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The idea of interviewing Dan Ariely was somehow latent on my mind since I started being interested in cognitive psychology and cognitive behavior psychotherapy, but actually got more ardent ever since irrationality became a research topic for his team at Duke University. I think reading his paper and also this transcribed interview with him would be also comforting for people who found out about Bucharest fire incident that rocked our society and also for people who are personally related to this tragedy. Beatrice Popescu: First of all, dear Professor Ariely, we would like to thank you for squeezing this interview among the huge amount of activities you are currently involved in. You have started your BA studies with hard sciences, mathematics and physics at Tel Aviv University and you continued them with philosophy and psychology.

No flashes of lightning illuminated my laboratory; nor was there a baying of the hounds on the moor. But this was still a good day for science. I followed the same procedure for the less attractive pairs. See the illustration for an example of the two conditions used in the study. It was now time for the main part of the experiment.

Approaching one student after another, I asked each to participate. When the students agreed, I handed them a sheet with three pictures as in the illustration here. Some of them had the regular picture A , the decoy of that picture —A , and the other regular picture B.

What was my motive in all this? Simply to determine if the existence of the distorted picture -A or -B would push my participants to choose the similar but undistorted picture. There were no pictures of Brad Pitt or George Clooney in my experiment, of course. Pictures A and B showed ordi- 12 predictably irrational nary students. But do you remember how the existence of a colonial-style house needing a new roof might push you to choose a perfect colonial over a contemporary house—simply because the decoy colonial would give you something against which to compare the regular colonial?

It did. This was not just a close call—it happened 75 percent of the time. Was it good or bad? Did one really need home-baked bread?

Why not just buy a fancy coffee- maker sitting nearby instead? Flustered by poor sales, the manufacturer of the bread machine brought in a marketing research firm, which suggested a fix: Now sales began to rise along with many loaves of bread , though it was not the large bread maker that was being sold.

They could say: What if you are single, and hope to appeal to as many attractive potential dating partners as possible at an upcoming singles event? My advice would be to bring a friend who has your basic physical characteristics similar coloring, body type, facial features , but is slightly less attractive —you. Because the folks you want to attract will have a hard time evaluating you with no comparables around. Now that you know this secret, be careful: Relativity helps us make decisions in life.

But it can also make us downright miserable. Because jealousy and envy spring from comparing our lot in life with that of others. Modern life makes this weakness even more pronounced. Over the course of our conversation he mentioned that one of his employees had recently come to him to complain about his salary. And indeed, it needed to stop: By , the average CEO was paid times as much.

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But guess what happened. Once salaries became public information, the media regularly ran special stories ranking CEOs by pay. Rather than suppressing the executive perks, the publicity had CEOs in America comparing their pay with that of everyone else.

The result? It has been shown repeatedly that the link between amount of salary and happiness is not as strong as one would expect it to be in fact, it is rather weak. Yet we keep 27 predictably irrational pushing toward a higher salary.

Much of that can be blamed on sheer envy. This was his goal. This was his dream. So he took another route with his career—the route of Wall Street. You can almost see him, standing in the middle of the room at the reunion, drink in hand—a large circle of influence with smaller circles gathering around him.

Look for someone whose sibling is married to a productivity-challenged individual. If we are thinking of buying a new house, we can be selective about the open houses we go to, skipping the houses that are above our means.

If we are thinking about buying a new car, we can focus on the models that we can afford, and so on. We can also change our focus from narrow to broad. Let me explain with an example from a study conducted by two brilliant researchers, Amos Tversky and Daniel Kahneman. Suppose you have two errands to run today. The first is to buy a new pen, and the second is to buy a suit for work.

What would you do? Now you are on your second task: In this case, most people say that they would not. But what is going on here?

This is the problem of relativity—we look at our decisions in a relative way and compare them locally to the available alternative. Would we perhaps be better off spending it on books, clothes, or a vacation? Thinking broadly like this is not easy, 20 the truth about relativity because making relative judgments is the natural way we think. Can you get a handle on it? I know someone who can. He is James Hong, cofounder of the Hotornot. For sure, James has made a lot of money, and he sees even more money all around him.

