The Irrational Bundle

Although we all realize that offering cash instead of gifts is more economically efficient, I don’t expect that many people will follow this rational advice, because we all know that doing so will in no way endear us to our hosts. If you want to demonstrate affection, or strengthen your relationship, then giving a gift—even at the risk that it won’t be appreciated as much as you hoped—is the only way to go.

So imagine two scenarios. Let’s say it’s the holidays, and two different neighbors invite you to their parties in the same week. You accept both invitations. In one case, you do the irrational thing and give Neighbor X a bottle of Bordeaux; for the second party you adopt the rational approach and give Neighbor Z $50 in cash. The following week, you need some help moving a sofa. How comfortable would you be approaching each of your neighbors, and how do you think each would react to your request for a favor? The odds are that Neighbor X will step in to help. And Neighbor Z? Since you have already paid him once (to make and share dinner with you), his logical response to your request for help might be, “Fine. How much will you pay me this time?” Again, the prospect of acting rationally, financially speaking, sounds deeply irrational in terms of social norms.

The point is that while gifts are financially inefficient, they are an important social lubricant. They help us make friends and create long-term relationships that can sustain us through the ups and downs of life. Sometimes, it turns out, a waste of money can be worth a lot.

Reflections on Social Norms: Benefits in the Workplace

The same general principles regarding social norms also apply to the workplace. In general, people work for a paycheck, but there are other, intangible benefits we get from our jobs. These are also very real and very important, yet much less understood.

Often, when I’m on a flight and the people sharing the row with me don’t immediately put their headphones on, I enter into an interesting discussion with one of them. Invariably, I learn a lot about my neighbor’s work, work history, and future projects. On the other hand, I discover very little about the person’s family, favorite music, movies, or hobbies. Unless my neighbor gives me a business card, I almost never learn his or her name until the moment we are both about to leave the plane. There are probably many reasons for this, but I suspect that one of them is that most people take a lot of pride in their work. Of course this may not be true of everyone, but I think that for many people the workplace is not just a source of money but also a source of motivation and self-definition.

Such feelings benefit both the workplace and the employee. Employers who can foster these feelings gain dedicated, motivated employees who think about solving job-related problems even after the workday is over. And employees who take pride in their work feel a sense of happiness and purpose. But in the same way that market norms may undermine social norms, it may be that market norms also erode the pride and meaning people get from the workplace (for example, when we pay schoolteachers according to their students’ performance on standardized tests).

Imagine that you work for me, and that I want to give you a year-end bonus. I offer you a choice: $1,000 in cash or an all-expenses-paid weekend in the Bahamas, which would cost me $1,000. Which option would you choose? If you are like most people who have answered this question, you would take the cash. After all, you may have already been to the Bahamas and may not have enjoyed being there very much, or maybe you’d prefer to spend a weekend at a resort closer to home and use the remainder of the bonus money to buy a new iPod. In either case, you think that you can best decide for yourself how to spend the money.

This arrangement seems to be financially efficient, but would it increase your happiness with your work, or your loyalty to the company? Would it make me a better boss? Would it improve the employer-employee relationship in any way? I suspect that both your and my best interests would be better served if I simply didn’t offer you a choice and just sent you on the Bahamas vacation. Consider how much more relaxed and refreshed you would feel, and how well you would perform, after a relaxing weekend of sun and sand, compared with how you would feel and behave after you got the $1,000 bonus. Which would help you feel more committed to your job, more enjoyment in your work, more dedication to your boss? Which gift would make you more likely to stay long hours one night to meet an important deadline? On all of these, the vacation beats the cash hands down.

This principle doesn’t apply only to gifts. Many employers, in an effort to show their employees how well they are treating them, add different line items to their paycheck stubs, describing exactly how much money the employer is spending on health care, retirement plans, the gym at work, and the cafeteria. These items are all legitimate, and they reflect real costs to the employer, but overtly stating the prices of these items changes the workplace from a social environment in which the employer and employee have a deep commitment to each other to a transactional relationship. Explicitly stating the financial value of these benefits can also diminish enjoyment, motivation, and loyalty to the workplace—negatively affecting both the employer-employee relationship and our own pride and happiness at work.

Gifts and employee benefits seem, at first glance, to be an odd and inefficient way of allocating resources. But with the understanding that they fulfill an important role in creating long-term relationships, reciprocity, and positive feelings, companies should try to keep benefits and gifts in the social realm.

