PREDICTABLY IRRATIONAL

Dan Ariely

   Predictably Irrational: The Hidden Forces That Shape Our Decisions is a 2008 book by Dan Ariely, in which he challenges readers' assumptions about making decisions based on rational thought.

CHAPTER 1 : The Truth about Relativity

        In chapter 1, Ariely describes the ways in which people not only compare things, but also compare things that are easily comparable. For example, if given the following options for a holiday - Paris (with free breakfast), Rome (with free breakfast), and Rome (no breakfast included), most people would probably choose Rome with the free breakfast. The rationale is that it is easier to compare the two options for Rome than it is to compare Paris and Rome. Relativity helps people make decisions but it can also make them miserable. People compare their lives to those of others, leading to jealousy and envy. Ariely finishes the chapter by saying “the more we have, the more we want” and his suggested cure is to break the cycle of relativity. 

The Fallacy of Supply and Demand 

In chapter 2, consumers purchase items based on value, quality or availability – often on all three. The methods of appointing a value to an object with no previous value, like the Tahitian black pearl, is susceptible to irrational pricing. A value can be as easily (arbitrarily) assigned as by having a fancy ad with “equally” precious items and a high price tag in a window of a store on Fifth Avenue. When consumers buy a product at a certain price, they become "anchored" to that price, i.e. they associate the initial price with the same product over a period of time. An anchor price of a certain object, say a plasma television, will affect the way they perceive the value of all plasma televisions hence forth. Other prices will seem low or high in relation to the original anchor. In other words, decisions about future LCD television purchases become coherent after an initial price has been established in the consumer's mind.

The Cost of Zero Cost 

           In chapter 3, Ariely explains how humans react to the words "free" and "zero". Humans make decisions without rationalizing the outcomes of their choices. To illustrate this point, Ariely conducted multiple experiments. The outcome was consistent: when faced with multiple choices, the free option was commonly chosen. With the opportunity to receive something for free, the actual value of the product or service is no longer considered. Ariely claims, “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.” 

          Ariely's concept of "FREE!" applies not only to monetary and quantitative costs, but also to time. We forgo some of our time when we wait in line for free popcorn or to enter a museum on a free-entrance day. We could have been doing something else at that time.

Being Paid vs. A Friendly Favor

          In chapters 4 and 5, Ariely speaks in great detail of the differences between social norms—which include friendly requests with instant payback not being required—and market norms—which account for wages, prices, rents, cost benefits, and repayment being essential. Experiments also showed that offering a small gift would not offend anybody (the gift falls into social norms), but mentioning the monetary value of the gifts invokes market norms.

         Ariely talks about how social norms are making their way into the market norms. To illustrate, State Farm's slogan, “Like a good neighbour, State Farm is there,” proves that companies are trying to connect with people on a social level in order to gain trust and allow the customer to overlook minor infractions. The author concludes that "money, as it turns out, is the most expensive way to motivate people. Social norms are not only cheaper, but often more effective as well.”

Emotion in Decision Making

        In chapter 6, Ariely collaborated with close friend George Loewenstein, a professor of economics and psychology at Carnegie Mellon University.  They determined that in an emotional state, the young men were more likely to undergo an action that they would not normally consider. High-emotion situations such as anger, frustration, and hunger have the potential to trigger such effects on decision-making. In such situations our behaviour is fully controlled by emotions. We are not the people we thought we were. No matter how much experience we have we make irrational decisions every time we are under the influence of such high emotions.

The Problem of Procrastination (procrastination refers to the act of replacing more urgent actions with tasks less urgent) and Self-control 

         In chapter 7, over the last decade Americans have shown surprisingly little self-control. Ariely blames this lack of self-control on people's two states in which they make their judgements—cool state and hot state. In our cool state we make rational long-term decisions, whereas in our hot state we give in to immediate gratification and put off our decisions made in the cool state. With proper motivators such as deadlines and penalties, people are more willing to meet deadlines or long-term goals. The author states that based on his experience with his students, deadlines set by authority figures such as teachers and supervisors make us start working on a specific task earlier. If we set the deadlines ourselves, we might not perform well. Moreover, we will not start making any progress towards the completion of the task until the deadline approaches.

The High Price of Ownership 

           In chapter 8, Ariely discusses how we overvalue what we have, and why we make irrational decisions about ownership. The idea of ownership makes us perceive the value of an object to be much higher if we own the object. This illustrates the phenomenon of the endowment effect -- placing a higher value on property once possession has been assigned.

Ariely gives three reasons why we do not always think rationally when it comes to our possessions:

1.    Ownership is such a big part of our society that we tend to focus on what we may lose rather than on what we may gain.

2.    The connection we feel to the things we own makes it difficult for us to dispose of them.

3.    We assume that people will see the transaction through our eyes.

 To avoid the endowment effect, Ariely suggests that we create a barrier between ourselves and the material things we are tempted by daily.

The Effect of Expectations 

           In chapter 9, Ariely and several colleagues conducted a series of experiments to determine whether previous knowledge can change an actual sensory experience. One of the experiments was conducted in the Muddy Charles, one of the MIT's pubs. Students visiting the pub tasted two types of beer -- Budweiser and the MIT Brew (which contains balsamic vinegar).

              In the “blind test” the majority preferred the altered brew, but when they were told in advance that it was vinegar-laced, they chose the original Budweiser. Another group of students was made aware of the vinegar content immediately after tasting both kinds of drinks. However, they still reported that they preferred it, proving that knowledge after the experience does not affect our sensory perceptions.

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