Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions


Predictably Irrational: The Hidden Forces that Shape Our Decisions
Author: Dan Ariely
Publisher: Harper
Published: 5/19/2009
Why do our headaches persist after we take a one-cent aspirin but disappear when we take a fifty-cent aspirin? Why do we splurge on a lavish meal but cut coupons to save twenty-five cents on a can of soup? When it comes to making decisions in our lives, we think we're making smart, rational choices. But are we?

Book Summary - Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely

Key Insights

While we all like to think of ourselves as wholly pragmatic and objective in our decision-making capabilities, the processes we follow when choosing a product or service are heavily influenced by outside factors, many of which are unconscious. Our memories, our personal biases, our experiences, and our present circumstances all play a key role in every choice we make. By becoming even slightly more aware of our subconscious inclinations, we can start to recognize maladaptive patterns and teach ourselves to become savvier consumers and humans.

Key Points

On Comparison

You may have heard the expression, “Comparison is the thief of joy.” This phrase, originally coined by former President Theodore Roosevelt, expresses that when we compare our accomplishments to those of others who are presumably more successful than us, we diminish our ability to find happiness in our own lives.

A modern-day example of this effect?

Instagram.

We might be feeling good about our recent trip to the Adirondacks until we see someone else’s picture of a week spent in Paris. Suddenly, our adventure in the mountains feels less significant than it did five minutes ago.

Rationally, we know that comparison leads to negative feelings of self-worth. And yet, we are still hard-wired to compare, over and over again.

Nowhere is the role of comparison more prevalent than in the retail and foodservice industries. In designing products, many companies capitalize on the consumer’s tendency to compare by purposefully manipulating prices. Take restaurants, for example. Some restaurants intentionally put expensive items on their menus so that people view the alternate options as cheaper by comparison.

You see that the $50 steak is expensive, so you justify your decision to order the $35 hamburger because at least you are not spending as much money as you would have on the steak! In your mind, you have made a smart decision...when, in reality, $35 is still a lot of money for a hamburger!

In social science, this phenomenon is referred to as the anchoring bias. You are basing your order on the menu items you see in front of you rather than considering what a particular dish would typically cost at other, similar restaurants nearby.

The Power of Free

To humans, the word free is more than just a string of letters put together--it is also an incredibly powerful emotional trigger. When a no-cost item is made available to us, we almost always go after it, even if it is an item that we absolutely do not need. In an attempt to rationalize our choice, we are quick to invent a reason as to why our acquisition could be useful in the future.

Oh? You are giving away those key chains? It will take twelve! When my toddler grows up and turns sixteen, she will use them for her car keys and so will all of her friends!

Our minds respond to the promise of freedom in a very specific way.

Consider chocolate, one of America’s favorite drugs.

In a study, a group of people was offered a choice between $.15 Lindt truffle (tasty) or $.01 Hershey’s Kisses (less tasty). Most people (73%) chose the Lindt truffles.

However, when the experiment was re-done with the Lindt truffles costing $.14 each and the Hershey’s Kisses being free, the majority (69%) now chose the Hershey’s Kisses in spite of the fact that they could now have gotten the Lindt truffles at an even better price than the first time around.

So, why do we react irrationally when presented with the promise of free?

Think of it this way: when you buy a product, you take a risk. If the item you purchased ends up not being worth the cost, you have incurred a loss. Humans hate losing things. When an item is free, there is no downside aka there is no risk that going this route will result in a net loss. It is a safe, risk-averse path. This phenomenon is called the zero price effect.

Major corporations are often quick to capitalize on the zero price effect. For instance, when ordering a product from Amazon, have you ever been incentivized to upgrade your account so you can access free shipping? Or have you ever bought a book that was part of a buy-one-get-one-free deal? Zero price effect in action.

Expectation

At one point, both Pepsi and Coke made the argument that they were the number one soda brand. And technically, neither company was wrong.

How can this be?