Reflections on Market Norms and Romance

One of the great philosophers of our time, Jerry Seinfeld, unintentionally demonstrated that social and market norms—much like an acid and a base in chemistry—clash if we try to mix them. In one episode of Seinfeld, Jerry hires a maid. This is not all that unusual in itself, except that in this case, the maid happens to be very attractive and naturally (for New York City) she is waiting to be “discovered.” Elaine predicts the inevitable, that Jerry will eventually start dating the maid. Later, after celebrating being right about her prediction, she comments sarcastically on what a prudent undertaking it is to date one’s maid. Here Elaine sagely points out the inherent difficulties in uniting the market norm (maid) and social norm (girlfriend). Jerry, expecting as much, gives a haphazard defense, arguing that he would never trip lightly into such a fraught situation and claiming that their personal and work relationships are completely separate. When the next inevitable evolution of their “relationship” occurs—that is, the maid/girlfriend stops cleaning entirely (but takes the money anyway)—Kramer is horrified and calls Jerry a john, picking up on the fact that it’s not exactly normal to pay one’s significant other for services rendered. Both relationships (girlfriend and maid) end when Jerry claims that they’re through and, in the same breath, that she’s fired. What happened is that Jerry mixed two competing norms—social and market—before realizing that they cannot comfortably coexist.

Romantic relationships, in both fiction and real life, can provide useful insights into a lot of areas in behavioral economics. But as we’ve already seen, they are particularly useful in helping us think about the strange combinations of social and market norms. One wonderfully sad example of a person who did not understand this complexity is a woman in New York who, in 2007, posted a personal ad on Craigslist. In her ad, she said that she was seeking a husband who earned more than $500,000 a year. She described herself as “spectacularly beautiful,” “articulate,” and “superficial.” She also said that while she had no problems dating businessmen who made $250,000, she was unable to break the $250,000 barrier and find someone above this income level. She hoped to date someone who could get her what she really wanted: a nice apartment on Central Park West.

Let’s assume, for the sake of argument, that this woman really was spectacularly beautiful, articulate, and wonderful in every way. What would happen if she walked into a bar filled with stockbrokers, found her guy, and explicitly stated her goal as she did in the ad, and he accepted her offer? The terms of the relationship would certainly be established, putting them firmly in the market norm, rather than the social norm, domain.

Now, say that this “happy” couple eventually gets married. What would happen the first time she didn’t want to have sex with her stockbroker husband or refused to spend the holidays with his mother? My guess is that the give-and-take that is so common and acceptable in regular romantic relationships (and in every social exchange) would not be part of this relationship . . . and that the explicit exchange of beauty for money would ensure that the relationship would break down.

I don’t actually know what became of this woman, but the responses to her ad make me suspect that this approach to finding a husband did not have a good ending. Because she bluntly introduced market norms into the relationship she was looking for, many respondents compared her offer to a business transaction. In fact, one anonymous respondent took her market norms framing to the next level. He assured the woman that he met her criteria but explained that the proposal was a “crappy business deal” because his assets (money) were likely to appreciate over time, while her assets (looks) would certainly depreciate as she aged. He also added, correctly, that in this situation, the economically rational thing to do would be to lease rather than buy.

CHAPTER 5

The Power of a Free Cookie

How free Can Make Us Less Selfish

Some time ago, I decided to go watch firsthand one of the most infamous acts of raw, unabashed, supply-and-demand capitalism in action. I am talking, of course, about Filene’s Basement’s “Running of the Brides”—an event that has been held annually since 1947 and is the department store’s answer to the famous “Running of the Bulls” in Pamplona, Spain. Instead of watching thousand-pound bulls trampling and goring foolhardy humans, I observed about a thousand blushing brides-to-be (and their minions) trampling one another in a mass grab for discount-priced designer wedding dresses. According to the store’s Web site,

gowns originally priced at thousands of dollars are on this day offered for a pittance, from $249 to $699.

Early on the morning of the sale, the brides, each with a small army of moms and friends, line up outside the store (some even camp out the night before). The minute the doors open, they turn into a frantic, screaming, pushing mob, running to the racks to tear off as many dresses as they can carry. (One piece of particularly useful advice for brides: put all your friends in brightly colored uniforms or silly headgear so you can identify them in the melee as they grab armfuls of dresses.) It takes just a minute or so for the racks to be stripped to bare metal. As soon as they have their piles of dresses, the women strip off their clothes and begin trying them on. Dresses that don’t fit are tossed aside, and the poor, bedraggled store assistants try to pick them off the floor and re-rack them.

Although I’d heard horror stories of injuries and scuffles, I personally didn’t see a lot of violence. But I did witness rampant selfishness, to say nothing of the air turning blue from the terrible language. (I suspect that if their fiancés were to witness this event, it might have led to a serious rethinking of marriage proposals.)

