Business Tools Blog

A few weeks ago, I wrote about Dan Ariely’s book Predictably Irrational.

A concept that Dan introduces, it that we live in two worlds: one characterized by social exchanges and the other characterized by market exchanges.  I found this concept fascinating.   Without realizing it, we will behave very differently based on whether we perceive a situation to be a social or market exchange.   For example, if a friend asks you to help her move a few boxes, you will gladly help (even on a Saturday morning).  However, if a friend says, “I will pay you $10 to help me move,” you will probably begin negotiating - after all, your Saturday morning is worth more than $10.

Dan Ariely describes an experiment in a day care center, that illustrates how these norms apply to business:

My good friends Uri Gneezy (a professor at the University of California at San Diego) and Aldo Rustichini (a professor at the University of Minnesota) provided a very clever test of the long-term effects of a switch from social to market norms. A few years ago, they studied a day care center in Israel to determine whether imposing a fine on parents who arrived late to pick up their children was a useful deterrent. Uri and Aldo concluded that the fine didn’t work well, and in fact it had long-term negative effects. Why? Before the fine was introduced, the teachers and parents had a social contract, with social norms about being late. Thus, if parents were late — as they occasionally were — they felt guilty about it — and their guilt compelled them to be more prompt in picking up their kids in the future. (In Israel, guilt seems to be an effective way to get compliance.) But once the fine was imposed, the day care center had inadvertently replaced the social norms with market norms. Now that the parents were paying for their tardiness, they interpreted the situation in terms of market norms. In other words, since they were being fined, they could decide for themselves whether to be late or not, and they frequently chose to be late. Needless to say, this was not what the day care center intended.

But the real story only started here. The most interesting part occurred a few weeks later, when the day care center removed the fine. Now the center was back to the social norm. Would the parents also return to the social norm? Would their guilt return as well? Not at all. Once the fine was removed, the behavior of the parents didn’t change. They continued to pick up their kids late. In fact, when the fine was removed, there was a slight increase in the number of tardy pickups (after all, both the social norms and the fine had been removed).

This experiment illustrates an unfortunate fact: when a social norm collides with a market norm, the social norm goes away for a long time. In other words, social relationships are not easy to reestablish. Once the bloom is off the rose — once a social norm is trumped by a market norm — it will rarely return.

So the moral of the story is that we behave very differently in social exchanges vs. market exchanges.  By understanding this, we can better understand why people behave the way they do.   Predictably/Irrational reveals a number of experiments that test human behavior in social vs. market settings.