Predictably Irrational

by Dan Ariely

  My own approach is to try to view all transactions (particularly large ones) as if I were a nonowner, putting some distance between myself and the item of interest. In this attempt, I’m not certain if I have achieved the uninterest in material things that is espoused by the Hindu sannyasi, but at least I try to be as Zen as I can about it.

  Reflections on the Challenges of Ownership

  In 2007 and 2008, home values across America plummeted as fast as George W. Bush’s approval ratings. Each month brought with it more bad news: more foreclosures, more new homes for sale in a stagnant real estate market, and more stories of people who couldn’t get mortgages. Results from a study by Zillow.com (a Web site that facilitates home searches and price estimations) illustrated just how strongly this news affected home owners: in the second quarter of 2008, nine out of ten home owners (92 percent) said there had been foreclosures in their local real estate market, and they were concerned that these foreclosures had lowered home values in their neighborhoods. Moreover, four in five home owners (82 percent) did not see much hope for improvement in the real estate market in the near future.

  On the face of it, Zillow’s research suggested that homeowners had been paying attention to the media, had an idea of what was happening in the economy, and understood that the housing crunch was a reality. But this study also found that these seemingly well-informed people believed that the values of their own homes had not decreased as much. Two out of three home owners (62 percent) believed that the value of their own home had increased or stayed the same, and about half (56 percent) planned to invest in home improvements, even as they watched the housing market collapse around them. What explained the wide gap between their inflated perception of their homes’ values and the gloomy market reality?

  As we discussed in Chapter 8, ownership fundamentally changes our perspective. In the same way that we think our own kids are more wonderful and special than our friends’ and neighbors’ children (regardless of whether our children deserve such esteem), we overvalue everything that we own, whether it’s a pair of basketball tickets or our domiciles.

  But home ownership is even more interesting and complex than, say, the regular case of owning a coffee mug or a pair of baseball tickets—because we invest so much in our houses. Think, for example, about all the changes and tinkering we do to our homes once we move into them. We replace laminate countertops with granite. We take out a wall and install a new window that lets the light shine just so on the dining room table. We paint the living room walls a deep earthy clay color. We change the bathroom tile. We add a porch and install a koi pond in the backyard. Little by little, we make changes here and there until the house feels perfectly tailored to our unique individual tastes, until it expresses our elegant or eclectic sense of style to everyone else. When the neighbors come over, they admire our countertops and light fixtures. But in the end, do other people value the changes we have so lovingly made as much as we do? Do they value these changes at all?

  Consider a home owner who compares her own beautifully remodeled house with a similar one down the street that has been languishing on the market for months, or with another that has recently sold for much less than the asking price. In so doing, she understands why the owners of these other homes had such a hard time selling them. They had the laminate and not the granite countertops, no earthy clay paint or light that fell just so on the dining room table. “No wonder those houses didn’t sell,” she thinks to herself, “they simply are not as nice as mine.”

  MY WIFE, SUMI, and I also fell victim to this bias. When we worked at MIT, we bought a new house in Cambridge, Massachusetts (the house was originally built in 1890, but it felt new to us). We promptly went about fixing it up. We took down some walls to give the house an open feel, which we loved. We renovated the bathrooms and set up a sauna in the basement. We also converted the carriage house in the garden into a small combination office-apartment. Sometimes we would pack our laundry basket with some wine, food, and clothing, and escape to the carriage house for a “weekend away.”

  Then, in 2007, we took jobs at Duke University and moved to Durham, North Carolina. We assumed that the housing market would continue to decline, and that it would be in our best interest to sell the Cambridge house as quickly as possible. We also wanted to avoid having to pay for heating, taxes, and a mortgage on two homes.

  Many people came to see our beautifully remodeled Cambridge home. They all seemed to appreciate the structure and the feel of the place, but no one put in an offer. People told

  us that the house was beautiful, but somehow they could not fully appreciate the benefit of the open floor plan. Instead, they wanted something with more privacy. We heard what they said, but it didn’t fully register. “Clearly,” we said to each other after each set of prospective buyers had come and gone, “those people are just dull and unimaginative, and have no taste. Surely our beautiful, open, airy home will be just right for the perfect someone.”

  Time passed. We paid double mortgages, double heating bills, and double taxes while the housing market continued to slow down. Many more people came to see the house and left without extending an offer. Eventually Jean, our real estate agent, delivered the bad news to us the way a doctor tells a patient there’s something funny looking on his X-ray. “I think,” she said slowly, “that if you want to sell the house, you will have to rebuild some walls and reverse some of the changes you have made.” Until she said those words, we had not accepted this truth. Despite our disbelief, and still fully convinced of our superior taste, we took the plunge and paid a contractor to re-erect some walls. A few weeks later the house was sold.

  In the end, the buyers didn’t want our home. They wanted theirs. This was a very expensive lesson, and I certainly wish we had had a better sense of the effect of our modifications on potential buyers.