NOW, TRADITIONAL ECONOMICS takes a very simple and straightforward view of the scene at Filene’s Basement when prices on wedding gowns are so dramatically reduced. When a Vera Wang gown is reduced from $10,000 to $249, the excitement (“demand,” in economic-speak) over the gown dramatically increases. More precisely, demand increases for two reasons. According to the first law of demand, it increases because more women are now in the market for designer gowns (they can now afford them). And according to the second law of demand, it increases because at these prices women might buy multiple units. This second law is less relevant for wedding gowns, where women presumably need just one, but central in cases where we need multiple units (cookies, sweaters, etc.). Still, even in the case of wedding dresses, multiple women have been sighted leaving Filene’s Basement with more than one gown. These two laws are the nuts and bolts of the standard economic rule of demand. (Admittedly, the Filene’s event isn’t just any occurrence of “increased demand.” It’s more like an all-out bridal battlefield.)

THESE TWO ECONOMIC laws of demand seem perfectly reasonable, but as we learned in Chapter 4, “The Cost of Social Norms,” market rules are just some of the forces that operate on us. As social animals, we also have social forces to contend with—and when economic and social forces mix, the outcome is sometimes different from what we would expect. When we explored the interactions between social and market norms, we basically found that when we add money to a situation that operates on social norms, motivation can decrease rather than increase. For example, if I asked you to help me change my tire, you’ll probably think to yourself: “Okay, Dan’s a nice enough guy most of the time, so I will be happy to help him out.” But if I asked you: “Would you help me change the tire of my car—how about [checking my wallet] $3 for your help?” Now you’ll think: “Man, no way, what a jerk! Does he really think my time is worth that little?” What this means is that when I ask you for a favor and add $3 to the mix, you don’t think to yourself: “How wonderful! I get to help Dan and I get to earn $3.” Instead, you change your perspective on the situation, look at it as work, and conclude that it is not worth your time (of course, if I offered you $175, you would most likely take on this job).

The basic lesson, then, is that when we offer people a financial payment in a situation that is governed by social norms, the added payment could actually reduce their motivation to engage and help out.

But what if the situation was reversed and we asked people to pay us for something? Would the effect of social norms work in the same way? This was the question that Uri Gneezy (a professor at the University of California at San Diego), Ernan Haruvy (a professor at the University of Texas at Dallas), and I wanted to explore: the effect of mixing social and market norms on demand.

To think more concretely about this effect, imagine that one of your coworkers—let’s call her Susan—also happens to be a rather talented baker. One weekend, in a fit of boredom, Susan bakes a hundred chewy chocolate-chip-oatmeal cookies using her grandmother’s famous recipe, and it just so happens that there are about a hundred people in the

office. Since your desk is adjacent to hers, Susan comes

to your office first and places before you the box with all those delicious-smelling confections. How many would you take, and how would you decide this? Chances are you would quickly consider, among other things, your level of hunger, your waistline, and your love of chocolate-chip-oatmeal cookies. You might also think about how your

co-workers would feel if the cookies ran out, and if they learned that you took a lot of them. With all this in mind, including the importance of social norms, you decide to take one or two.

Now, consider a variation of this situation. This time, Susan comes by your desk asking you if you want to buy cookies for a nickel a piece. Now how many would you take, and what would dictate your decision? Most likely, you would again take into account your level of hunger, your waistline, and your love of chocolate-chip-oatmeal cookies. But unlike the previous case, this time you will have no compunction about buying a bunch to eat and take home (knowing how much your kids would love them), and you would not even think about the fact that by getting so many of Susan’s cookies you are depriving your coworkers from that same joy.

Why would your decision change so much once Susan asks for a nickel apiece? Because, very simply, by asking for money, she has introduced market norms into the equation, and these have chased away the social norms that governed the case of the free cookies. More interesting, it’s clear in both cases that if you take multiple cookies, there will be fewer for the other people in your office. But if Susan offers her cookies for free, I am willing to bet that you will think about social justice, the consequences of appearing greedy, and the welfare of your coworkers. Once money is introduced into the exchange, you stop thinking about what’s socially right and wrong, and you simply want to maximize your cookie intake.

In the same way, if you go to Filene’s Basement and discover a fantastic deal on wedding gowns, you don’t naturally think about all the other women who would also like to score a similar deal on their Vera Wangs—and therefore you grab as many dresses as you can. In economic exchanges, we are perfectly selfish and unfair. And we think that following our wallets is the right thing to do.

URI, ERNAN, AND I decided to find out what would actually happen in the two Susan cookie scenarios. To that end, we set up one of our makeshift candy stands at the MIT student center and watched for the outcome of two experimental scenarios:

Scenario 1: Pretend you’re a college student hurrying through the student center on your way to a late afternoon class. You see a booth up ahead with a sign that reads “Starburst Fruit Chews for 1¢ each.” Let’s say that, thinking quickly, you recall that you haven’t eaten lunch, that the last time you bought Starburst was in the movie theater, and, hey, they’re only one cent each. So you go over and buy ten Starbursts. Lunch is served!

