TSC 86: Why Do We Choose What We Choose? Unraveling the Mysteries of Decision-Making
"It never ceases to amaze me: we all love ourselves more than other people, but care more about their opinion than our own." — Marcus Aurelius
Welcome to another issue of The Scipionic Circle — I hope you find something of value.
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Food for Thought
I. Decoding the Decoy Effect: How Context Shapes Our Decisions
"The context and order of choosing affects things in ways we would not consciously expect – not just in corporate decision-making and recruitment, but also in personal decisions. The psychologist and behavioural economist Dan Ariely was one of the first people to highlight the famous decoy effect in the decision process – the phenomenon whereby consumers tend to have a specific change in preference between two options when also presented with a third option that is more desirable than one, but less desirable than the other. A seminal example explored by Ariely is the Economist magazine’s subscription offer. The middle option – where you are offered a print only subscription for $125 – is known as a decoy. No one – except perhaps someone who deeply loathes technology – would ever choose it, since for the same price you could get the full print and online subscription, but it does have a huge effect on behaviour. By creating a very easy ‘no-brainer’ decision, it encourages more people to take up the higher-value full subscription. In one experiment carried out by Ariely, it led 84 per cent of putative subscribers to choose the full-price, all-in subscription. However, when you remove the dummy option and only have the two sensible ones, preferences are reversed: 68 per cent chose the lower-priced, online-only subscription.
"Context is everything: strangely, the attractiveness of what we choose is affected by comparisons with what we reject. As one friend remarked, ‘Everyone likes to go to a nightclub in the company of a friend who’s slightly less attractive than them.’
"Estate agents sometimes exploit this effect by showing you a decoy house, to make it easier for you to choose one of the two houses they really want to sell you. They will typically show you a totally inappropriate house and then two comparable houses, of which one is clearly better value than the other. The better value house is the one they want to sell you, while the other one is shown to you for the purpose of making the final house seem really good." — From Alchemy: The Surprising Power of Ideas That Don't Make Sense by Rory Sutherland.
II. Framing Effects on Decision-Making: Shifting Perspectives on Risk and Reward
"It’s not just the framing of risks that can flip people’s choices; it’s also the framing of rewards. Suppose you have just been given $1,000. Now you must choose between getting another $500 for sure and flipping a coin that would give you another $1,000 if it lands heads. The expected value of the two options is the same ($500), but by now you have learned that most people are risk-averse and go for the sure thing. Now consider a variation. Suppose you have been given $2,000. You now must choose between giving back $500 and flipping a coin that would require you to give back $1,000 if it lands heads. Now most people flip the coin. But do the arithmetic: in terms of where you would end up, the choices are identical. The only difference is the starting point, which frames the outcomes as a “gain” with the first choice and a “loss” with the second. With this shift in framing, people’s risk aversion goes out the window: now they seek a risk if it offers the hope of avoiding a loss. Kahneman and Tversky conclude that people are not risk-averse across the board, though they are loss-averse: they seek risk if it may avoid a loss.
"Once again, it’s not just in contrived gambles. Suppose you have been diagnosed with a life-threatening cancer and can have it treated either with surgery, which incurs some risk of dying on the operating table, or with radiation. Experimental participants are told that out of every 100 patients who chose surgery, 90 survived the operation, 68 were alive after a year, and 34 were alive after five years. In contrast, out of every 100 who chose radiation, 100 survived the treatment, 77 were alive after a year, and 22 were alive after five years. Fewer than a fifth of the subjects opt for radiation—they go with the expected utility over the long term. But now suppose the options are described differently. Out of every 100 patients who chose surgery, 10 died on the operating table, 32 died after a year, and 66 were dead within five years. Out of every 100 who chose radiation, none died during the treatment, 23 died after a year, and 78 died within five years. Now almost half choose radiation. They accept a greater overall chance of dying with the guarantee that they won’t be killed by the treatment right away. But the two pairs of options pose the same odds: all that changed was whether they were framed as the number who lived, perceived as a gain, or the number who died, perceived as a loss." — From Rationality: What It Is, Why It Seems Scarce, Why It Matters by Steven Pinker.
