Predictably Irrational: The Hidden Forces That Shape Our Decisions

By Dan Ariely

Amazon

I think of Predictably IrrationalStumbling on Happiness and Thinking, Fast and Slow as a trilogy of pop psychology books written by guys named Dan. Irrational shines a light on the common ways we all defy so-called “rational” behavior, and why we continue to do so. This was my least favorite of the three; please note that I read the other two books before this one, so there is probably some sort of cognitive bias at work. If I had to pick one book, I’d recommend Thinking. But it can be a challenging read. Irrational is a more accessible take, like Happiness.


What a piece of work is a man! how noble in reason! how infinite in faculty! in form and moving how express and admirable! in action how like an angel! in apprehension how like a god! The beauty of the world, the paragon of animals. —from Act II, scene 2, of Hamlet

We all think of ourselves along the lines of Shakespeare’s depiction (although we do realize that our neighbors, spouses, and bosses do not always live up to this standard).
Let me start with a fundamental observation: most people don’t know what they want unless they see it in context.

In essence, introducing (–A), the decoy, creates a simple relative comparison with (A), and hence makes (A) look better, not just relative to (–A), but overall as well.

Once you see the decoy effect in action, you realize that it is the secret agent in more decisions than we could imagine. It even helps us decide whom to date—and, ultimately, whom to marry.

Relativity helps us make decisions in life. But it can also make us downright miserable. Why? Because jealousy and envy spring from comparing our lot in life with that of others.

As H. L. Mencken, the twentieth-century journalist, satirist, social critic, cynic, and freethinker noted, a man’s satisfaction with his salary depends on (are you ready for this?) whether he makes more than his wife’s sister’s husband.

Understand that relativity is everywhere, and that we view everything through its lens—rose-colored or otherwise.

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).

First impressions are important, whether they involve remembering that our first DVD player cost much more than such players cost today (and realizing that, in comparison, the current prices are a steal) or remembering that gas was once a dollar a gallon, which makes every trip to the gas station a painful experience.

The power of the first decision can have such a long-lasting effect that it will percolate into our future decisions for years to come. Given this effect, the first decision is crucial, and we should give it an appropriate amount of attention.

It seems then that instead of consumers’ willingness to pay influencing market prices, the causality is somewhat reversed and it is market prices themselves that influence consumers’ willingness to pay.

The draw of zero cost is not limited to monetary transactions. Whether it’s products or money, we just can’t resist the gravitational pull of FREE!

Instead of offering FREE! shipping on orders over a certain amount, the French division priced the shipping for those orders at one franc. Just one franc—about 20 cents. This doesn’t seem very different from FREE! but it was. In fact, when Amazon changed the promotion in France to include free shipping, France joined all the other countries in a dramatic sales increase.

Zero is not just another discount. Zero is a different place. The difference between two cents and one cent is small. But the difference between one cent and zero is huge!

Just thinking about money makes us behave as most economists believe we behave—and less like the social animals we are in our daily lives.

It’s remarkable how much work companies (particularly start-ups) can get out of people when social norms (such as the excitement of building something together) are stronger than market norms (such as salaries stepping up with each promotion).

Money, as it turns out, is very often the most expensive way to motivate people.

Although we all realize that offering cash instead of gifts is more economically efficient, I don’t expect that many people will follow this rational advice, because we all know that doing so will in no way endear us to our hosts.

Of course this may not be true of everyone, but I think that for many people the workplace is not just a source of money but also a source of motivation and self-definition.

In economic exchanges, we are perfectly selfish and unfair. And we think that following our wallets is the right thing to do.

As it turns out, we are caring social animals, but when the rules of the game involve money, this tendency is muted.

In essence, when prices are zero and social norms are a part of the equation, people look at the world as a communal good.

When public policy or environmental issues are at stake, our task is to figure out which of the two—social or market norms—will produce the most desirable outcome.

When you’re focused, mind and body, on one highly emotional objective—grabbing that wedding dress—it’s hard to factor in others’ well-being.

Sexual arousal is familiar, personal, very human, and utterly commonplace. Even so, we all systematically underpredict the degree to which arousal completely negates our superego, and the way emotions can take control of our behavior.

Avoiding temptation altogether is easier than overcoming it.

But to make informed decisions we need to somehow experience and understand the emotional state we will be in at the other side of the experience.

