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(Book Review) Predictably Irrational

Rating

Dan Ariely is without doubt, one of my all time favorite author. In my opinion this is surely one of the best books on decision making, economics, psychology and behavior. Among the distinguishing criteria of Ariely book is his simple writing style which is both engaging and easy to understand.

Therefore, it is a great read. A definitive 8/10⭐ book!

Irrationality

Author Dan Ariely was 18 when an explosion burned him so severely that he was confined to a hospital for three years. Cut off from friends and normal routines, he began to observe and reflect upon behavior including that of his own and that of others.

Suffering from intense pain from his burns and subsequent therapy where the nurses bathed him in disinfectant daily. It involves first tearing off his bandages as quickly as possible. He felt that his pain might been less if the nurses removed the bandages slowly. But the nurses insisted that there was no difference.

Interesting enough, after he left the hospital, he conducted research to proved his point.

According to Ariely,

“We are not only irrational, but predictably irrational…our irrationality happens the same way, again and again.”

Relativity and Choice

A group of 100 MIT students where made to choose between a magazine advertised three subscription options:

  • $59 for a subscription to the online version only,
  • $125 for a subscription to the print magazine only and
  • $125, again, for both.

The results, 16 chose online-only and 84 chose the print-and-online option. When the magazine eliminated the print-only option, 68 students chose the less expensive online-only option and only 32 chose the costlier, two-version option.

If the students had been making rational decisions based purely on facts, such a difference would not have existed. The combined price clearly made the print version virtually free. People look at context, comparisons and relativity not only in magazine subscriptions, but also in decisions on more important matters, such as dating and salary negotiations.

They can be more or less happy depending on the group of alternatives they use for comparison.

That offers an important life lesson: “Be careful about your context for comparison.”

For example, people who might easily spend thousands for leather car upholstery would not spend that amount on leather upholstery for their living room furniture. Expanding the context for comparison would help them decide if they could do better things with the money than cover their car seats.

“Wouldn’t economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?”

It’s Not Supply and Demand

Conventional economics say that supply and demand determine price. However, the study of behavioral economics has shown that factors completely irrelevant to the supply-and-demand curve can determine prices. Even in the oil and gas industry, factors such as speculations, paper movements could result in the irrational rise or slump of the crude oil prices.

The initial price someone may be willing to pay for an item is more or less arbitrary. But, once established, that price becomes an anchor. The same is true in other areas of life. People fixate on those anchors. That means no decision is really inconsequential or minor. Every decision can echo through your future. Like people deciding that a restaurant is good because it has a long line of people waiting to get in, you’ll effectively get in line with your previous decisions.

Be Aware of Giveaways

This is a powerful method in marketing. I have been using it multiple times myself. The reason is quite simple, the prospect of getting something for nothing is powerful.

Ariely once offered subjects the choice of buying a premium chocolate truffle for 15¢ or an ordinary Hershey’s Kiss for a penny. Almost 75% chose the truffle. Then he reduced the price of both by a penny, so the truffle cost 14¢, but the Hershey’s Kiss was free. “Some 69%” of the subjects who got those two choices picked the Hershey’s Kiss, because it was free. We just love freebies.

“There is no known cure for the ills of ownership.”

In fact, vendors’ free offers are costly to consumers. When Amazon offers free shipping for larger orders, many people order extra books just to qualify for the free shipping. The offer of free oil changes influenced Ariely to buy a red sedan instead of a family van, even though the oil changes amounted to only .5% of the car’s price.

Policy makers should put this principle to work by making certain health checks free, and offering free benefits to people who do socially desirable things, such as driving electric cars.

Social Versus Market Norms

Market norms apply to monetary exchanges. People expect to pay for what they get, and vice versa.

Social norms do not involve payment.

Confusing the two leads to problems, as in the case of the young man who spends a lot of money courting a young lady and then wonders why she won’t bestow a physical expression of her appreciation.

Social norms are so powerful that research suggests people will work as hard for no money as they will for good pay to accomplish a social good.

However, social norms are vulnerable, and once relationships shift from social norms to market norms, moving them back is very hard.

“FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is.”

When organizations build social relationships with their employees and customers, they commit themselves to relaxing market norms. If you evoke social norms to get customers to trust you, they will be angry if you cut services and then market norms as the reason.

Similarly, if you reinforce employees’ loyalty socially and then fire them to save money according to market norms, they will feel betrayed because the ethos of the market is inconsistent with the social mores you established.

Maybe Later?

Procrastination is a common, albeit irrational, failure. I a victim of procrastination myself, most of the time.

However, when discussion procrastination, many people procrastinate about saving, dieting and other important decisions.

Ariely found that letting students make their own choices of research paper deadlines, and commit to them in advance, improved their performance.

Ownership Doesn’t Pay, It Costs

The mere fact of owning something seems to endow it with value it did not have when someone else owned it. In an experiment at Duke University, where tickets to major basketball games are available only through a hard-to-win lottery, Ariely asked students who had not won tickets how much they would pay for one.

Generally, they said about $170. Then, he asked students who had won a ticket how much they’d expect to sell it for; the average answer was $2,400. The mere fact of ownership made the tickets seem much more valuable than the lack of ownership. People form strong attachments to their own things. When they think of selling these things, they consider the value lost, not the value the buyer would gain. They suppose that a buyer should recognize their item’s intangible, emotional value.

Ownership also applies to opinions. People even find it very difficult to turn loose of what they think. Therefore, try to avoid taking ownership in the first place; maintain as much detachment as possible when ownership is unavoidable. Simply recognizing the risks of ownership may help.

“Avoiding temptation altogether is easier than overcoming it.”

Expectations Are Powerful

People pretty much get what they think they will get. Tell people that their beer has vinegar in it before they take a sip and they will wrinkle their noses at the taste. Don’t tell them, and they are apt to find the flavor refreshingly novel.

A presentation that sets expectations. For example, a fancy set of wine glasses will affect perception of the taste.

Brain scans show that if you tell people they are about to taste Coca-Cola, that information activates an area of the brain associated with memory and ideas.

Their association with the brand predisposes them to enjoy the taste or hate it, which is pre-determined by their own personal preference with Coca-Cola.

Everybody Cheats (Yes, Everybody)

Controlled experiments found that most experimental subjects, when given a chance to cheat, would cheat a little bit. They would not cheat blatantly, but they would chisel. They were not as likely to cheat to gain money as they were to gain some non-cash item. Ariely once put a six-pack of soft drinks in communal dormitory refrigerators. The soft drinks disappeared. Then he put a small sum of cash in each refrigerator. No one stole the cash.

Cheating is widespread, but you can turn to a strong deterrent: the 10 Commandments. Experimental subjects asked to think about the 10 Commandments before participating in the experiment did not cheat. Even students who could only remember a few of the Commandments did not cheat. References to the Commandments, or to codes of honor and other reminders of the sacred trust can indeed have a desirable impact on conduct.

Ariely explore more in details about cheating in another one of his awesome book, The (Honest) Truth About Dishonesty.

“We are far less rational in our decision making than standard economics assumes.”

Buy Now : Amazon (Global $14.39) | Kinokuniya (Malaysia RM 86.13)

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