One of his good friends, in fact, is a founder of PayPal and is worth tens of millions. But Hong knows how to make the circles of comparison in his life smaller, not larger. In his case, he started by selling his Porsche Boxster and buying a Toyota Prius in its place.

They wish they had a Ferrari. There, he found a new livelihood: The Japanese needed watches, of course. They did have pearls, though—many thousands of them. Before long, Assael had taught his son how to barter Swiss watches for Japanese pearls.

Brouillet had just sold his air-freight business and with the proceeds had purchased an atoll in French Polynesia—a blue- lagooned paradise for himself and his young Tahitian wife. Brouillet explained that its turquoise waters abounded with black-lipped oysters, Pinctada margaritifera. And from the black lips of those oysters came something of note: At the time there was no market for Tahitian black pearls, and little demand. But Brouillet persuaded Assael to go into business with him.

Together they would harvest black pearls and sell them to the world. He could have tried to push them to consumers by bundling them together with a few white pearls. There, a string of Tahitian black pearls glowed, set among a spray of diamonds, rubies, and emeralds. Assael had taken something of dubious worth and made it fabulously fine. How did he persuade the cream of society to become passionate about Tahitian black pearls—and pay him royally for them?

In order to answer this question, I need to explain something about baby geese. Lorenz called this natural phenomenon imprinting. Is the human brain, then, wired like that of a gosling? Do our first impressions and decisions become imprinted?

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And if so, how does this imprinting play out in our lives? When we encounter a new product, for instance, do we accept the first price that comes before our eyes? And more importantly, does that price which in academic lingo we call an anchor have a long-term effect on our willingness to pay for the product from then on?

And this includes anchoring. Similarly, once we buy a new product at a particular price, 25 predictably irrational we become anchored to that price. But how exactly does this work? Why do we accept anchors? Consider this: Then, we would ask them to actually bid on these items in an auction. What were we trying to prove? The existence of what we called arbitrary coherence. And would that initial anchor have a long-term influence?

Drazen passed out forms that listed all the items. In other words, if the last two digits are twenty-three, write twenty-three dollars. The students enjoyed this class exercise, but when I asked them if they felt that writing down the last two digits of their social security numbers had influenced their final bids, they quickly dismissed my suggestion.

No way! When I got back to my office, I analyzed the data. Did the digits from the social security numbers serve as anchors? In the end, we could see that students with social security numbers ending in the upper 20 percent placed bids that were to percent higher than those of the students with social security numbers ending in the lowest 20 percent see table on the facing page.

Now if the last two digits of your social security number are a high number I know what you must be thinking: Social security numbers were the anchor in this experiment only because we requested them.

Any question, in fact, would have created the anchor. Does that seem rational? Of course not. This is called a second price auction. The data had one more interesting aspect. Although the willingness to pay for these items was arbitrary, there was also a logical, coherent aspect to it.

Everyone was willing to pay more for the keyboard than for the trackball—and also pay more for the Hermitage than for the Cotes du Rhone. The significance of this is that once the participants were willing to pay a certain price for one product, their willingness to pay for other items in the same product category was judged relative to that first price the anchor.

In life we are bombarded by prices. But price tags by themselves are not necessarily anchors. From then on, we are willing to accept a range of prices—but as with the pull of a bungee cord, we always refer back to the original anchor. The price tag is not the anchor. But if we decide to buy it or seriously contemplate buying it at that price, then the decision becomes our anchor henceforth in terms of LCD television sets.

Anchoring influences all kinds of purchases. Uri Simon- sohn a professor at the University of Pennsylvania and George Loewenstein, for example, found that people who move to a new city generally remain anchored to the prices they paid for housing in their former city.

Likewise, transplants from more expensive cities sink the same dollars into their new housing situation as they did in the past. The only way out of this box, in fact, is to rent a home in the new location for a year or so. That way, we adjust to the new environment— and, after a while, we are able to make a purchase that aligns with the local market.