Giving up on our long-term goals for immediate gratification, my friends, is procrastination.

When we have problems with self-control, sometimes we delay tasks that we should do immediately. But we also exhibit problems with self-control when we attend too frequently to tasks that we should put off—such as obsessively checking our e-mail.

In order to overcome many types of human fallibility, I believe 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.

One of my colleagues at Duke University, Ralph Keeney, recently noted that America’s top killer isn’t cancer or heart disease, nor is it smoking or obesity. It’s our inability to make smart choices and overcome our own self-destructive behaviors.

I suspect that over the next few decades, real improvements in life expectancy and quality are less likely to be driven by medical technology than by improved decision making.

Much of our life story can be told by describing the ebb and flow of our particular possessions—what we get and what we give up.

The first quirk, as we saw in the case of the basketball tickets, is that we fall in love with what we already have.

The second quirk is that we focus on what we may lose, rather than what we may gain.

The third quirk is that we assume other people will see the transaction from the same perspective as we do.

Once we take ownership of an idea—whether it’s about politics or sports—what do we do? We love it perhaps more than we should. We prize it more than it is worth. And most frequently, we have trouble letting go of it because we can’t stand the idea of its loss. What are we left with then? An ideology—rigid and unyielding.

That’s what marketing is all about—providing information that will heighten someone’s anticipated and real pleasure.

The advantage of Coke over Pepsi was due to Coke’s brand—which activated the higher-order brain mechanisms. These associations, then, and not the chemical properties of the drink, gave Coke an advantage in the marketplace.

Expectations also shape stereotypes. A stereotype, after all, is a way of categorizing information, in the hope of predicting experiences.

Expectations enable us to make sense of a conversation in a noisy room, despite the loss of a word here and there, and likewise, to be able to read text messages on our cell phones, despite the fact that some of the words are scrambled.

The likelihood of agreement about “the facts” becomes smaller and smaller as personal investment in the problem grows.

When stripping away our preconceptions and our previous knowledge is not possible, perhaps we can at least acknowledge that we are all biased.

As it turns out, positive expectations allow us to enjoy things more and improve our perception of the world around us. The danger of expecting nothing is that, in the end, it might be all we’ll get.

In general, two mechanisms shape the expectations that make placebos work. One is belief—our confidence or faith in the drug, the procedure, or the caregiver. The second mechanism is conditioning.

If we see a discounted item, we will instinctively assume that its quality is less than that of a full-price item—and then in fact we will make it so.

The more we understand the connection between brain and body, the more things that once seemed clear-cut become ambiguous. Nowhere is this as apparent as with the placebo.

The physician’s enthusiasm for a treatment can play a real role in its efficacy.

The idea of sacrificing the well-being and perhaps even the life of some individuals in order to learn whether a particular procedure should be used on other people at some point in the future is indeed difficult to swallow.

At the same time, the trade-offs we make by not carrying out enough placebo experiments are also hard to accept.

Trust, like money, is a crucial lubricant for the economy.

Today, psychologists, economists and environmentalists use the phrase “the tragedy of the commons” to describe the same basic principle: 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.

If we start to think about trust as a public good (like clean air and water), we see that we can all benefit from higher levels of trust in terms of communicating with others, making financial transitions smoother, simplifying contracts, and many other business and social activities.

When we are removed from any benchmarks of ethical thought, we tend to stray into dishonesty. But if we are reminded of morality at the moment we are tempted, then we are much more likely to be honest.

All these electronic transactions, with no physical exchange of money from hand to hand, might make it easier for people to be dishonest—without ever questioning or fully acknowledging the immorality of their actions.

As the author and journalist Upton Sinclair once noted, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” We can now add the following thought: it is even more difficult to get a man to understand something when he is dealing with nonmonetary currencies.

When we deal with money, we are primed to think about our actions as if we had just signed an honor code.

But look at the latitude we have with nonmonetary exchanges. There’s always a convenient rationale. We can take a pencil from work, a Coke from the fridge—we can even backdate our stock options—and find a story to explain it all.

Being swayed by what other people choose might lead you to choose a worse alternative.

Indeed, it can be rather depressing to realize that we all continually make irrational decisions in our personal, professional, and social lives. But there is a silver lining: the fact that we make mistakes also means that there are ways to improve our decisions—and therefore that there are opportunities for “free lunches.”

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.

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