Predictably Irrational

Whenever I handed out a sheet that had a regular picture, its inferior version, and another regular picture, the participants said they would prefer to date the "regular" person—the one who was similar, but clearly superior, to the distorted version—over the other, undistorted person on the sheet. This was not just a close call—it happened 75 percent of the time.

This is the problem of relativity—we look at our decisions in a relative way and compare them locally to the available alternative.

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. In response, executives' salaries skyrocketed. The trend was further "helped" by compensation consulting firms (scathingly dubbed "Ratchet, Ratchet, and Bingo" by the investor Warren Buffett) that advised their CEO clients to demand outrageous raises. The result? Now the average CEO makes about 369 times as much as the average worker—about three times the salary before executive compensation went public.

Consider this: if I asked you for the last two digits of your social security number (mine are 79), then asked you whether you would pay this number in dollars (for me this would be $79) for a particular bottle of Côtes du Rhône 1998, would the mere suggestion of that number influence how much you would be willing to spend on wine? Sounds preposterous, doesn't it? Well, wait until you see what happened to a group of MBA students at M I T a few years ago. What were we trying to prove? The existence of what we called arbitrary coherence. The basic idea of arbitrary coherence is this: although initial prices (such as the price of Assad's pearls) are "arbitrary," once those prices are established in our minds they will shape not only present prices but also future prices (this makes them "coherent").

When I got back to my office, I analyzed the data. Did thedigits from the social security numbers serve as anchors? Remarkably,they did: the students with the highest-ending social security digits (from 80 to 99) bid highest, while those with the lowest-ending numbers (1 to 20) bid lowest. The top 20 percent, for instance, bid an average of $56 for the cordless keyboard; the bottom 20 percent bid an average of $16. In the end, we could see that students with social security numbers ending in the upper 20 percent placed bids that were 216 to 346 percent higher than those of the students with social security numbers ending in the lowest 20 percent (see table on the facing page).

Two groups bidding on willingness to hear a noise: one group gets 10 cents, the other 90 cents. When asked to bid once more, the 10 cents group were willing to listen to the sound again for a lower price than 90 cents people.

You're walking past a restaurant, and you see two people standing in line, waiting to get in. "This must be a good restaurant," you think to yourself. "People are standing in line." So you stand behind these people. Another person walks by. He sees three people standing in line and thinks, "This must be a fantastic restaurant," and joins the line. Others join. We call this type of behavior herding. It happens when we assume that something is good (or bad) on the basis of other people's previous behavior, and our own actions follow suit.

It seems then that instead of consumers' willingness to pay influencing market prices, the causality is somewhat reversed and it is market prices themselves that influence consumers' willingness to pay.

So what happened when the "customers" flocked to our
table? When we set the price of a Lindt truffle at 15 cents and
a Kiss at one cent, we were not surprised to find that our customers
acted with a good deal of rationality: they compared
the price and quality of the Kiss with the price and quality of
the truffle, and then made their choice. About 73 percent of
them chose the truffle and 27 percent chose a Kiss.
Now we decided to see how FREE! might change the situation.
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! made. The humble Hershey's
Kiss became a big favorite. 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.
Meanwhile, the Lindt truffle took a tumble; customers choosing
it decreased from 73 to 31 percent.

Copenhagen

The two major breakthroughs are so far:

1. Saving the world's rainforests: Reducing Emissions from Deforestation and forest Degradation (REDD) => an income scream to countries with the poorest emissions, part of the Clean Development Mechanism => can function either as a "get out of jail free card or an income stream"

2. Clinton leads charge - 100 billion dollar fund - to create pot for developing countries.

Newsweek: "In November, I met with an executive at one of the private-equity firms that has sprung up in Beijing. He talked up the firm's investments in energy software and mobile communications. But exporters? He wouldn't touch them."

While trade has rebounded from its lows, the volume is nowhere near its peak. In September, the combined total of U.S. imports and exports was 24 percent below the level of July 2008. Countries stung by the sudden drop-off in demand from foreign buyers have realized that they can no longer simply export their way to prosperity. (China's exports fell 23 percent between August 2008 and August 2009.) Smart investors are channeling resources to companies that produce domestic goods for domestic markets.

Why the split? Turns out that Morales, for all his fire-breathing rhetoric, governs with far more discipline. Both he and Chávez have nationalized key industries, but while Chávez blew his windfall on poorly focused social programs, Morales has been a model of fiscal austerity. He built up enormous reserves; made smart investments in infrastructure, electricity, and microfinance; and diversified trade to depend less on the U.S. So while Venezuela is suffering from blackouts, water shortages, and double-digit inflation, Bolivia is growing faster than at any point in the past three decades. Now, that's downright radical.

Conducted by the Lowy Institute for International Policy and the MacArthur Foundation, the study found that three quarters of Chinese pointed to environmental problems such as climate change as a major threat to China's security, while 67 percent cited water and food shortages, and 58 percent said internal separatists. Only half of respondents thought the U.S. posed a security threat, and 45 percent still worried about Japan (though the survey indicated that would change if Japan were to acquire nuclear weapons). The other big regional players--India, Russia, and South Korea--were seen as relatively negligible risks.

Fasting unto death

A case of a single man effecting change: K. Chandrasehkar Rao fasting unto death to create the Telegamara state...

http://www.nytimes.com/2009/12/11/world/asia/11india.html?hp