So we anchor ourselves to initial prices. But do we hop from one anchor price to another flip-flopping, if you will , continually changing our willingness to pay? Or does the first anchor we encounter become our anchor for a long time and for many decisions? To answer this question, we decided to conduct another experiment—one in which we attempted to lure our participants from old anchors to new ones. Once the experiment started we presented our "'The result was not due to wealth, taxes, or other financial reasons.

One sound was a second high- pitched 3,hertz sound, somewhat like someone screaming in a high-pitched voice. Another was a second full- spectrum noise also called white noise , which is similar to the noise a television set makes when there is no reception.

The third was a second oscillation between high-pitched and low-pitched sounds. We also used annoying sounds, specifically, because no one likes such sounds if we had used classical music, some would have liked it better than others. As for the sounds themselves, I selected them after creating hundreds of sounds, choosing these three because they were, in my opinion, equally annoying.

We placed our participants in front of computer screens at the lab, and had them clamp headphones over their ears. We are interested in how annoying you find it. Immediately after you hear the tone, we will ask you whether, hypothetically, you would be willing to repeat the same experience in exchange for a payment of 10 cents. Would the anchor prices make a difference? To find out, 32 the fallacy of supply and demand we turned on the sound—in this case the irritating second, 3,hertz squeal.

Some of our participants grimaced. Would the participant be willing, hypothetically, to repeat the experience for a cash payment which was 10 cents for the first group and 90 cents for the second group? After answering this anchoring question, the participants were asked to indicate on the computer screen the lowest price they would demand to listen to the sound again.

This decision was real, by the way, as it would determine whether they would hear the sound again—and get paid for doing so. The participants whose price was too high did not listen to the sound and were not paid for this part of the experiment. What was the point of all this? We wanted to find out whether the first prices that we suggested 10 cents and 90 cents had served as an anchor.

And indeed they had. Do you see the difference that the suggested price had? But this was only the start of our exploration. Would they do it? To put it in terms of goslings, would they swim across the pond after their original imprint and then, midway, swing their allegiance to a new mother goose? In terms of goslings, I think you know that they would stick with the original mom. But what about humans? The next two phases of the experiment would enable us to answer these questions.

The respondents pressed a button on their computers to indicate yes or no. When we compared the prices, the cents group offered much lower bids than the cents group. Perhaps the participants in the cents group said 34 the fallacy of supply and demand something like the following to themselves: This sound is not much different. So if I said a low amount for the previous one, I guess I could bear this sound for about the same price. So since I said a high amount for the previous one, I guess I could bear this sound for about the same price.

There was one more step to this experiment. This time we had our participants listen to the oscillating sound that rose and fell in pitch for 30 seconds.

Once again, the participants typed in yes or no. Then we asked them for real bids: Which one of these would have the largest influence on the price they demanded to listen to the sound?

Those who had first encountered the cent anchor accepted low prices, even after 90 cents was suggested as the anchor. What did we show? That our first decisions resonate over a long sequence of decisions.

To illustrate this process, consider this example. Others join. We call this type of behavior herding. This happens when we believe something is good or bad on the basis of our own previous behavior. Does that make sense? Let me explain. I assume that nearly everyone has had this experience, since Starbucks sits on every corner in America.

You are sleepy and in desperate need of a liquid energy boost as you embark on an errand one afternoon. You glance through the windows at Starbucks and walk in. But since you have walked in and are now curious about what coffee at this price might taste like, you surprise yourself: The following week you walk by Starbucks again. Should you go in?

This is a complex computation—so instead, you resort to the simple approach: In doing so, you just became the second person in line, standing behind yourself. A few days later, you again walk by Starbucks and this time, you vividly remember your past decisions and act on them again—voila! You become the third person in line, standing behind yourself. As the weeks 37 predictably irrational pass, you enter again and again and every time, you feel more strongly that you are acting on the basis of your preferences.

Buying coffee at Starbucks has become a habit with you. Now that you have gotten used to paying more for coffee, and have bumped yourself up onto a new curve of consumption, other changes also become simpler. So is a lateral move to other offerings at Starbucks: However, there is something odd in this story.

