How To Do Precisely the Right Thing

We frequently make bad decisions because of the way we compare things. You’re offered a three-year job, and have your choice of two salary plans:

Which salary plan would you choose?

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Most people would rather get yearly raises, even if it means making less overall.

Many of us are convinced that we always get stuck in the slowest checkout line at the grocery store, and that if we make a break for it and change to another line, that one will magically slow down and the one we were in originally will speed up. Of course, the distribution of instances between us getting in the fast and slow lines is even, and bad karma has nothing to do with it. But the experience of being in the fast line causes no stress and no memory. It’s barely an experience at all.

SXSW podcasts are now online, so we can catch up on missed sessions (subscription feed). Harvard professor Daniel Gilbert’s How To Do Precisely the Right Thing At All Possible Times is an absolutely fascinating exploration of the power of comparison in context to mislead our brains, and of the influences we draw from repeated exposure to certain kinds of stimuli, which in turn cause us to draw faulty mental maps and reach incorrect conclusions. Sounds airy, but the talk is packed with concrete examples.

Our perception of value is usually based on comparison, rather than on inherent value. When buying a car, one might opt to pay the extra $300 for the better stereo without blinking, even though we could drive across town and get the same stereo for $100. If we weren’t buying a new car, of course we would drive across town to save $200. But we stupidly judge the value of the stereo relative to the purchase price of the car, not to itself. This drives economists crazy.

Anyway, the MP3 encoding on the SXSW podcasts is unfortunately terrible, but the Gilbert presentation is a gas.

Music: Strata Institute :: kahn

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11 Replies to “How To Do Precisely the Right Thing”

  1. Most people would rather get yearly raises, even if it means making less overall.

    Except, of course, your contrary readership. :)

  2. ‘Zackly. You guys are totally blowing D. Gilbert out of the water here (though sample size is still small). He kind of faces the same thing with the audience he’s addressing in the webcast – the audience is too smart to agree with the demographics he keeps citing.

    Looking back on this post, I feel like I’ve undersold just how interesting this talk is, and not made the point well at all. Do give it a listen if you have the time.

  3. If I knew ahead of time how long I’d work at a particular place (or at least the 3 years in your example) I may be tempted to take the 150 over 3yrs. But in our job society you’re usually paid at your new job based off what you were making at your old job. Not to mention that if I did work for a company that realized I would take rate cuts every year, what happens in the years after those listed if I wanted to stay longer?

    It’s like anything else, are you in it for the long haul or the short-term?

  4. I voted for the second option because I’d take the 60k and then, if I wasn’t enjoying myself, find a new job the next year ;)

    The talk does sound interesting – wish I had time to devote some attention to it right now – and it reminds me of many similar examples I’ve read in the *excellent* books of John Allen Paulos: http://www.math.temple.edu/~paulos/

  5. It’s like anything else, are you in it for the long haul or the short-term?

    According to Gilbert, we are very patient in the long haul but very impatient in the short term. If you ask people if they’d rather have $50 now or $60 in a month, most will take $50 now. But if you ask them if they’d rather have $50 in a year or $60 in 13 months, they’ll take the $60 in 13 months. “If I’m waiting a year, why not wait another month?” The relative judgement we make about time and the “pain” of waiting has little to do with logical or economic benefit to ourselves and everything to do with perception.

    Dan – I didn’t say quitting was an option!

    I’ve also skewed the fairness of the poll by including the line “Most people would rather get yearly raises, even if it means making less overall” directly after it. Most people think they’re not like most people.

  6. Dan – I didn’t say quitting was an option!

    In which case, I’m sure I could sue your ass for trying to enforce such a restrictive contract ;-)

    My employment contract with Leo Burnett came close to requiring three months notice, but I managed to wriggle that down to six months (actually, I only had to give one month’s notice… but they had to pay me for six months!)

    I think, therefore, that my gut reaction may have had a lot to do with my past experience. But aside from that, I was also inclined to go for the 60k up front because, hell, I need that money right now, I’m sure cashflow will be a lot easier within 3 years especially if I’m so valuable to you that you’re willing to give me a contract which ties me up for three years.

    My third thought was “what do these contracts add up to over the entire term”. At which point, my eye slipped further down the page and your response answered that without me having to do the maths.

    I can honestly say that the need to have an ever-increasing salary never really entered my head, but I know I’m probably fairly unusual in that respect (after all, last time I really took a new job it was at a 50% paycut from my previous post).

  7. My employment contract with Leo Burnett came close to requiring three months notice

    I meant, of course, three years.

  8. I’d take the first oen.. since in my first year.. I’d get $135.. did you really mean to put Yr.1 for all 3 years? Did no one else notice this??

  9. This kind of test just goes to show how much smarter people are than economists. People will always choose the increasing salary because they know, in the real world, that 3 years of steadily increasing salary generally means the 4th year will increase too (and vice versa). Nobody offers 3-year contracts like the example above.

    And maybe people are spending $300 on a $100 stereo because it’s a) easier than making a separate trip across town, b) the stereo is covered by the car dealer’s warranty, and c) relative to the overall cost of the car, $200 is a small percentage.

    Ordinary people understand percentages — and that’s the key to saving money, a fact which seems to have escaped this economist. If you focus obsessively on every $1, you’ll drive yourself crazy. But if you look for ways to save 5%, 10%, or 20% on everything, you can save a lot of money in a year.

  10. Olive, how would you get $135k in your first year? Thanks for the typo notice – fixed.

    Dylan – Maybe. But hopefully people can “suspend disbelief” to answer a question like this, which is about a 3-yr contract (there is no 4th year).

    As for percentages, I think I’ve failed to convey Gilbert’s point on this. He’s not an economist, but he’s saying that an economist or a rationalist would vehemently disagree that it makes sense to pay attention to percentages — real dollars are all that matter. If it makes sense for you to drive across town to buy the stereo when you’re not buying the car, then it still makes sense to drive across town to buy the stereo when you are buying the car. The fact that the stereo is a small percentage of the purchase cost is what FOOLS you into thinking that somehow the $200 is negligible. You didn’t think it was negligible when you weren’t buying the car.

    Gilbert’s whole talk is about how our perceptions of relativism — such as this one — lead us to make irrational decisions — like buying the stereo with the car when it doesn’t make sense to do so.

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