7 Lessons from Predictability Irrational | Dan Ariely
Overall Impression
This was indeed a fun and insightful book to read. Professor Ariely, who serves as an Economics professor at Duke University, explains our daily irrationalities in a humorous and relatable manner. Since these irrational behaviors occur on a daily basis, it is relatively easy to observe them in our everyday life. It also helps me to become aware of the marketing strategies that companies use to attract potential consumers and some inferior decisions I made choose due to my irrationality. In addition, this book, in my opinion, is a great introduction to behavioral economics because it is easy to understand yet helpful to learn the factors that guide our seemingly irrational behavior.
Score: 4.5/5
Recommendation: a great book for those who are looking for an introduction to behavioral economics or just want to learn about human irrationality in general.
Lessons
1. Everything is Relative
The first key lesson from the book is that we humans do not think in absolute terms but rather in relativity. In other words, there is no absolute since the intrinsic value is impossible to determine, and the absolute value meaningless when not compared with others. For instance, you might think you have a pretty nice house until you visit your friend who is living in an ocean-viewing mansion. You might think you have a nice suit until you feel the material of your coworkers’ expensive designer suit. You may argue that, if we are constantly comparing ourselves with others, we will never reach true happiness since there will always be something better than what we have. Such arguments are definitely valid and the best way to be content is to break out of the comparison cycles. In my opinion, this is one of the key reasons why meditation is so powerful and useful in terms of helping us to reach true happiness because it teaches us to be content and grateful for our current circumstances and possessions.
Many businesses take advantage of our comparison mindset by employing the decoy effect, which means sellers intentionally add an inferior option to make the other ones more appealing. For example, have you seen an option that seems so bad that makes you question why the seller even decide to provide it in the first place? That horrible option, as it turns out, is usually a decoy that makes the other options more appealing.
The same relativity theory can make us rethink the supply and demand theory in traditional economics. The free market assumes that everyone is rational while this is not necessarily the case because people make judgments about the products they purchase not solely through the demand but past decisions. To break out of the cycle and make more rational decisions, we should question ourselves the validity of our choice from previous decision making. For instance, the next you walk past your favorite coffee shop, instead of asking what coffee do I want, ask do I want coffee in the first place.
2. Zero Cost is Costly
The title might sound like an oxymoron but we often make bad decisions when we see the word “Free.” Usually, people would sacrifice the values of other items or just ignore them altogether to chase the free item. For instance, when people see two candies on sale, the Hershey bar that usually costs 1 dollar is now free and another exclusive chocolate bar that costs 3 dollars is now 1 dollar, the majority would choose the free Hershey bar over the other. Such a choice does not make any economics sense but makes perfect psychological sense. People would prefer free items because humans are loss-aversed. By choosing the option that does not cost anything, we can forget about considering the downside and the possibility that the cost would not justify the result. A typical inner dialogue of people who choose the free Hershey bar would look something like this: “Hmmm. What if the other chocolate bar is not good? Oh well, I mean the Hershey bars are free. What is there to lose?”
3. Social Norms vs. Market Norms
What if you decide to pay your mother-in-law for the great Thanksgiving dinner? What if you tell your electrician “I owe you one”? The outcome may not be ideal for either one. The two situations fall into the two domains we have: the social norms and the market norms. Social norms are what we have with our neighbors, friends, and families, where we would not charge money for a favor. Market norms are what we have with the marketplace when we trade currencies for the service or product provided. Once we bring the market norms into the social norms, it becomes nearly irreversible. Therefore, it is important to keep close relationships within the social norms. However, many companies, which are market norm places, bring social norms into their organization by making employees feel like a family because it will make them more productive and loyal, but when things turn bad, companies retrieve back to the market norms and fire them. Such inconsistency often degrades the reputation of a company. In brief, social norms are an important aspect of society and a key that makes us human.
4. Ownership is Expensive
We value things more highly if we own it. This is the famous endowment effect. Not only do we value things we more, but we also tend to fight harder to keep it because giving up ownership is considered a loss. Many companies take advantage of this mindset and provide free trials because the experience of the free trial creates a sense of ownership within the customer. This also explains why auctions are often very effective because people would imagine themselves owning the product by being the highest bidder. When someone else outbids them, they would feel a sense of loss and would try to win the bid to ensure their ownership.
5. More is Not Better
Do you remember the time when you eat out with your friends and your friend decide the same thing you originally decide to order and you end up changing to a different plate? This is driven by our tendencies to “keep the door open” and to be unique. In other words, we like to try different things both because we like to explore more options and be different. Yet, this can be very ineffective because the decisions themselves also take resources. Therefore, next time we are deciding between options, we both should ask ourselves if we are doing so simply because we want to be different as well as the consequences of indecision.
6. Price Makes us See Things
When we have very similar products next to each other, we usually assume price differentiates the quality of those goods. While this is not necessarily true, it simplifies our lives by introducing a factor that is easy to perceive and understand. When we decide to purchase the higher-priced item, the power of expectation comes in. When we expect something to be better, we usually perceive it to be better as well because it would not introduce a cognitive dissonance that would make us uncomfortable and question our decision. Therefore positive feedback loop begins: we expect pricer item to better, and we perceive them to be so, and this reinforces our original mindset of price equals quality.
7. When do We Cheat More
People tend to cheat more when the reminder of the honor code is absent. Therefore, it is a good idea to place the honor code before the temptation and the actual cheating behavior. Studies also found that people eat more with non-monetary items and cash can also work as an honor code since it is a universal symbol of financial integrity. The implication of this finding is that, as cash becomes more invisible and intangible in the digital era, people have less reminder of the honor code to avoid cheating behavior. It is helpful to implement such reminders and make people reconsider before committing to low integrity behaviors.