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This is where it gets really interesting. He worked diligently to separate Starbucks from other coffee shops, not through price but through ambience. Accordingly, he designed Starbucks from the very beginning to feel like a continental coffeehouse. They sold fancy French coffee presses. And that, to a great extent, is how Starbucks succeeded. This time, we had a different twist to explore. Could we do the same? Whoever you are holding me now in hand, Without one thing all will be useless, I give you fair warning before you attempt me further, 1 am not what you supposed, but far different.

Who is he that would become my follower? Who would sign himself a candidate for my affections? The way is suspicious, the result uncertain, perhaps destructive. You would have to give up all else, I alone would expect to be your sole and exclusive standard, Your novitiate would even then be long and exhausting, The whole past theory of your life and all conformity to the lives around you would have to be abandon'd, Therefore release me now before troubling yourself 40 the fallacy of supply and demand any further, let go your hand from my shoulders.

Put me down and depart on your way. Owing to limited space, I told them, I had decided to hold an auction to determine who could attend. I passed out sheets of paper so that they could bid for a space; but before they did so, I had a question to ask them.

This, of course, served as the anchor. Now I asked the students to bid for a spot at my poetry reading. Do you think the initial anchor influenced the ensuing bids? Before I tell you, consider two things. First, my skills at reading poetry are not of the first order. They could have turned the tables completely and demanded that I pay them.

And now to the results drumroll, please. They offered, on average, to pay me about a dollar for the short poetry reading, about two dollars for the medium poetry reading, and a bit more than three dollars for the long poetry reading.

Maybe I could make a living outside academe after all. As you might expect, they demanded payment: But once the first impression had been formed that they would pay me or that I would pay them , the die was cast and the anchor set. Moreover, once the first decision had been made, other decisions followed in what seemed to be a logical and coherent manner. Of course, Mark Twain came to the same conclusions: For one, they illustrate the many choices we make, from the trivial to the profound, in which anchoring plays a role.

According to economic theory, we base these decisions on our fundamental values—our likes and dislikes. But what are the main lessons from these experiments about our lives in general?

Could it be that we made arbitrary decisions at some point in the past like the goslings that adopted Lorenz as their parent and have built our lives on them ever since, assuming that the original decisions were wise? Is that how we chose our careers, our spouses, the clothes we wear, and the way we style our hair? Were they smart decisions in the first place? Or were they partially random first imprints that have run wild?

What then? You might begin by questioning that habit. How did it begin? Second, ask yourself what amount of pleasure you will be getting out of it. Is the pleasure as much as you thought you would get? Could you cut back a little and better spend the remaining money on something else? In the case of the cell phone, could you take a step back from the cutting edge, reduce your outlay, and use some of the money for something else? And as for the coffee—rather than asking which blend of coffee you will have today, ask yourself whether you should even be having that habitual cup of expensive coffee at all.

Given this effect, the first decision is crucial, and we should give it an appropriate amount of attention. Socrates said that the unexamined life is not worth living. Even if they once were completely reasonable, are they still reasonable? That seems to make sense. Traditional economics assumes that prices of products in the market are determined by a balance between two forces: The price at which these two forces meet determines the prices in the marketplace.

The results of all the experiments presented in this chapter and the basic idea of arbitrary coherence itself challenge these assumptions. What this means is that demand is not, in fact, a completely separate force from supply. And this is not the end of the story. Here is an illustration of this idea. Now imagine that two new taxes will be introduced tomorrow. One will cut the price of wine by 50 percent, and the other will increase the price of milk by percent.

What do you think will happen? These price changes will surely affect consumption, and many people will walk around slightly happier and with less calcium. But now imagine this. What if the new taxes are accompanied by induced amnesia for the previous prices of wine and milk?

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Under conventional economic theory, this should cut demand. But would it? Moreover, much as in the example of Starbucks, this process of readjustment could be accelerated if the price change were to also be accompanied by other changes, such as a new grade of gas, or a new type of fuel such as corn-based ethanol fuel. But I do believe that in the long term, it would have a much smaller influence on demand than would be assumed from just observing the short-term market reactions to price increases.

