By Kerry Tinga
The story goes that in the 1950s when instant cake mixes were first introduced to the public to simplify the lives of the average American housewife, sales were slow and the companies just could not understand why. The mixes were so easy, just add water and they were ready to go. How could something that simplifies someone’s life so much not be more popular? Then came Ernest Dichter, a psychologist and expert in consumer behavior, whose investigation found that women who used the mixes were ashamed to be using them: It was too easy. Against logical notions of efficiency, several companies started selling a new type of cake mix where the baker had to add an egg. And the rest, as they say, is history.
This is a classic example of the “IKEA effect.” Identified and named in a study by Norton et al, it’s a theory that says people may overvalue products they have a hand in creating, like a wobbly bookshelf from IKEA, simply because they had a hand in creating it. It does not make any logical sense, but neither does making decisions based on emotions, or agreeing with something because more people agree with it even when part of you thinks it’s wrong, or wanting instant gratification rather than a larger pay out later on. Yet we all do these things.
Professor Dan Ariely, one of the researchers in the Norton et al study, wrote in his book The Upside of Irrationality that we are less like “hyper-rational Mr Spock” and more along the lines of the “fallible, myopic, vindictive, emotional, biased Homer Simpson.”
Last week the Nobel Prizes were awarded, one award that attracted a lot of buzz was the Prize for Literature going to Kazuo Ishiguro, known for The Remains of the Day and Never Let Me Go. A day after the award was announced a friend of mine messaged me saying she had just bought four of his novels and was going to start reading them. The Swedish Academy praised him for his novels of “great emotional force” that “uncovered the abyss beneath our illusory sense of connection with the world.”
While his work beautifully explores the sadness of the human condition (I greatly encourage everybody to read at least the two novels of his, such as the two I mentioned), another winner just about nailed what it means to be human. The Nobel Prize in Economics was awarded to Professor Richard Thaler, known as a pioneer in the field of behavioral economics and for his cameo in The Big Short where he gave a mini lecture alongside Selena Gomez (who is an actress and not a behavioral economist).
“We Americans eat too much, take on too much debt, save too little, and put off anything mildly unpleasant as long as possible,” Thaler wrote in a 2011 New York Times op-ed. The only rational conclusion is that human beings are irrational! That is pretty much the quickest summary of Thaler’s years and years of hard work and research.
Neoclassical economic theories often assume that man is a rational economic entity and will make rational decisions based on the information available to him: They weigh the pros and cons, and act out of self-interest. The research of behavioral economists into the anomalies of economic theory was originally met with criticisms. Thaler had difficulty getting his initial ideas out there. Leading economic journals rejected his first paper. “I didn’t have any data,” he admitted in the New York Times in 2001. “It was stuff that was just true.” Eventually, behavioral economics started catching on. It is now generally accepted by the mainstream.
So how does knowing we are irrational help economists? Well that is where Thaler’s work becomes even more interesting. Although we are irrational creatures, there is something of a system to our irrationality called “cognitive bias,” like the IKEA effect mentioned in the beginning of this article. It is those patterns of deviation from logic that economists can capitalize on through what Prof. Thaler calls “nudging,” a form of choice architecture that subtly influences the decision-making of a person.
An interesting example is the etching of a fly on urinals in a bathroom in Amsterdam. The presence of the drawings changed the human male behavior, thereby reducing spillage and general cleaning costs. “It turns out,” writes Thaler, “that if you give men a target, they can’t help but aim at it.”
This idea of nudging has been used in advance domestic policies in the US and the UK, and large corporate firms. I won’t embarrass myself in trying to explain it, as I don’t really understand what it means. All I am trying to say that it is used all around us, and not just in urinals in the Netherlands. So it is okay to make mistakes and be human. Don’t be ashamed, because the world is recognizing that we are irrational and imperfect.
When asked what he was going to do with the prize money of nine million kronor (about $1.1 million), Thaler responded that he would try to spend it “as irrationally as possible.”