Lessons from Predictably Irrational by Dan Ariely
‘Predictably Irrational’ highlights how emotions and norms influence our behaviour
Classical Economic Theory states that Man is a rational being who makes smart, logical choices. However, human behaviour in practice is usually at odds with what is expected in theory.
Dan Ariely’s book seeks to bring out this ‘irrational’ side of humans through a series of illuminating experiments. Each experiment illustrates how ‘invisible forces’ such as our emotions or social norms influence our behaviour. Interestingly, our irrational behaviour is neither senseless nor random. It manifests itself in systematic and predictable ways.
The author illustrates that these ‘irrational behaviours’ hold important implications for individuals, businesses and policy makers.
In the subsequent paragraphs, I discuss a few ‘irrational behaviours’ highlighted by the author.
1. Everything is relative — we always look at things in comparison to other things
Our mind is wired such that we are always looking at things around us in relation to others. We compare not only physical things but also experiences and ephemeral things such as emotions, attitudes. Thus, we compare jobs with jobs, vacations with vacations, lovers with lovers and wines with wines.
How businesses use it
- Decoy Pricing: One of the pricing options is usually a dummy option simply meant to make us choose the more expensive option.
- High priced dishes on restaurant menus — These boost the revenue even if no one knows buy them. This happens as people won’t buy the most expensive dish but they will choose the second most expensive dish.
The decoy effect is in action even when we are deciding whether someone is attractive. For example, imagine there are two friends at a party. The one who is slightly more attractive, might seem to be more attractive not just in comparison but in general as well.
2. Fallacy of demand and supply — prices of products can be manipulated through arbitrary anchors
Pricing is believed to be a function of demand and supply. However, that might not always be the case.
A lot of expensive things that we buy — diamond, houses, iPhone etc have often had their initial prices set arbitrarily. As a result, we have high anchors for the prices of these products. Thus, we are willing to pay these high prices even subsequently because of the initial anchor that has been set in our minds.
- It is possible to manipulate what the consumer is willing to pay for your product by setting an arbitrary anchor.
- Once you are willing to pay a certain price for one product, the willingness to pay for other items in the same product category is judged relative to the first price (the anchor).
- To be able to set an arbitrary anchor for your product, make sure the experience is very different from any other existing product in the same category. (This was how companies like Starbucks, Apple were able to put a high price tag on their offerings)
3. When something is free we only see the upside and not the downside
When something is offered for free, it gives us such an emotional charge that we perceive what is being offered is immensely more valuable than it really is. This is referred to as the ‘zero price effect’.
Examples of businesses using it
- Amazon’s free shipping offer for purchases above a certain threshold. Whenever you buy, you are likely to add extra products due to the lure of free shipping.
- The ‘Buy X Get Y free’ offers that are run by many businesses — It often leads us to buying an inferior quality product just because something is free with that product.
Companies offer a free complementary product along with a product to make it seem more attractive.
- It may also affect food items— It is possible that the attraction we have for zero prices could also apply to zero calories, zero carbs etc. (Remember, Pepsi’s “zero calorie” cans!)
To avoid this, don’t jump at any offer where something is offered for free. Think long and hard if it the purchase will add value to you.
4. Social Norms — The reason why we are willing to do some things for free but not when we are paid
Consider that you helped a neighbor move their furniture. Imagine, if they offered you money for your services. Sounds ridiculous! Isn’t it?
That’s because some things operate in realm of social norms. These are friendly requests that people make of one another. They are usually warm and fuzzy. Payback is not immediately required.
Behavior and expectation in these is markedly different from transactions operating in the realm of market norms. There’s nothing warm and fuzzy about them. Money is involved in these transactions and you get what you pay for.
- Introducing market norms into social exchanges, violates social norms and hurts relationships.
- When social norm collides with a market norm, it goes away for a long time. (Example: A day care center instituted a fine for parents who came late to pick their kids. Subsequently, the frequency of parents getting late increased. This was because the ‘guilt’ of getting late could be absolved by paying a ‘fine’ )
- Social norms are not only cheaper but more effective as well. Thus, companies have tried to build relationships with customers and employees by going beyond the transactional nature of these relationships. However, this requires commitment from the companies in both the good times and the bad times.
5. Our behaviour can be completely unpredictable when we are in an emotionally charged state
In case of a sudden surge in emotions such as anger, fear or arousal, we react differently. More importantly, we can’t imagine these changes in our behaviour when we are in a calm state.
“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.” — Dan Ariely
- It is easier to fight temptations before it arises than after it has started to lure you in.
- For certain situations, such as driving at high speed, we will forget the potential consequences in the moment of thrill. Thus, technological innovations(such as speed governors) are necessary to help avoid these situations.
- We should not take decisions in an emotionally charged state. This is well captured in the following lines.
“Don’t promise when you’re happy.
Don’t reply when you are angry,
And don’t decide when you are sad.” — Anonymous
6. Restricting our freedom is the best way to exercise self-control and prevent procrastination
Human race may have made unprecedented technological advancements, but its yet to conquer the mind. In this age of continuous distractions and temptations, the ability to exercise self-control is a superpower.
The best cure to this could be pre-commitment to deadlines, use of technology and simplification of processes. For example:
- Savings is important but we have a tendency to spend if there is money in the account — A simple solution is the automatic deductions that kick in as soon as our salary is credited.
- Deadlines (especially when they are externally imposed) are a surefire way of getting things done within a particular timeframe.
7. We overvalue what we have, due to our emotions and experiences associated with it
Our tendency to assign more value to an object when we own it, compared to how we would value the same item if it belonged to someone else is referred to as the endowment effect.
For instance, when you are selling something, you are likely to assign a much higher price to it than its true market value. This happens because you are thinking more about what you will lose than what you will gain.
How businesses use it
- Virtual ownership is one of the mainspring of the advertising industry. For example, when we see a happy couple driving a BMW through the coastline, we already begin imagining ourselves there. We become partial owner even before we own anything.
- Companies enable you to use their products through “free trials” and easy return policies such as “30 day money back” guarantee — Once you have started using a product, the endowment effect kicks in and its much harder to let go off the product.
8. Too many choices distract us from our main objective
“In today’s age, people are beset not by a lack of opportunity, but by a dizzying abundance of it.” — Dan Ariely
As a result, we might spread ourselves too thin. Jumping from one opportunity to another or one experience to another, without taking the time to relish it.
How to avoid this trap of having “too many open doors” at the same time
- We need to realize that some doors are infact disappearing doors and need immediate attention — For example, we may work long hours at our job without realizing that the childhood of our sons and daughters is slipping away.
- We should consciously start closing the doors which we derive little value from.
Predictably irrational is a fascinating read. It shows how all of us are systematically irrational. Understanding our ‘irrational side’ can have a profound impact on the way we interact with the world and the world interacts with us.