Another implication of arbitrary coherence has to do with the claimed benefits of the free market and free trade. In other words, in many cases we make decisions in the marketplace that may not reflect how much pleasure we can get from different items. If anchors and memories of these anchors—but not preferences— determine our behavior, why would trading be hailed as the key to maximizing personal happiness utility?

So, where does this leave us? Yes, a free market based on supply, demand, and no friction would be the ideal if we were truly rational. Yet when we are not rational but irrational, policies should take this important factor into account. What about all those free! And what about the worthless free! Zero is not just another price, it turns out. Would you buy something if it were discounted from 50 cents to 20 cents?

Would you buy it if it were discounted from 50 cents to two cents? You bet! Why does free! After all, free! Zero has had a long history. The Babylonians invented the concept of zero; the ancient Greeks debated it in lofty terms how could something be nothing? Now zero was on a roll: So much for a brief recounting of the history of zero.

But the concept of zero applied to money is less clearly understood. Nonetheless, free! If free! As you have undoubtedly guessed by now, this procedure is called an experiment.

Well, sort of. They cost about 30 cents each when we buy them in bulk. Hershey cranks out 80 million Kisses a day. We did this because we wanted to make sure that we did not attract different types of people in the different conditions—avoiding what is called self-selection.

About 73 percent of them chose the truffle and 27 percent chose a Kiss. Now we decided to see how free! So we offered the Lindt truffle for 14 cents and the Kisses free. Would there be a difference? Should there be? After all, we had merely lowered the price of both kinds of chocolate by one cent.

But what a difference FREE! Some 69 percent of our customers up from 27 percent before chose the free! Kiss, giving up the opportunity to get the Lindt truffle for a very good price. What was going on here? First of all, let me say that there are many times when getting FREE!

The critical issue arises when FREE! For instance, imagine going to a sports store to buy a pair of white socks, the kind with a nicely padded heel and a gold toe.

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This is a case in which you gave up a better deal and settled for something that was not what you wanted, just because you were lured by the FREE! It was an either-or decision, like choosing one kind of athletic sock over another. Kiss so dramatic: Both chocolates were discounted by the same amount of money. The relative price difference between the two was unchanged—and so was the expected pleasure from both.

According to standard economic theory simple cost- benefit analysis , then, the price reduction should not lead to any change in the behavior of our customers. Before, about 27 percent chose the Kiss and 73 percent chose the truffle. And since nothing had changed in relative terms, the response to the price reduction should have been exactly the same. How strange but predictable we humans are! This conclusion, incidentally, remained the same in other experiments as well.

But, once again, when we lowered the price of the Kiss to free, the reaction was dramatic. We decided that perhaps the experiment had been tainted, since shoppers may not feel like searching for change in a purse or backpack, or they may not have any money on them. Such an effect would artificially make the free offer seem more attractive.

What happened? The students still went overwhelmingly for the free! What is it about FREE! Why do we have an irrational urge to jump for a free! I believe the answer is this. The real allure of free! And so, given the choice, we go for what is free. This, the zero price effect, is in a category all its own.

I recently saw a newspaper ad from a major electronics maker, offering me seven free! First of all, do I need a high-definition player right now? Probably not. Second, the DVD maker had a clear agenda behind its offer. So how much is free! Those are two rational thoughts that might prevent us from falling under the spell of FREE!

But, gee, those free! DVDs certainly look good! Getting something free! But what would happen if the offer was not a free price, but a free exchange? Are we as susceptible to free 55 predictably irrational products as we are to getting products for free?

Early in the evening, Joey, a nine-year-old kid dressed as Spider-Man and carrying a large yellow bag, climbed the stairs of our front porch. His mother accompanied him, to ensure that no one gave her kid an apple with a razor blade inside. She stayed on the sidewalk, however, to give Joey the feeling that he was trick-or-treating by himself. The small Snickers bar weighed one ounce, and the large Snickers bar weighed two ounces. This deal might have stumped a rocket scientist, but for a nine-year-old boy, the computation was easy: In a flash Joey put two of his Kisses into my hand, took the two-ounce Snickers bar, and dropped it into his bag.

