the mind’s hidden processes in a language that would be familiar to
MBA
grads in corporations across America.

Deep in her heart, Erica did not think the way the behavioral economists did. She saw cultures first. She saw society as an organic creature—a complex growth of living relationships. The behavioral economists may be behavioral, but they were still economists. That is to say, the behavioral economists acknowledged complexities and errors that the classical economists ignored, but they still argued that human errors were predictable, systemic, and expressible in mathematical formulas. Erica suspected they were trimming their sails. If they acknowledged that behavior was not law-governed—if it was too unpredictable to be captured in mathematics and models—then they would no longer be economists. They wouldn’t get published in economic journals or get to go to economic conferences. They’d have to move their offices over to the psychology departments, a big step down in the academic pecking order.

Nonetheless, just as the behavioral economists had an incentive to pretend that what they were doing was still rigorous, tough-minded science, so did Erica. Her clients respected science. They, too, had been trained to think of society as a mechanism. If she had to adopt some of their mind-set in order to get them to listen to her, so be it.

Erica decided she would build her consulting business not on cultural segmentation, which the market wasn’t ready for, but on behavioral economics, which was hot and in demand.

Erica read the major behavioral economists. Behind every choice, they said, there is a choice architecture, an unconscious set of structures that helps frame the decision. This choice architecture often comes in the forms of heuristics. The mind stores certain “if ... then ...” rules of thumb, which get activated by context and can be trotted out and applied in appropriate or near-appropriate circumstances.

First, for example, there is priming. One perception cues a string of downstream thoughts that alters subsequent behavior. If you ask test subjects to read a series of words that vaguely relate to being elderly (“bingo,” “Florida,” “ancient”), when they leave the room they will walk more slowly than when they came in. If you give them a group of words that relate to aggressiveness (“rude,” “annoying,” “intrude”), they will be quicker to interrupt somebody in conversation after the experiment is supposedly over.

If you tell somebody stories about high achievement just before they perform some test or exercise, they will perform better than if you had not told them those stories. If you merely use the words “succeed,” “master” and “achieve” in a sentence, they will do better. If you describe what it is like to be a college professor, they will do better on knowledge tests. On the other hand, if you play into negative stereotypes, they will do worse. If you remind African American students that they are African Americans just before they take a test, their scores will be much lower than if you had not reminded them. In one case, Asian American women were reminded of their ethnicity before a math test. They did better. Then they were reminded they were women. They did worse.

Priming can work in all sorts of ways. In one experiment, some students in a group were asked to write down the first three digits of their phone number and then all were asked to guess the year of Genghis Khan’s death. The students who wrote down the digits were more likely to guess he lived in the first millennium, with a three-digit death year.

Another heuristic involves anchoring. No piece of information is processed in isolation. Mental patterns are contagious, and everything is judged in comparison to something else. A $30 bottle of wine may seem expensive when surrounded by $9 bottles of wine, but it seems cheap when surrounded by $149 bottles of wine (which is why wine stores stock those superexpensive wines that almost nobody actually buys). The manager of a Brunswick pool-table store tried an experiment. One week he showed customers to his lowest priced pool table first, at $329, and then worked his way up. The ones who bought any table that week spent on average $550. The next week he showed customers to the $3,000 table first and worked his way down. That week, the average sale topped $1,000.

Then there is framing. Every decision gets framed within a certain linguistic context. If a surgeon tells his patients that a procedure may have a 15 percent failure rate, they are likely to decide against it. If he tells them the procedure has an 85 percent success rate, they tend to opt for it. If a customer at a grocery store sees some cans of his favorite soup on a shelf, he is likely to put one or two in the cart. If there is a sign that says “Limit: twelve per customer,” he is likely to put four or five in the cart. Dan Ariely asked students to write down the last two digits of their Social Security number and then bid on a bottle of wine and other products. Students with high Social Security numbers (between 80 and 99) bid, on average, $56 for a cordless keyboard. Students with lower numbers (1-20) bid $16 on average. The high-digit students bid 216 to 346 percent higher than the low-digit students because they were using their own numbers for a frame.