Scenario 2: The setting is the same, but this time the sign reads “Starburst Fruit Chews for free.” You reminisce over the memory of popping these candies in your mouth when you went to the movies as a kid, happily recalling that it was one of the few times your parents allowed you to eat lots of sugar. Now what would you do? How many Starbursts would you take? According to the two laws of demand, with this new, irresistibly reduced price of zero, more people will go for the Starburst, and those who do will take more of the colorful square candy.

We set up our candy booth in the afternoon hours when the stream of students was more or less steady, and from time to time, we switched the conditions by alternating the free and the 1¢ signs (the penny price represented what we called the “monetary condition”). We counted the number of students who stopped by our booth and how many Starbursts they either bought or picked up. We found that during an average hour in the monetary condition, about 58 students stopped by and purchased candy, while in an average hour in the free condition, 207 students stopped by to take candy. Altogether, nearly three times the number of students stopped at the booth when Starbursts were free. Just as the theory of demand predicts, the decrease in price resulted in a greater number of people consuming the product. So far so good for the first law of demand.

Now, given the second law of demand, you’d assume that once the price drops from 1¢ to zero, each of the students who took candy would take more units. And since the number of students who stopped by was almost three times as large, you might expect that together these two forces of demand will make the total demand in our free condition much larger than the demand in the monetary condition.

So how many more Starbursts did our students pick up

when they were free? Trick question: They picked up fewer Starbursts!

When the Starbursts cost a cent apiece, the average number of candies per customer was 3.5, but when the price went down to zero, the average went down to 1.1 per customer. The students limited themselves to a large degree when the candy was free. In fact, almost all the students applied a very simple social-norm rule in this situation—they politely took one and only one Starburst. This, of course, is the opposite of the second law of demand. And how did these two forces of demand work together? In total, the increase due to the greater number of people that stopped by and the decrease due to the reduction in the number of candies that each person took resulted in students collectively taking fewer Starbursts as the price decreased from 1¢ to free.

What these results mean is that when price is not a part of the exchange, we become less selfish maximizers and start caring more about the welfare of others. We saw this demonstrated by the fact that when the price decreased to zero, customers restrained themselves and took far fewer units. So while the product (candy, in our case) was more attractive to more people, it also made people think more about others, care about them, and sacrifice their own desires for the benefit of others. As it turns out, we are caring social animals, but when the rules of the game involve money, this tendency is muted.

THE RESULTS FROM our experiment also help explain one of the great mysteries in life: why, when we are dining out with friends, taking the last olive feels like such a big deal.

Imagine you go to a friend’s birthday party. The appetizers are luscious: there’s a lovely spread of cheese and fruit; dishes of gherkins, kalamata olives, and tapenades; and lots of tiny little crostini. You walk around the room talking to old friends, and the wine is flowing. At some point, you wander into the kitchen and notice the delicious-looking four-decker Red Velvet cake (your personal favorite). As you chitchat with the other guests, you can’t stop thinking about that mouthwatering cake. All you really want to do is abscond with the entire thing, eat as much as you can in the laundry room without anyone knowing, and blame the dog if anyone asks. But what do you do? You balance your own desire with the desires of your friends, and you end up with only a medium-sized slice.

Recently, I was in an analogous situation with two of my colleagues and friends, Jiwoong Shin and Nina Mazar. If you’ve ever been to a sushi restaurant with friends, you know that as the California rolls and sashimi pieces on the plate in the middle of the table start to dwindle, the people sitting around it gradually become shyer about popping them into their mouths. At the end of our meal, there was one lonely spicy tuna left, and none of us seemed to be willing to put it out of its misery. When the waitress came to bring us the check and take away the plate with the lone sushi, I asked her how often people leave a single piece at the end of the meal. “Oh,” she said, “I find one extra piece left almost every time. I think it is even more common than people finishing all their sushi.”

Now I have eaten a lot of sushi in my life, and I can’t remember a time either when I was dining alone or when I got my own personal portion of sushi when I left anything on the plate. Somehow, when it’s just me who’s eating, I always manage to finish it all. But when the sushi is served in a large plate in the middle of the table, it just feels like taking the last one would be, well, a bit déclassé. “I really can’t eat any more,” I might say to my friends. “Go ahead. You take it.”

What is this sushi magic? Simply put, the communal plate transforms the food into a shared resource, and once something is part of the social good, it leads us into the realm of social norms, and with that the rules for sharing with others.

BACK TO OUR experiments, the next question we wanted to examine was whether the pattern of demand that we observed in the experiments was really due to the change from some payment to no payment. Or would it also happen when we discount prices of candies to anything above zero? According to the theory of social norms, this odd behavior of demand should manifest itself only when the price drops to zero—because only when price is not a part of an exchange do we start thinking about social consequences of our actions. Uri, Ernan, and I decided to take a closer look at this hypothesis in our next experiment.