All but 56 the cost of zero cost one of the kids to whom I presented this offer traded in two Kisses for the bigger candy bars. Zoe was the next kid to walk down the street. She was dressed as a princess, in a long white dress, with a magic wand in one hand and an orange Halloween pumpkin bucket in the other. But I did have a trick up my sleeve.

I offered little Zoe a deal: This logic was perfectly clear to Joe and the kids who encountered the condition in which both Snickers bars had a cost. But what would Zoe do? As you might have guessed by now, Zoe, and the other kids to whom I offered the same deal, was completely blinded 57 predictably irrational by free!

About 70 percent of them gave up the better deal, and took the worse deal just because it was FREE! Indeed, the draw of zero cost is not limited to monetary transactions. So do you think you have a handle on free!? Think quickly. Which would you take? If you jumped for the free! But look again: A few years ago, Amazon. Is the French consumer more rational than the rest of us? Rather, it turned out, the French customers were reacting to a different deal.

Instead of offering free! Just one franc— about 20 cents. In fact, when Amazon changed the promotion in France to include free shipping, France joined all the other countries in a dramatic sales increase.

In preparation for the new price structure, AOL geared up for what it estimated would be a small increase in demand. What did it get? An overnight increase from , to , customers logging into the system, and a doubling of the average time online. When choosing between two products, then, we often overreact to the free one.

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We might opt for a free! My most recent personal encounter with this involved a car. When I was looking for a new car a few years ago, I knew that I really should buy a minivan. In fact, I had read up on Honda minivans and knew all about them. But then an Audi caught my eye, at first through an appealing offer— free! How could I resist?

To be perfectly honest, the Audi was sporty and red, and I was still resisting the idea of being a mature and responsible father to two young kids.

Just because it was free! So I bought the Audi—and the free! A few months later, while I was driving on a highway, the transmission 60 the cost of zero cost broke—but that is a different story. Of course, with a cooler head I might have made a more rational calculation. It gets worse, though: Oh, for a minivan.

The concept of zero also applies to time. Time spent on one activity, after all, is time taken away from another. So if we spend 45 minutes in a line waiting for our turn to get a FREE!

My favorite personal example is free-entrance day at a museum. Despite the fact that most museums are not very expensive, I find it much more appealing to satisfy my desire for art when the price is zero.

Of course I am not alone in this desire. So on these days I usually find that the museum is overcrowded, the line is long, it is hard to see anything, and fighting the crowds around the museum and in the cafeteria is unpleasant.

You bet I do—but I go nevertheless. Zero may also affect food purchases. Food manufacturers have to convey all kinds of information on the side of the box. They have to tell us about the calories, fat content, fiber, etc. Is it possible that the same attraction we have to zero 61 predictably irrational price could also apply to zero calories, zero trans fats, zero carbs, etc.? With one brand you get a calorie-free beer, and with another you get a three-calorie beer.

Which brand will make you feel that you are drinking a really light beer? You might even feel so good that you go ahead and order a plate of fries. Think how powerful that idea is! Zero is not just another discount. The difference between two cents and one cent is small.

But the difference between one cent and zero is huge! If you are in business, and understand that, you can do some marvelous things. Want to draw a crowd? Want to sell more products? Make part of the purchase free! Similarly, we can use free! Want people to drive electric cars? In the same way, if health is your concern, focus on early detection as a way to eliminate the progression of severe illnesses.

Want people to do the right thing—in terms of getting regular colonoscopies, mammograms, cholesterol 62 the cost of zero cost checks, diabetes checks, and such? But when we stop to think about it, free! This would give him a total expected pleasure of 35 pleasure units for the truffle, and a total expected pleasure of four pleasure units 5 — 1 for the Kiss.

What about the case when the cost is reduced by the same amount for both products? Truffles cost 14 cents and the Kiss is free.

The same logic applies. The taste of the chocolates has not changed, so the rational consumer would estimate the pleasure to be 50 and five pleasure units, respectively. What has changed is the displeasure. In this setting the rational consumer would have a lower level of displeasure for both chocolates because the prices have been reduced by one cent and one displeasure unit.

