Predictably Irrational: The Hidden Forces That Shape Our Decisions

Dan Ariely

 

Predictably Irrational: The Hidden Forces That Shape Our Decisions

Dan Ariely

Recommendation Category: 1 – Read NOW!

This is an extremely interesting book with many many intriguing anecdotes and studies that explains the fundamentally irrational ways we behave every day. I really enjoy the reading and find it very intellectually stimulating. I kept sharing examples highlighted in the book at dinner tables this past week illustrating how much I love them! 🙂

Below are a few samplers, and I strongly encourage you to read the full book.

  • The rule of relativity: To appraise things, we compare them to others. Many marketers take advantage of this by introducing expensive “decoy products” that make other things seem cheaper by comparison. For example, some savvy restaurants will deliberately overprice the most expensive item on their menu, so customers will then feel the second most expensive item is relatively cheaper and wind up ordering it.
  • The power of free: Free is not just a price, but a powerful, almost irresistible emotional trigger. Consider a study with chocolates: people were offered a choice between tasty Lindt truffles for 15 cents apiece or considerably less-tasty Hershey’s Kisses for one cent apiece. Most people (73 percent) chose the tasty Lindt truffles. But what do you think happened when the prices were tweaked to 14 cents per truffle and zero cents (free) per Hershey’s Kiss? The difference in prices was identical (14 cents), but now one product invoked the power of “free.” The result: 69 percent of people now chose Hershey’s Kisses, even though they still could have gotten the tastier truffles at a very attractive price. That’s the power of free.
    • Why this irrationality? Basically, whenever we pay for an item, we take a risk: if the item is not worth the price, we lose money. And humans really hate losing things. Hence, when an item has no potential downside (it’s free), we perceive it as far more valuable than it really is. This is known as the zero price effect.
  • The anchoring effect: The first price number we hear affects what we are willing to pay later.The way in which we decide what we’re willing to pay for products is far more irrational than most of us realize. Research has indicated that, instead of making a rational analysis of supply and demand, we in fact tend to rely on a phenomenon called arbitrary coherence: we expect prices to be coherent, so we take whatever price is first quoted to us, no matter how arbitrarily derived (such as writing the last two digits of one’s social security number), and use it as an anchor to determine a reasonable price in our future purchases.
  • We overvalue what we own: First of all, when we own something, we fall in love with it. We think warmly of all the things we have done with it or could do with it (such as experiencing the atmosphere at a basketball game), so we value it more highly. The second reason is that people disproportionately focus on what they are losing: for the seller it’s the things they could do with the ticket but for the buyer it’s the other things they could experience with the money. Both feel that what they are parting with is more valuable than what they are getting. Finally, we expect people to appreciate the same things as we do. A house seller feels he deserves a higher price because of his “creative” wallpapering choices, while the buyer thinks she should get a discount because of them.
  • The placebo effect: our experiences are shaped by our expectations. Incredibly, even the potency of medicine is impacted by expectations. This is clearly seen in the placebo effect: patients who expect a drug to work will feel better after taking it than those who don’t expect it to work. Even more astonishingly, the more expensive the medicine is, the more powerful its effects are. People who were told their pain medication cost $2.50 per pill found it relieved pain more often than those told it cost just 10 cents per pill.
  • Social vs. market norms: Social norms dictate how we deal with friendly requests and favors, where immediate repayment of the favor is not expected. Market norms, on the other hand, are more cold and calculating: resources are exchanged; work is performed for a salary – tit for tat. Of these two set of norms, it is entirely possible to inadvertently invoke the wrong ones in the wrong situation. In general, market norms tend to make people more selfish. Take, for example, when lawyers were asked if they would provide cheaper services to needy retirees. Most of them said no, but when they were asked if they would do it for free, most said yes. The lesson is that when you make a request, think carefully about which norms you invoke. Often just mentioning money is enough to make people apply cold market norms, and studies have shown that once invoked, it is very difficult to revert back to warm and unselfish social norms
  • The tendency to cheat (just a little bit): People are prone to dishonesty, but not wildly so.The tendency for dishonesty becomes even more prominent when the reward for cheating is not cash but some other item: most people would not steal cash from work but might well take a pen or a coffee mug. This is because most people consider honesty to be important, so we are more comfortable with dishonesty if we can rationalize it. As seen in the example above, most participants tend to cheat a little in quizzes with small monetary prizes. But what if participants were asked to recall the Ten Commandments before taking the quiz? Astonishingly, they did not cheat at all! It seems that merely thinking about honesty is enough to keep us on the righteous path.
  • Obsession with open options (#1 rule of online dating LOL)People are obsessed with keeping their options open, even when it hurts them in the long run. In 210 BC, after the Chinese commander Xiang Yu had ferried his army across the Yangtze River, he set fire to his own ships. He did this to show his troops that retreat was not an option. In response, they fought so ferociously that they won nine battles consecutively. This story has become famous because deliberately closing an available option runs counter to our natural instincts. We humans try to keep our options open as much as possible: in our education, our careers and our choice of romantic partner. As the story of Xiang Yu shows, sometimes closing options is beneficial, because it forces us to focus. Rather than kidding ourselves that we can keep all options open indefinitely, we need to make difficult choices about what is truly important to us.