III. The Value of Meaning Over Substance: Understanding the Magic of Perception in Decision-Making
"We don’t value things; we value their meaning. What they are is determined by the laws of physics, but what they mean is determined by the laws of psychology.
"Wine tastes better when poured from a heavier bottle. Painkillers are more effective when people believe they are expensive. Almost everything becomes more desirable when people believe it is in scarce supply, and possessions become more enjoyable when they have a famous brand name attached.
"Sadly, no one in public life believes in magic, or trusts those who purvey it. If you propose any solution where the gain in perceived value outweighs the attendant expenditure in money, time, effort or resources, people either don’t believe you, or worse, they think you are somehow cheating them. This is why marketing doesn’t get any credit in business – when it generates magic, it is more socially acceptable to attribute the resulting success to logistics or cost-control.
"Ethically principled as it may sometimes seem, this aversion to magic brings huge problems; the ingrained reluctance even to entertain magical solutions results in a limitation in the number of ideas that people are allowed to consider.
"It is because of this that governments are usually confined to pulling on the twin levers of legal compulsion and economic incentive, while ignoring solutions which may be more cost-effective or less coercive. For instance, the UK Government’s recent decision to spend £60 billion on a new high-speed railway to link London, Birmingham and Manchester is a case in point. The case for this expenditure is twofold: partly it’s about saving time by means of new, faster trains, and partly it’s about creating additional capacity. However, the problem is cost. £60 billion is obviously a lot of money, and then there’s the time it will take to build the new line. It’s true that the new trains will knock around an hour off every journey, with a typical trip to Manchester reduced to something like 70 minutes from the current time of 2 hours and 10, but we’ll have to wait till the end of the 2020s to enjoy this gain. Waiting ten years to save 60 minutes is hardly a compelling proposition.
"So I suggested a magical alternative that would reduce the journey time to Manchester by around 40 minutes and increase the capacity of the existing trains, all in the space of six months and at a trivial cost of around £250,000. The trick I used was simple. Don’t look at the logistics of the problem, look at it from the perspective of a passenger. To reduce journey times by 40 minutes, you don’t have to reduce the amount of time people spend on the train – which is in any case the most enjoyable part of their journey – you could simply reduce the amount of time they waste waiting for the train. Provided their end-to-end journey is 40 minutes quicker, they’ve saved 40 minutes. This would be easy to do. At the moment, most people buy an advance ticket to travel from London to Manchester or Birmingham, which gives a considerable saving on the cost of the journey, but requires you to travel on a specified train – and if you miss this train, the ticket is worthless. As a result, people typically allow a wide margin of error in fear of missing their train, and turn up at Euston station about 45 minutes before their designated train is due to depart. In those 45 minutes, two earlier trains will typically leave the station, and these generally have empty seats on them.
"All you need to do to cut 40 minutes off the journey time, I explained, is to create a mobile app that would allow you to board one of the two earlier trains whenever spare seats are available, in return for a small voluntary payment. Obviously this wouldn’t always work, as sometimes the earlier trains will be full, but most of the time it would be an easy way to allow people to cut 20–40 minutes off their time at the station. It would also have the additional benefit of increasing the capacity of the network, because otherwise empty seats would now be occupied, and the ones on the later train could be re-sold. As far as I know, no one has taken this suggestion seriously – it does not fit into transport analysts’ narrow, metric-driven conception of what improvement might look like. Their only conception of time-saving applies to time spent in motion – the means by which they aim to improve things are too narrowly defined." — From Alchemy: The Surprising Power of Ideas That Don't Make Sense by Rory Sutherland.
Quotes to Ponder
I. Maya Angelou on hidden transformation:
"We delight in the beauty of the butterfly, but rarely admit the changes it has gone through to achieve that beauty."
II. Marcus Aurelius on the paradox of social validation:
"It never ceases to amaze me: we all love ourselves more than other people, but care more about their opinion than our own."
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Thank you for reading,