Here is the main point: The total ex- 64 the cost of zero cost pected pleasure for the truffle would now be 36 pleasure units 50—14 , and the total expected pleasure for the Kiss would now be five pleasure units 5 — 0. The truffle leads by the same 31 points, so it should be the same easy choice.

The truffle wins hands down. This is how the pattern of choice should look, if the only forces at play were those of a rational cost-benefit analysis. The turkey is roasted to a golden brown; the stuffing is homemade and exactly the way you like it.

Your kids are delighted: And your wife is flattered: The festivities continue into the late afternoon. You loosen your belt and sip a glass of wine. Gazing fondly across the table at your mother-in-law, you rise to your feet and pull out your wallet.

As silence descends on the gathering, you wave a handful of bills. No, wait, I should give you four hundred! A glass of wine falls over; your mother-in-law stands predictably irrational up red-faced; your sister-in-law shoots you an angry look; and your niece bursts into tears.

As Margaret Clark, Judson Mills, and Alan Fiske suggested a long time ago, the answer is that we live simultaneously in two different worlds— one where social norms prevail, and the other where market norms make the rules. The social norms include the friendly requests that people make of one another. Could you help me move this couch?

Could you help me change this tire? Social norms are wrapped up in our social nature and our need for community.

They are usually warm and fuzzy. The second world, the one governed by market norms, is very different. The exchanges are sharp-edged: When we keep social norms and market norms on their separate paths, life hums along pretty well.

Take sex, for in- 68 the cost of social norms stance. We may have it free in the social context, where it is, we hope, warm and emotionally nourishing. This seems pretty straightforward.

When social and market norms collide, trouble sets in. Take sex again. A guy takes a girl out for dinner and a movie, and he pays the bills. They go out again, and he pays the bills once more. On the fourth date he casually mentions how much this romance is costing him.

She calls him a beast and storms off. He should also have remembered the immortal words of Woody Allen: In fact, it was one of the most boring tasks we could find there is a tradition in social science of using very boring tasks. The task was to drag the circle, using the computer mouse, onto the square. Once the circle was successfully dragged to the square, it disappeared from the screen and a new circle appeared at the starting point. We asked the participants to drag as many circles as they could, and we measured how many circles they dragged within five minutes.

This was our measure of their labor output—the effort that they would put into this task. Some of the participants received five dollars for participating in the short experiment. They were given the money as they walked into the lab; and they were told that at the end of the five minutes, the computer would alert them that the task was done, at which point they were to leave the lab.

Because we paid them for their efforts, we expected them to apply market norms to this situation and act accordingly. Participants in a second group were presented with the same basic instructions and task; but for them the reward was much lower 50 cents in one experiment and 10 cents in the other. Finally, we had a third group, to whom we introduced the tasks as a social request. It was merely a favor that we asked of them. We expected these participants to apply social norms to the situation and act accordingly.

How hard did the different groups work? In line with the ethos of market norms, those who received five dollars dragged on average circles, and those who received 50 70 the cost of social norms cents dragged on average circles. As expected, more money caused our participants to be more motivated and work harder by about 50 percent. What about the condition with no money? The results showed that on average they dragged circles, much more than those who were paid 50 cents, and just slightly more than those who were paid five dollars.

In other words, our participants worked harder under the nonmonetary social norms than for the almighty buck OK, 50 cents. Perhaps we should have anticipated this. There are many examples to show that people will work more for a cause than for cash.

The lawyers said no. Then the program manager from AARP had a brilliant idea: Overwhelmingly, the lawyers said yes. When no money was mentioned they used social norms and were willing to volunteer their time. Because once market norms enter our considerations, the social norms depart. The sensei the master teacher was not charging the group for the training. Setting down his bamboo shinai, the master calmly replied that if he charged them, they would not be able to afford him.

In other words, when the market norms entered the lab, the social norms were pushed out. But what would happen if we replaced the payments with a gift? Surely your mother-in-law would accept a good bottle of wine at dinner. Or how about a housewarming present such as an eco-friendly plant for a friend?

Are gifts methods of exchange that keep us within the social exchange norms? We replaced the cent reward with a Snickers bar worth about 50 cents , and the five-dollar incentive with a box of Godiva chocolates worth about five dollars.