  OUR PROPENSITY TO overvalue what we own is a basic human bias, and it reflects a more general tendency to fall in love with, and be overly optimistic about, anything that has to do with ourselves. Think about it—don’t you feel that you are a better-than-average driver, are more likely to be able to afford retirement, and are less likely to suffer from high cholesterol, get a divorce, or get a parking ticket if you overstay your meter by a few minutes? This positivity bias, as psychologists call it, has another name: “The Lake Wobegone Effect,” named after the fictional town in Garrison Keillor’s popular radio series A Prairie Home Companion. In Lake Wobegone, according to Keillor, “all the women are strong, all the men are good-looking, and all the children are above average.”

  I don’t think we can become more accurate and objective in the way we think about our children and houses, but maybe we can realize that we have such biases and listen more carefully to the advice and feedback we get from others.

  CHAPTER 9

  Keeping Doors Open

  Why Options Distract Us from Our Main Objective

  In 210 BC, a Chinese commander named Xiang Yu led his troops across the Yangtze River to attack the army of the Qin (Ch’in) dynasty. Pausing on the banks of the river for the night, his troops awakened in the morning to find, to their horror, that their ships were burning. They hurried to their feet to fight off their attackers, but soon discovered that it was Xiang Yu himself who had set their ships on fire, and that he had also ordered all the cooking pots crushed.

  Xiang Yu explained to his troops that without the pots and the ships, they had no other choice but to fight their way to victory or perish. That did not earn Xiang Yu a place on the Chinese army’s list of favorite commanders, but it did have a tremendous focusing effect on his troops: grabbing their lances and bows, they charged ferociously against the enemy and won nine consecutive battles, completely obliterating the main-force units of the Qin dynasty.

  Xiang Yu’s story is remarkable because it is completely antithetical to normal human behavior. Normally, we cannot stand the idea of closing the doors on our alternatives. Had most of us been in Xiang Yu’s armor, in othe
r words, we would have sent out part of our army to tend to the ships, just in case we needed them for retreat; and we would have asked others to cook meals, just in case the army needed to stay put for a few weeks. Still others would have been instructed to pound rice out into paper scrolls, just in case we needed parchment on which to sign the terms of the surrender of the mighty Qin (which was highly unlikely in the first place).

  In the context of today’s world, we work just as feverishly to keep all our options open. We buy the expandable computer system, just in case we need all those high-tech bells and whistles. We buy the insurance policies that are offered with the plasma high-definition television, just in case the big screen goes blank. We keep our children in every activity we can imagine—just in case one sparks their interest in gymnastics, piano, French, organic gardening, or tae kwon do. And we buy a luxury SUV, not because we really expect to drive off the highway, but because just in case we do, we want to have some clearance beneath our axles.

  We might not always be aware of it, but in every case we give something up for those options. We end up with a computer that has more functions than we need, or a stereo with an unnecessarily expensive warranty. And in the case of our kids, we give up their time and ours—and the chance that they could become really good at one activity—in trying to give them some experience in a large range of activities. In running back and forth among the things that might be important, we forget to spend enough time on what really is important. It’s a fool’s game, and one that we are remarkably adept at playing.

  I saw this precise problem in one of my undergraduate students, an extremely talented young man named Joe. As an incoming junior, Joe had just completed his required courses, and now he had to choose a major. But which one? He had a passion for architecture—he spent his weekends studying the eclectically designed buildings around Boston. He could see himself as a designer of such proud structures one day. At the same time he liked computer science, particularly the freedom and flexibility that the field offered. He could see himself with a good-paying job at an exciting company like Google. His parents wanted him to become a computer scientist—and besides, who goes to MIT to be an architect anyway?* Still, his love of architecture was strong.

  As Joe spoke, he wrung his hands in frustration. The classes he needed for majors in computer science and architecture were incompatible. For computer science, he needed Algorithms, Artificial Intelligence, Computer Systems Engineering, Circuits and Electronics, Signals and Systems, Computational Structures, and a laboratory in Software Engineering. For architecture, he needed different courses: Experiencing Architecture Studio, Foundations in the Visual Arts, Introduction to Building Technology, Introduction to Design Computing, Introduction to the History and Theory of Architecture, and a further set of architecture studios.

  How could he shut the door on one career or the other? If he started taking classes in computer science, he would have a hard time switching over to architecture; and if he started in architecture, he would have an equally difficult time switching to computer science. On the other hand, if he signed up for classes in both disciplines, he would most likely end up without a degree in either field at the end of his four years at MIT, and he would require another year (paid for by his parents) to complete his degree. (He eventually graduated with a degree in computer science, but he found the perfect blend in his first job—designing nuclear subs for the Navy.)

