In league with the likes of Freakonomics and touching on some similar topics as Hooked, Predictably Irrational is a great introduction to behavioral economics, making a great case to question the assumptions long held true by standard economic theory. Ariely uses a mix of anecdotal and empirical evidence to repeatedly show that humans are irrational, and their irrationality can be predicted. Essential reading for marketers, economists, psychologists, and even the everyday person looking to become more aware of all the forces that shape our decisions.
Notable Excerpts
ON RELATIVITY & ANCHORING
‘Tom had discovered a great law of human action, namely, that in order to make a man covet a thing, it is only necessary to make the thing difficult to attain.’
This, then, is what we call arbitrary coherence. Initial prices are largely “arbitrary” and can be influenced by responses to random questions; but once those prices are established in our minds, they shape not only what we are willing to pay for an item, but also how much we are willing to pay for related products (this makes them coherent).
Starbucks did everything in its power… to make the experience feel different - so different that we would not use the prices at Dunkin’ Donuts as an anchor, but instead would be open to the new anchor that Starbucks was preparing for us.
ON (SELF) HERDING
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.
But there’s another kind of herding, one that we call self-herding. This happens when we believe something is good (or bad) on the basis of our own previous behavior. Essentially, once we become the first person in line at the restaurant, we begin to line up behind ourself [sic] in subsequent experiences.”
ON THE FALLACY OF SUPPLY & DEMAND
Demand is not, in fact, a completely separate force from supply
Sometimes we want our decisions to have rational veneer when, in fact, they stem from a gut feeling - what we crave deep down. I suspect that in our attempts to make sure that we end up with the decisions that seem well-reasoned and thoughtful, we commonly undergo a lot of unnecessary mental gymnastics and justifications, particularly when the choices are large and significant.
ON THE POWER OF FREE
What is it about FREE! that’s so enticing? Why do we have an irrational urge to jump for a FREE! item, even when it’s not what we really want?
I believe the answer is this. Most transactions have an upside and a downside, but when something is FREE! we forget the downside. FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is. Why? I think it’s because humans are intrinsically afraid of loss.
Money, as it turn out, is very often the most expensive way to motivate people. Social norms are not only cheaper, but often more effective as well.
ON THE EFFECT OF EMOTION
‘Man is not truly one, but truly two.’ [from Dr. Jekyll and Mr. Hyde]
Even the most brilliant and rational person, in the heat of passion, seems to be absolutely and completely divorced from the person he thought he was. Moreover, it is not just that people make wrong predictions about themselves - their predictions are wrong by a large margin.
ON PROCRASTINATION
Tightly restricting [students] freedom is the best cure for procrastination. But… simply offering the students a tool by which they could precommit to deadlines helped them achieve better grades.
Although almost everyone has problems with procrastination, those who recognize and admit their weakness are in a better position to utilize available tools for precommitment and by doing so, help themselves overcome it.
In order to overcome many types of human fallibility, I belive it’s useful to look for tricks that match immediate, powerful, and positive reinforcements with the not-so-pleasant steps we have to take toward our long-term objectives… By pairing something that we love with something that we dislike but that is good for us, we might be able to harness desire with outcome - and thus overcome some of the problems with self-control we face every day.
ON OWNERSHIP
We fall in love with what we already have.
The more work you put into something, the more ownership you begin to feel for it.” “We begin to feel ownership even before we own something.
In the end, buyers didn’t want our home. They wanted theirs.
In Lake Wobegone, ‘all the women are strong, all the men are good-looking, and all the children are above average.’ [Garrison Keillor]
ON CHASING EVERYTHING
In 1941, the philosopher Erich Fromm wrote a book called ‘Escape from Freedom.’ In a modern democracy, he said, people are beset not by a lack of opportunity, but by a dizzying abundance of it… running from door to door is a strange enough human activity. But even stranger is our compulsion to chase after doors of little worth.
ON EXPECTATIONS
When we believe beforehand that something will be good, therefore, it generally will be good- and when we think it will be bad, it will [be] bad
Don’t underestimate the power of presentation
Research on stereotypes shows not only that we react differently when we have a stereotype of a certain group of people, but also that stereotyped people themselves react differently when they are aware of the label that they are forced to wear.
