Predictably Irrational

by Dan Ariely

Read: 10/2013

Review

It is easy to point the finger at others and say they are irrational. This book makes the point that we are all irrational. And that's not a bad thing; in fact, its perfectly natural. When it comes to human behavior, we don't live in a rational world. That's why so many things that make sense "on paper" miserably fail in practice. This book is popular in the business and marketing crowd, and understandably so. However, this book makes an interesting read for anybody interested in leadership and influence. Ultimately, this book is not pessimistic about our irrational tendencies, but optimistic that 1) irrational behavior isn't necessarily bad; and 2) irrational behavior once recognized can be made more rational.

Notes & Quotes

Main Lesson 1: "We are pawns in a game whose forces we largely fail to comprehend." There are numerous non-rational things that affect our thinking, not because we are weak-minded or stupid, but because we are human.

Main Lesson 2: "Although irrationality is commonplace, it does not necessarily mean that we are helpless." Once we understand irrational influences, we can be more vigilant toward them.

Human are constantly comparing things. We are generally bad at estimating the intrinsic value of a thing -- we need something to compare it to. Marketers use this to their advantage by creating a less-desirable low price, too-expensive high price, then a relative most attractive middle price option.

Another lesson: the more we have the more we want. Once you have driven a Porsche, a Mazda won't do.

Similar to relativity. Because of prejudices and comparisons, supply and demand is a result of irrational desires or subject experience, more than objective economic analysis.

People will not only pay more for coffee at Starbucks, but actually believe it tastes better because of the upscale atmosphere of the shop.

If you ask somebody to think of a random number before asking them to offer to buy something, how high or low that random number is will actually affect the offer.

In conclusion, its too simplistic to assume markets will naturally set optimal prices. In other words, the invisible hand doesn't always work.

Humans become irrational when the word "Free" is involved. One experiment: Sell a piece of high quality chocolate for 15 cents and low quality for 1 cent. Most people will choose the higher quality chocolate. Drop both prices by a cent, making the low quality chocolate FREE, and suddenly most people take the free option even though the economic proposition is the same.

Amazon's use of FREE super saver shipping is a brilliant business strategy.

The idea of FREE has big, unrealized implications for public policy. If more politicians made things FREE, instead of discounted -- such as tax rebates on energy efficient cars -- policy could be much more effective.

Humans tend to separate things into business/economic transactions, and social transactions. This is why you'll help a friend move for free, and be offended if he offers to pay you. Mixing up economic and social transactions is the source of much awkwardness. This is also why gifts of things (social) tend to go over better than gifts with direct monetary value. Once people feel like they are obligated to return equal value for a gift, it is no longer social. While most people would prefer a gift of $1000 cash, a gift worth $1000 (not cash) is often seen as more personal and valuable.

This is why many businesses try to market themselves as our friends. Like a good neighbor, State Farm is there. There is evidence is friendly marketing is counter-productive.

People make vastly different decisions when they are sexually aroused. They will do things when aroused that they would not do when un-aroused. Its a true Dr. Jeckyl and Mr. Hyde situation. People literally have split personalities when it comes to arousal. "One things led to another, and before I knew it I was… " this is a true story.

It is easy to say we'll do one thing when we are in a cool state, but when we are aroused (non-sexually) we change our mind. We say we'll save money, but when we sit in the expensive, new car, we are "aroused" in a sense and change our mind about saving.

Setting early deadlines (progress report style) -- and even with penalties -- is an effective method to overcome procrastination.

We overvalue what we have. The fear of loss is much greater than the pleasure of gain. This is partially why sellers also start high and buyers start low -- besides economic advantage, they genuinely see the value differently.

Humans are generally afraid to close doors or burn bridges. We like to have many options. But the problem is options are counter-productive, and distract us from our main objective. Its like the hungry donkey standing between two bales of hay, unable to choose one, the donkey starves and dies.

It is good to say no, and let things go. Another implication: it is better to choose between to equal options as quickly as possible. The decision will frequently matter less than the opportunity cost of trying to make the best decision.

We tend to see what we expect to see. Fans of two opposing teams will literally/genuinely see the same play differently. One fan can see a penalty, while the other doesn't, and they both can be sincere.

This is why marketers try to hype and cause prejudices. Most people have positive associations with red coke cans, and tend to prefer coke over pepsi. Whereas in blind tests, people like pepsi better.

We tend to associate high price with quality. Very much like the placebo effect, we will feel and appreciate the quality of more expensive things. Most people will say 50 cent aspirin was more effective than a 1 cent aspirin even if they were the same thing.

The placebo effect is very powerful -- way beyond sugar pills. In one study, half the patients were actually given knee surgery, while the other half had "fake" or simulated surgery (they took them to hospital, knocked them out, but didn't actually do the surgery). Months later, both sets of patients reported the same level of recovery. This raises interesting and challenging questions about medical effects -- if placebo treatment is as effective as the real treatment, should we save significant money by using the placebo?

Most people who describe themselves as basically honest -- and indeed are basically honest -- will cheat just a little bit. Very few of us are misanthropic liars, and very few of us will bluntly steal or cheat. However, if given the chance, with little risk of being caught, we will cheat just a little bit. We will estimate our business expenses on the high side, for example.

This might explain of a group of normally honest people, can accidentally cause big problems with fraud/dishonesty by chain reaction. Everybody cheats just a little and suddenly there is a big problem.

Interestingly, the use of honor codes, or the presence of the Ten Commandments, can increase honesty and reduce cheating even when there is no risk of being caught.

Most of the little cheats that occur in the previous chapter will occur by proxy. People are very reluctant to take cash -- even very small amounts -- but will steal a pen from work. This is why people will frequently return a lost wallet without touching the cash, but will keep a lost hat/umbrella/etc.

Behaviorial economics is much different than regular economics. A group of friends ordering a round of beers will feel pressure to order something different than everybody else. Not only will they order different things, but they will actually report greater enjoyment of the "worse" option they "settled for". When the same people write down their orders privately, and hand them in, they are more likely to order the same things.

People are willing to sacrifice pleasure for social norms.

Standard economics assumes people will make objective, rational decisions. There might be the occasional mistake, but overall in the long run reason will prevail. Behaviorial economics look at how people actually behave, rather than how they arguable ought to behave.

In conclusion, we are irrational and its perfectly natural.