As it turned out, in blind taste tests, people preferred Pepsi, while in non-blind tests, Coke was the beverage of choice.

So, how often does branding impact taste?

Almost always, actually.

Our reactions to products and services are built on a combination of our expectations and experiences. If we saw a Coke label on a bottle, for instance, this could lead us to recall a positive memory of drinking Coke. We would then be basing our soda selection not only on taste but also on our previous associations.

Expectation plays a significant role in the pharmaceutical industry, in particular. More often than not, research finds that people who think a drug will make them feel better ultimately do end up feeling better than those who doubt its potency.

Why?

Because memory is a powerful force.

If you remember taking Advil when you had a headache and it worked, you would likely choose it again over Tylenol. This would further confirm your belief that Advil is the best painkiller. Once you have settled on Advil, you would probably discard or ignore any positive information about Tylenol, thus reinforcing your proclivity to select Advil. This is confirmation bias--you are only interested in collecting data that supports what you already believe.

Research also found that the more expensive a pain minimizing pill was, the more likely people were to find it effective. Logically, there is no correlation between pill cost and how physiologically successful it is, so the connection is psychological.

In drug trials, studies show that the participants who received a placebo often still experienced the full effect of the actual medicine, because they thought it was what they had taken.

Social versus Market Norms

 

  • I am going to my parents’ house on Sunday for Father’s Day and my mom is cooking. I was thinking of paying her $100 because she will be working hard to prepare the meal.

 

2) I work for a university and I recently hired an intern for my department. I plan on paying her for her work with high-fives and a bi-weekly hug.

When reading the above examples, you are likely thinking that Mom should get a hug (and maybe a high-five) for cooking you dinner and the intern should be monetarily compensated for her work. Both forms of payment show appreciation, albeit in different ways.

So, why is it that we inherently feel like we know who should receive the money versus the hug?

It boils down to norms.

Market Norms--These norms dictate the exchange of resources. A calculated transaction occurs--you do X amount of work and I will pay you Y amount of money at a designated time.

Social Norms--These norms dictate how we deal with friendly requests where there is not an expectation of immediate repayment.

While this seems like a simple distinction, it can be easy to find yourself in a gray area with this concept. For instance, if you are talking with a friend and considering doing a favor for them, you may not want to ask your friend to pay for it.

Why?

Because once you talk about costs, you are putting yourself in the market norms category. From then on, there may be an expectation that every time you or your friend asks the other for a favor, monetary transactions will be involved. Studies show that aftermarket norms have been introduced in a relationship, it is challenging to shift back into social norms.

Conversely, when your employer asks you what you want your salary to be for next year and you respond with a bear hug, they will be less likely to ask you about financial compensation later on.

The Main Take-away

Next time you are choosing your breakfast cereal, take a moment, and pause before you pull it off the shelf. Consider the following: Are you making this selection because you like the color of the box? It is because it is cheaper than the other cereals in the aisle? Is it because there is an incentive on the back for something free? Is it because it is the first cereal you saw when you walked into the grocery store? Or is it because you grew up in a household full of Fruit Loops and would love to mentally return to that spot?

Regardless of your answer, the point remains the same. If we are willing to take the time to break down our decisions--even small ones--into their base components, we start to develop a sense of what motivates us to make the choices that we do. We can use this awareness to better our lives, better ourselves, and to avoid falling victim to the same psychological traps that worm their way into our decision-making processes time and time again.

About the Author

Daniel Ariely is an Israel-American author and professor. He was born in 1967 in New York City, New York. Ariely holds two Phds--one in cognitive psychology from the University of North Carolina at Chapel Hill (1996) and another in marketing from Duke University (1998).

Throughout his career, Ariely founded several companies, most of which focused on applying behavioral science and economics to marketing and strategy problems.

In addition to his extensive entrepreneurial experience, Ariely has taught behavioral economics at both the Massachusetts Institute of Technology and his alma mater, Duke University.

Predictably Irrational: The Hidden Decisions That Shape Our Decisions was Ariely’s first book.

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