When stripping away our preconceptions and our previous knowledge is not possible, perhaps we can at least acknowledge that we are all biased. If we acknowledge that we are trapped within our perspective, which partially blinds us to the truth, we may be able to accept the idea that conflicts generally require a neutral third party.
The brilliant satirist Alexander Pope once wrote: ‘Blessed is he who expects nothing, for he shall never be disappointed.’
ON THE POWER OF PRICE & PLACEBOS
Two mechanisms shape the expectations that make placebos work. One is belief - our confidence or faith in the drug, the procedure, or the caregiver…not only makes us feel better but also triggers our internal healing processes… The second mechanism is conditioning… the body builds up expectancy after repeated experiences and releases various chemicals to prepare us for the future.
When it comes to medicines, then, we learned that you get what you pay for. Price can change the experience.
ON TRUST AND THE TRAGEDY OF THE COMMONS
The Tragedy of the Commons is..
When we use a common resource at a rate that is slower than the rate at which it replenishes, all is well. However, if a few individuals get greedy and use more than their share, the system of consumption becomes unsustainable, and in the long term, everybody loses. In essence, the tragedy of the commons is about two competing human interests. On one hand, an individual should care about the sustainability of shared resources in the long term because everyone, including the individual, benefits from it. At the same time, in the short term, the individual benefits immediately from taking more than his or her fair share.
We, as a society, share the public good of trust. When we all cooperate, trust is high and the total value to society is maximal. But distrust is infectious. When we see people defect… we start acting similarly; trust deteriorates, and everybody loses, including the individuals who initially gained from their selfish acts.
ON CHEATING
When given the opportunity, many honest people will cheat… once tempted to cheat, [honest people don’t] seem to be as influenced by the risk of being caught as one might think… even when we have no chance of getting caught, we still don’t become wildly dishonest.
People cheat when they have a chance to do so, but they don’t cheat as much as they could. Moreover, once they begin thinking about honesty…they stop cheating completely.
When we look at the world around us, much of the dishonesty we see involves cheating that is one step removed from cash… cheating is a lot easier when it’s a step removed from money…When [students] were given the same chance to cheat with non-monetary currency, their cheating increased…more than doubling in magnitude. What a difference there is in cheating for money versus cheating for something that is a step away from cash! …We have learned that given a chance, people cheat. But what’s really odd is that most of us don’t see this coming. [We don’t] see how fast we can rationalize our dishonesty when it is one step away from cash.
ON STANDARD ECONOMIC THEORY AND OUR PREDICTABLE IRRATIONALITY
Standard economics assumes that we are rational - that we know all the pertinent information about our decisions, that we can calculate the value of the different options we face, and that we are cognitively unhindered in weighing the ramifications of each potential choice… and even if we make a wrong decision…we will quickly learn from our mistakes either on our own or with the help of ‘market forces.’…But…we are all far less rational in our decision making than standard economic theory assumes. Our irrational behaviors are…systematic and predictable. We all make the same types of mistakes over and over, because of the basic wiring in our brains.
Economic theory asserts that there are no free lunches - if there were any, someone would have already found them and extracted all their value…Behavioral economists…believe that people are susceptible to irrelevant influences from their immediate environment, irrelevant emotions, shortsightedness, and other forms of irrationality… free lunches from the perspective of behavioral economics [is]…that there are tools, methods, and policies that can help all of us make better decisions and as a consequence achieve what we desire.
We are pawns in a game whose forces we largely fail to comprehend. We usually think of ourselves as sitting in the driver’s seat, with ultimate control over the decisions we make and the direction our life takes; but, alas, this perception has more to do with our desires - with how we want to view ourselves - than with reality.
Although irrationality is commonplace, it does not necessarily mean that we are helpless. Once we understand when and where we may make erroneous decisions, we can try to be more vigilant, force ourselves to think differently about these decisions, or use technology to overcome our inherent shortcomings.