  Dana, another student of mine, had a similar problem—but hers centered on two boyfriends. She could dedicate her energy and passion to a person she had met recently and, she hoped, build an enduring relationship with him. Or she could continue to put time and effort into a previous relationship that was dying. She clearly liked the new boyfriend better than the former one—yet she couldn’t let the earlier relationship go. Meanwhile, her new boyfriend was getting restless. “Do you really want to risk losing the boy you love,” I asked her, “for the remote possibility that you may discover—at some later date—that you love your former boyfriend more?” She shook her head “no,” and broke into tears.*

  What is it about options that is so difficult for us? Why do we feel compelled to keep as many doors open as possible, even at great expense? Why can’t we simply commit ourselves?*

  To try to answer these questions, Jiwoong Shin (a professor at Yale) and I devised a series of experiments that we hoped would capture the dilemma represented by Joe and Dana. In our case, the experiment would be based on a computer game that we hoped would eliminate some of the complexities of life and would give us a straightforward answer about whether people have a tendency to keep doors open for too long. We called it the “door game.” For a location, we chose a dark, dismal place—a cavern that even Xiang Yu’s army would have been reluctant to enter.

  MIT’S EAST CAMPUS dormitory is a daunting place. It is home to the hackers, hardware enthusiasts, oddballs, and general misfits (and believe me—it takes a serious misfit to be a misfit at MIT). One hall allows loud music, wild parties, and even public nudity. Another is a magnet for engineering students, whose models of everything from bridges to roller coasters can be found everywhere. (If you ever visit this hall, press the “emergency pizza” button, and a short time later a pizza will be delivered to you.) A third hall is painted completely black. A fourth has bathrooms adorned with murals of various kinds: press the palm tree or the samba dancer, and music, piped in from the hall’s music server (all downloaded legally, of course), comes on.

  One afternoon a few years ago, Kim, one of my research assistants, roamed the hallways of East Campus with a laptop tucked under her arm. At each door she asked the students whether they’d like to make some money participating in a quick experiment. When the reply was in the affirmative, Kim entered the room and found (sometimes only with difficulty) an empty spot to place the laptop.

  As the program booted up, three doors appeared on the computer screen: one red, the second blue, and the third green. Kim explained that the participants could enter any of the three rooms (red, blue, or green) simply by clicking on the corresponding door. Once they were in a room, each subsequent click would earn them a certain amount of money. If a particular room offered between one cent and 10 cents, for instance, they would make something in that range each time they clicked their mouse in that room. The screen tallied their earnings as they went along.

  Getting the most money out of this experiment involved finding the room with the biggest payoff and clicking in it as many times as possible. But this wasn’t trivial. Each time you moved from one room to another, you used up one click (you had a total of 100 clicks). On one hand, switching from one room to another might be a good strategy for finding the biggest payout. On the other hand, running madly from door to door (and room to room) meant that you were burning up clicks which could otherwise have made you money.

  Albert, a violin player (and a resident of the Dark Lord Krotus worshippers’ hall), was one of the first participants. He was a competitive type, and determined to make more money than anyone else playing the game. For his first move, he chose the red door and entered the cube-shaped room.

  Once inside, he clicked the mouse. It registered 3.5 cents. He clicked again; 4.1 cents; a third click registered one cent. After he sampled a few more of the rewards in this room, his interest shifted to the green door. He clicked the mouse eagerly and went in.

  Here he was rewarded with 3.7 cents for his first click; he clicked again and received 5.8 cents; he received 6.5 cents the third time. At the bottom of the screen his earnings began to grow. The green room seemed better than the red room—but what about the blue room? He clicked to go through that last unexplored door. Three clicks fell in the range of four cents. Forget it. He hurried back to the green door (the room paying about five cents a click) and spent the remainder of his 100 clicks there, increasing his payoff. At the end, Albert inquired about his score. Kim smiled as she told him it was one of the best so far.

  ALBERT HAD CONFIRMED something
that we suspected about human behavior: given a simple setup and a clear goal (in this case, to make money), all of us are quite adept at pursuing the source of our satisfaction. If you were to express this experiment in terms of dating, Albert had essentially sampled one date, tried another, and even had a fling with a third. But after he had tried the rest, he went back to the best—and that’s where he stayed for the remainder of the game.

  But to be frank, Albert had it pretty easy. Even while he was running around with other “dates,” the previous ones waited patiently for him to return to their arms. But suppose that the other dates, after a period of neglect, began to turn their backs on him? Suppose that his options began to close down? Would Albert let them go? Or would he try to hang on to all his options for as long as possible? In fact, would he sacrifice some of his guaranteed payoffs for the privilege of keeping these other options alive?

  To find out, we changed the game. This time, any door left unvisited for 12 clicks would disappear forever.

  SAM, A RESIDENT of the hackers’ hall, was our first participant in the “disappearing” condition. He chose the blue door to begin with; and after entering it, he clicked three times. His earnings began building at the bottom of the screen, but this wasn’t the only activity that caught his eye. With each additional click, the other doors diminished by one-twelfth, signifying that if not attended to, they would vanish. Eight more clicks and they would disappear forever.

  Sam wasn’t about to let that happen. Swinging his cursor around, he clicked on the red door, brought it up to its full size, and clicked three times inside the red room. But now he noticed the green door—it was four clicks from disappearing. Once again, he moved his cursor, this time restoring the green door to its full size.