Then there are expectations. The mind makes models of what it thinks will happen, which colors its perceptions of what is actually happening. If you give people a hand cream and tell them it will reduce pain, you are building a set of expectations. People really feel their pain diminish, even if the cream is just hand lotion. People who are given a prescription pain reliever they are told costs $2.50 a pill experience much more pain relief than those given what they are told is a 10-cent pill (even though all the pills are placebos). As Jonah Lehrer writes, “Their predictions became self-fulfilling prophecies.”

Then there is inertia. The mind is a cognitive miser. It doesn’t like to expend mental energy. As a result people have a bias toward maintaining the status quo.
TIAA-CREF
offers college professors a range of asset-allocation options for their retirement accounts. According to one study, most of the participants in those plans make zero allocation changes during their entire professional careers. They just stick with whatever was the first option when they signed up.

Then there is arousal. People think differently depending on their state of mind. A bank in South Africa worked with Harvard economist Sendhil Mullainathan to conduct an experiment to see what sort of loan-solicitation letters worked best. They sent out different letters with different photographs on them, and they sent out different letters offering different loan rates. They found that the letter with photographs of a smiling woman did particularly well among men. The picture of the smiling woman increased demand for loans among men as much as lowering the interest rate by five percentage points.

Dan Ariely asked men a set of questions both when they were in an aroused state (Saran wrap-covered laptops, masturbation, you don’t want to know) and a nonaroused state. In the nonaroused state, 53 percent of the men said they could enjoy sex with someone they hated. In the aroused state, 77 percent said they could. In the nonaroused state, 23 percent said they could imagine having sex with a twelve-year-old girl. In the aroused state, 46 percent said they could imagine it. In the nonaroused state, 20 percent said they would try to have sex with their date after she said no. In the aroused state, 45 percent said they would keep trying.

Finally, there is loss aversion. Losing money brings more pain than winning money brings pleasure. Daniel Kahneman and Amos Tversky asked people if they would accept certain bets. They found that people needed the chance of winning $40 if they were going to undergo a bet that might cost them $20. Because of loss aversion investors are quicker to sell stocks that have made them money than they are to sell stocks that have been declining. They’re making self-destructive decisions because they don’t want to admit their losses.

Gradually Erica acquired a new vocabulary to define unconscious biases. But the work behavioral economists do on campus doesn’t automatically translate into the sort of work a consultant does in a boardroom. Erica needed to find a way to translate the research into usable advice.

For a few weeks, as her savings dwindled, Erica wrote memos to herself on how this could be done. When she had finished she looked them over and came to a profound realization. This was not the sort of thing she was good at. She was going to need to hire someone who could really play with ideas, who could take academic findings and find ways to apply them in the real world.

She asked around. She asked friends in the consulting world. She sent mass e-mails. She posted a little note on Facebook. Finally, through a friend of a friend, she heard about a young man who was good with ideas, who was available and who she could probably afford. The man’s name, of course, was Harold.

FREEDOM
AND
COMMITMENT

FOR
THE
FIRST
EIGHTEEN
YEARS
OF
HIS
LIFE
,
HAROLD
HAD
engaged in a sort of highly structured striving. During childhood, he had been extravagantly supervised, coached, and mentored. His missions had been clearly marked: get good grades, make the starting team, make adults happy.

Ms. Taylor had introduced a new wrinkle into his life—a love of big ideas. Harold discovered he loved world historical theories, the grander the better. Sometimes he would get so swept up in ideas, you had to chase him around with a butterfly net.

In college, Harold made another discovery. He could be interesting. In college, there were two different status economies. There was the daytime economy, when students interacted with adults and were at their resume-padding, mentor-pleasing best. Harold didn’t really stand out in this world, where he was surrounded by students whose conversation consisted mostly of how much work they had to do.

But then there was the nighttime economy, an all-student mosh pit of sarcasm and semen-related gross-out humor. In this economy, worldly accomplishments were irrelevant, and the social rewards went to those with the wittiest sensibilities.

Harold and his friends were sensibility gymnasts. They could pull off hilarious routines of irony, camp, ridicule, and self-referential, postmodern pseudo-mockery. Nothing they said was ever meant literally, and the trick to entering their social set consisted in knowing exactly how many layers of irony surrounded each conversational display.