Irrational behaviour is a part of human nature, but as MIT professor Ariely has discovered in 20 years of researching behavioural economics, people tend to behave irrationally in a predictable fashion. Drawing on psychology and economics, behavioural economics can show us why cautious people make poor decisions about sex when aroused, why patients get greater relief from a more expensive drug over its cheaper counterpart and why honest people may steal office supplies or communal food, but not money. According to Ariely, our understanding of economics, now based on the assumption of a rational subject, should, in fact, be based on our systematic, unsurprising irrationality. Ariely argues that greater understanding of previously ignored or misunderstood forces (emotions, relativity and social norms) that influence our economic behaviour brings a variety of opportunities for re-examining individual motivation and consumer choice, as well as economic and educational policy. Ariely's intelligent, exuberant style and thought-provoking arguments make for a fascinating, eye-opening read.
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My Review Rating: 4/5 Stars.
This is an insightful way of how our mind works and why we are often irrational in our decision making. This is useful if you are a consumer or working in the field of marketing as you will be able to learn some guidelines that might help you consume less or help your customers consume less.
Related Book Summary: LESSONS FROM YES! 50 SCIENTIFICALLY PROVEN WAYS TO BE PERSUASIVE
Book Summary
1. The Truth About Relativity Why Everything Is Relative – Even When It Shouldn’t Be
a. Choices are rarely made without a reference to other similar choices and their worth. When making a decision, we make our choices based on the array of choices presented. Decoy choices are choices inserted into the mix to “help” people choose a product.
b. Groups of choices that are similar to each other are preferred over isolated choices that have hard to compare attributes.
c. Relativity also plays to our emotions of contentment and creates the keeping up with the Jones syndrome. One can solve this by moving to a smaller circle where the objectives might be different or the less competitive.
2. The Fallacy Of Supply And Demand – Why The Prices Of Pearls And Everything Else Is Up In The Air
a. The chapter starts with the discovery of black pearls in Tahitian. An entrepreneur harvested the pearls and tried to sell them to the world. Initial efforts failed. However when the pearls were marketed with the finest gem stones, sales took off.
b. The price anchor was set to a similar level as precious stones. Once we set a price to a product, our mind becomes used to the fact that it cost a certain amount. Any amount below will be considered cheap and any amount above will be considered expensive. This is regardless of the actual value of the product. This is called arbitrary coherence.
c. An experiment involving suggesting initial prices by having participants write a number then bid for a product proved a correlation of the written number and the average bid price. Also when the participants were willing to pay a certain price of one product, their willingness to pay for other items in the same category was also similarly affected.
d. Self herding is the habit formation of establishing a new price anchor and continuously reinforcing the anchor without thought. To create new anchors in a space where there are already anchors, the author suggests that one creates a product positioning that is highly differentiated.
e. Thus since our initial anchors have far reaching consequences, we should consider the value when we purchase a first product.
3. The Cost Of Zero Cost – Why We Often Pay Too Much When We Pay Nothing
a. When product choices are placed together and a certain product is free, the free product creates a large relative value that distorts the choices. In a transaction, there is a return on investment. However once a product is free, there is no visible and direct loss created thus the return is infinity and thus the free choice is almost always the overwhelming choice.
4. The Cost Of Social Norms – Why We Are Happy To Do Things But Not When We Are Paid To Do Them
a. There are 2 worlds in which we exist. One is dictated by market norms and the other by social norms. We usually try to keep the 2 markets and the people that we interact with in each separate.
b. When money enters into a transaction/request, it becomes a market and people will view the request relative to the market.
c. People work equally hard when the norm is social compared to when the pay is market competitive. If the pay is reduced, the performance drops. However if the payment was not in monetary terms (gift), social norms take place. But when the price of the gift is mentioned, the market norms return. Hence we should keep the two entirely separate.
d. Mentioning money also affects behaviour of people. When money was mentioned or suggested, people became more self reliant and less willing to ask for help. In other words, they were more rational and market oriented.
e. When a market norm and social norm converges, the social norm is easily removed but is hard to get reestablish even when money is removed from the context.
f. Social motivations are cheaper and more effective that monetary motivations and should be incorporated into policy making to help people make sound decisions.
5. The Influence Of Arousal – Why Hot Is Much Hotter Than We Realise
a. The experiment was first conducted when the student was in a normal state. Then the experiment was then conducted again when the student was in an aroused state. The results were that in an aroused state, our choices were less rational and could not be predicted by ourselves in a cold state.
b. We should give ourselves time to cool down and analyze choices instead of making snap decisions.
6. The Problem Of Procrastination And Self Control – Why We Can’t Make Ourselves Do What We Want To Do
a. This chapter explores why it is so easy to lose sight of our goals and self control. We might not understand our own lack of self control. Commitments are necessary for keeping us on track. They could either be self proposed or imposed by another authority. There is reason to believe that commitments imposed by another authority might be more effective.
a. In general the ownership of something causes the value of the thing to increase only in the owner’s perspective because it is easier to attach emotional experiences to the object. The owner also focuses more on the aspect of the loss of the object and its benefits.
b. The more work we put into something, the more sense of ownership we get and thus higher satisfaction from using the product (IKEA effect). Ownership can also take hold partially causing virtual ownership where we imagine ourselves using the product before we own it.
8. Keeping Doors Open – When Options Distract Us From Our Main Objective
a. We feel compelled to keep as many choices available without due consideration to opportunity cost. When we are trying to keep our doors open, we also lose our focus on our current activities. The need to keep the choices open is due to our tendency towards loss aversion.
b. When we narrow our choices to the final 2 choices, it is now even much harder to make a decision because the two are so similar. The author suggests making a decision and getting on with our lives.
a. Expectations affect our experiences. If an expectation was set before using the product, our conclusion will likely be similar to the expectation. When the expectation was not set, the conclusion was made on the basis of the product. If the information supplied to manage the expectation was shown after the product was used, this information had little effect as the expectation would already have been set by the product experience.
10. The Power Of Price – Why A 50-Cent Aspirin Can Do What A Penny Aspirin Can’t
a. Placebos run on power of suggestion and they work because the person taking the medicine expects it to work. The expectation derives from a belief that the medicine works and the body becomes conditioned to the presence of the medicine and starts a physiological response.
b. The more expensive the item, the stronger its placebo effect.
11. The Context Of Our Character Part 1 – Why We Are Dishonest And What We Can Do About It
a. There are 2 types of dishonesty. One is a highly criminal dishonesty where the decision making is based on how much they can steal. The second is committed by the average person where the object is often not money and less decision making is made.
b. When given the opportunity, most honest people will cheat. Once tempted to cheat, the magnitude of cheating did not increase beyond a certain point.
c. Honesty has an internal monitor that activates when the amount is large. When the amount is small, it is passive and the dishonest act does not get register on the virtue counter.
d. The honesty monitor can be activated in certain ways. One could put up a sign reminding a person of honesty or a mirror for self reflection. All these ways helped in bringing up the contemplation of the internal moral benchmark.
a. When the object of dishonesty is cash, we are very unlikely to commit the dishonest act even though it might be a small amount. When the object is not cash but a product of similar value, we are inclined to commit the dishonest act. When cash is a step removed from our dishonest act, our dishonest rate goes up.
a. We should base our decision making on how we really behave instead of how we are modelled to behave in classical economic theory.
b. We are far off from really understanding ourselves and we underestimate the external influences to our decision making.
c. PS: if you want to participate in this journey, log on to www.predicatblyirrational.com
BOOK SUMMARY OF HOT, FLAT AND CROWDED
