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Dedication
Introduction

Dan Ariely
Walter Bender
Steve Benton
Bruce Blumberg
V. Michael Bove, Jr.
Cynthia Breazeal
Ike Chuang
Chris Csikszentmihályi
Glorianna Davenport
Judith Donath
Neil Gershenfeld
Hiroshi Ishii
Joe Jacobson
Andy Lippman
Tod Machover
John Maeda
Scott Manalis
Marvin Minsky
William J. Mitchell
Seymour Papert
Joe Paradiso
Sandy Pentland
Rosalind Picard
Mitchel Resnick
Deb Roy
Chris Schmandt
Ted Selker
Barry Vercoe

Dan Ariely

Dan Riely My passion is understanding the irrational aspects of human behavior, and then finding solutions to overcome the limitations this irrationality imposes on human life.

In a famous section of Mark Twain's novel, Tom Sawyer, the eponymous protagonist is faced with the unenviable task of whitewashing his aunt's fence. Dreading the schadenfreude of his friends, who he knows will be passing him on the road while he works, he cooks up a simple plan. As they pass, he acts as if he is enjoying himself. One by one, they fall for the ruse: they are not only reduced to begging him to take his place at the fence, but they even enjoy the work as they are doing it. As Twain concludes, Tom "had discovered a great law of human action, without knowing it—namely, that in order to make a man or a boy covet a thing, it is only necessary to make the thing difficult to attain."

Twain's perspective stands in stark contrast to modern economic theory, which assumes that people have a clear sense of what they want and what they like. Prices of consumer goods, such as chocolates, CDs, movies, massages, and vacations, are thought to reflect underlying "fundamental" values—specifically the pleasures that consumers anticipate receiving from these products. It is, however, rarely possible to measure fundamental values directly. There is simply no known method for measuring the pleasure that consumers obtain from goods and services. So the notion of fundamental valuation has been, and must be, accepted as a matter of faith.

Our research suggests that such faith may be misplaced. Twain's theory of human nature may be closer to reality than that propounded by modern economists. Their research shows that there is a large degree of arbitrariness in consumer valuations of even the most basic consumer products.

In one study, I sold valuable consumer products (such as $100 wireless keyboards and computer mice, an expensive and less expensive bottle of wine, and $75 boxes of chocolate) to postgraduate business students. Students were presented with one product at a time, and asked whether they would buy it for a price obtained by converting the last two digits of their social security number (an essentially random identification number required for Americans to obtain work) into a dollar figure—e.g., 34 became $34. After this yes/no response, they were asked to state the maximum price they were willing to pay for the product using a procedure that motivates people to provide their true valuations. The findings were striking. Although they were reminded that the social security number is essentially random, students with high social security numbers were willing to pay much more for the products. For example, students with social security numbers in the top half of the distribution priced the less-expensive bottle of wine—a 1998 Cotes du Rhone Jaboulet "Parallel" '45'—at $19.95, while those with social security numbers in the bottom half of the range priced the same bottle at only $11.62.

If valuations of consumer goods come from consumers who are so uncertain about their own values, then how can the economy function? A second aspect of the study provides a clue. If one looks across the different goods that were sold, one can see that, while students had little understanding of the absolute values of the different goods, but they did seem to have an idea of the relative values of the different goods. Thus, for example, all of the students priced the fancier bottle of wine—a 1996 Hermitage Jaboulet "La Chapelle"—higher than the Cotes du Rhone whether they had low social security numbers (mean price of $17.42), or high social security numbers (mean price of $27.76). The students did not know how much to value either wine, as demonstrated by the impact of the arbitrary social security number, but they did know that the superior wine was worth more than the inferior wine, and they priced the wines accordingly. Anyone looking only at the relative prices of the two wines, or the other objects, would conclude that these consumers were behaving perfectly in line with economic theory.

A second study poses an even closer analogy to the Tom Sawyer story. I asked one set of students if they would be willing to listen to me reading 10 minutes of Walt Whitman's poem "Leaves of Grass" to them if they were paid $10. Others were asked if they would pay $10 for the same experience. I then elicited prices (which could be positive or negative) from students for listening to "Leaves of Grass" for 1, 3 or 10 minutes. Again, students' values were powerfully influenced by the initial question. Those asked if they would pay were willing to pay to listen to the poetry, and those asked if they would listen if they were paid, needed to be paid to do it. But, whether they valued the experience positively or negatively, they named higher money amounts for longer durations of poetry. Participants had no idea whether this was a positive or negative experience, but they knew that it was more positive or negative if it was longer.

The pattern of arbitrary absolute, but sensible relative values can be seen, not only in prices for consumer goods, but in many aspects of the economy. For example, the value of stocks is inherently ambiguous, which can explain how stock market valuations can fluctuate so dramatically over short periods of time. As the economist Bob Shiller commented, "Who would know what the value of the Dow Jones Industrial Average should be? Is it really 'worth' 6,000 today? Or 5,000 or 7,000? or 2,000 or 10,000? There is no agreed-upon economic theory that would answer these questions." However, while the overall value of the market or of any particular company is inherently unknowable, people can (and do) respond to marginal changes in a sensible fashion. If the stock splits 2-1, investors drive the price down by approximately 50%.

A key economic implication of these studies is that some economic variables will have a much greater impact than others. When people recognize that a particular economic variable, such as a price, has changed, they will respond robustly. But when the change is not drawn to their attention, they will respond more weakly, if at all. The speed at which an economic variable changes is one factor that will determine whether it is visible to individuals—faster change is generally more noticeable. Other factors that can make a difference are how the information is presented—e.g., whether prices of alternative products are listed in a comparative fashion or are encountered sequentially, and whether prices are known privately or discussed. Thus, for example, large salary differentials may be easier to sustain in a work environment in which salary information is not discussed.

Economics is premised on the assumption that choices reveal true preferences—that the choice of A over B indicates that the individual will in fact be better off with A rather than with B. If consumers' choices are to a large extent arbitrary, then the claims of economists that free markets will lead to maximum well-being are substantially weakened. Market institutions that maximize consumer sovereignty need not maximize consumer well-being.


Favorite recent read: Three Men in a Boat, by Jerome K. Jerome
Copyright 2003 MIT Media Laboratory; Image Sumi Ariely