Takeaways from Predictably Irrational, Part II

I recently finished Dan Ariely's behavioral economics book, Predictably Irrational. You can read Dan's current writing at his blog. Here is part one in a multi-part series of my takeaways from the book. Here is the next part, focusing mostly on the different kinds of exchanges:

There are two worlds of interaction, the world of social norms and the world of market norms. An example of social norm is a friend helping a friend move a couch. Market norm would be hiring a professional mover.

There can be unexpected problems s in the world of market norms. It was the famous efficiency expert Frederick Taylor who said there is "hardly a competent workman can be found who does not devote a considerable amount of time to studying just how slowly he can work and still convince his employer that he is going at a good pace."

In fact, social norms can actually be more productive. There's a famous story (couldn't find a link) about an attempt to increase the amount of blood donation by paying givers. Surprisingly, less blood was donated. The good feelings that came with donating were replaced by a payment too low to compensate for the lost feelings.

The market and social worlds have a hard time existing together, because when combined the normal pattern of interaction become unclear. Remember my earlier post on loaning friends money? The example in the book was a story about a day care that charged a fine for parents for late pickups and actually got more late pickups (because people didn't feel guilty anymore). After they removed the charge, the late pickups increased even more (because people still didn't feel guilty and now didn't have to pay). Here's my earlier post on moral math.

However, gifts (not cash) can be a way to use market incentives within a social norm would. That's why blood donors get t-shirts and cookies. But be sure not to mention how much the goodies cost.

Another problem with market norms is they make you feel more self-reliant. Think about how helpful you are at home without pay, but how favors at work are bothersome. You assume other people are just as self-reliant as you making you less willing to help others.

This helps explain why businesses want to harness the power of social norms. It's why State Farm is a "good neighbor" and Johnson & Johnson is "the family company". It also helps explain why companies originally gave sick days, health insurance, and other employee perks. They are trying to make you loyal to them. The only problem is they expect you to treat them with the same loyalty. If you nickel and dime employees/customers after you've made them feel like family they treat you not like a greedy corporation, but a like a deceptive uncle.

These social norms are also important for the most valued members of our society. It would be expensive to pay people to run into burning buildings. Or to take down and armed mugger. Or to go to war. Yet firefighters, policemen, and soldiers are plentiful. It's not just because we pay them with money, but because we pay them with respect. They get parades, discounts, and drinks bought for them at bars.

I've always been skeptical of what Dan Ariely calls social norms in the marketplace, but this book showed me their value.