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The participants came to the lab, got their reward, worked as much as they liked, and left. Then we looked at the results. As it turned out, all three experimental groups worked about 72 the cost of social norms equally hard during the task, regardless of whether they got a small Snickers bar these participants dragged on average circles , the Godiva chocolates these participants dragged on average circles , or nothing at all these participants dragged on average circles.

The conclusion: But what would happen if we mixed the signals for the two types of norms? What would happen if we blended the market norm with the social norm? Or would it be somewhere in the middle? The next experiment tested these ideas. As it turned out, the participants were not motivated to work at all when they got the cent Snickers bar, and in fact the effort they invested was the same as when they got a payment of 50 cents.

They reacted to the explicitly priced gift in exactly the way they reacted to cash, and the gift no longer invoked social norms—by the mention of its cost, the gift had passed into the realm of market norms.

By the way, we replicated the setup later when we asked passersby whether they would help us unload a sofa from a truck. We found the same results. People are willing to work free, and they are willing to work for a reasonable wage; but offer them just a small payment and they will walk away. These results show that for market norms to emerge, it is sufficient to mention money even when no money changes hands.

But, of course, market norms are not just about effort—they relate to a broad range of behaviors, including self-reliance, helping, and individualism. In one of the experiments, the participants finished the unscrambling task and were then given a difficult puzzle, in which they had to arrange 12 disks into a square. Who do you think asked for " This general procedure is called priming, and the unscrambling task is used to get participants to think about a particular topic—without direct instructions to do so.

Indeed, just thinking about money makes us behave as most economists believe we behave—and less like the social animals we are in our daily lives. This leads me to a final thought: Yes, this might be an opportunity to impress your date with the caliber of the restaurant.

My good friends Uri Gneezy a professor at the University of California at San Diego and Aldo Rustichini a professor at the University of Minnesota provided a very clever test of the long-term effects of a switch from social to market norms. A few years ago, they studied a day care center in Israel to determine whether imposing a fine on parents who arrived late to pick up their children was a useful deterrent.

Thus, if parents were late—as 76 the cost of social norms they occasionally were—they felt guilty about it—and their guilt compelled them to be more prompt in picking up their kids in the future. In Israel, guilt seems to be an effective way to get compliance.

But once the fine was imposed, the day care center had inadvertently replaced the social norms with market norms. In other words, since they were being fined, they could decide for themselves whether to be late or not, and they frequently chose to be late.

Needless to say, this was not what the day care center intended. But the real story only started here. Now the center was back to the social norm. Would the parents also return to the social norm? Would their guilt return as well? Not at all. They continued to pick up their kids late. In fact, when the fine was removed, there was a slight increase in the number of tardy pickups after all, both the social norms and the fine had been removed. As someone who has been studying dishonesty for many years, what could I learn from the theft of my own book?

My first insight came with a personal conversion. The sudden, though predictable, shift in my feelings when I found my own work being downloaded for free was a jarring experience.

Maybe Information finds complete freedom too threatening, I thought, and maybe it would rather be a bit more protected. Recently in a lecture on dishonesty in San Francisco I was explaining, as I always do, that dishonesty is largely founded on our ability to rationalize, and a young guy stood up and argued that downloading music was actually the right thing to do.

All that time he was creating, writing, editing, and marketing this thing in order to fund his next project. And then everyone downloaded it, illegally, for free.

At which point he sat down. Once people start seeing a particular behavior—such as illegally downloading books, music, and movies—as a very common behavior, there is a chance that this sense of social proof will translate into a new understanding of what is right and wrong.

Sometimes such social shifts might be desirable—for instance, being part of an interracial couple used to be considered illegal and immoral, but now we see such couples all around us and it helps shape our understanding of social approval.

However, the behaviors we most often observe and notice are ones that are outside of the legitimate domain e. And then I had an insight about confession. How can we stop such trends toward dishonesty in this case, broader acceptance of illegal downloading? This is where confession and amnesty can come into play. What we find in our experiments is that once we start thinking of ourselves as polluted, there is not much incentive to behave well, and the trip down the slippery slope is likely.