Predictably Irrational

Infobox Book
name = Predictably Irrational: The Hidden Forces That Shape Our Decisions
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author = Dan Ariely
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country = USA
language = English
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genre = Behavioral economics
publisher = HarperCollins
pub_date = February 2008
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media_type = Print (Hardcover)
pages = 304
isbn = 9780061353239
oclc =
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"Predictably Irrational: The Hidden Forces That Shape Our Decisions" is a 2008 book by Dan Ariely, in which he challenges readers' assumptions about making decisions based on rational thought. Ariely explains, "My goal, by the end of this book, is to help you fundamentally rethink what makes you and the people around you tick. I hope to lead you there by presenting a wide range of scientific experiments, findings, and anecdotes that are in many cases quite amusing. Once you see how systematic certain mistakes are--how we repeat them again and again--I think you will begin to learn how to avoid some of them". [Ariely, "Predictably Irrational", xii]

The Effect of Expectations

Dan Ariely asks, can knowledge change an actual sensory experience or just the perception of it? One experiment Ariely performed consisted of free samples of two types of beer: 1.) Budweiser and 2.) an altered brew containing balsamic vinegar. In the “blind test” the majority preferred the altered beer, but when they did know it was vinegar laced, they chose the original Budweiser. Another group was made aware of the vinegar content immediately after. But they still consented that they preferred it, proving that knowledge does not affect the actual sensory experience of taste, only our perception of it. Ariely concludes, “Expectations can influence nearly every aspect in one’s life.” He gives a convincing argument that perception and expectations can override our senses, partially blinding us from the truth.

The Fallacy of Supply and Demand

As consumers we purchase items based on value, quality or availability – often based on all three. The methods of appointing a value to an object with no previous value, like the Tahitian black pearl, is susceptible to irrational pricing. A value can be as easily assigned as by having a fancy ad with “equally” precious items and a high price tag in a window of a store on Fifth Avenue. The “anchor” price is the amount associated with the same product over a period time.An anchor price of a certain object, say a plasma television, will affect the way we perceive the value of all plasma televisions hence forth. Other prices will seem low or high in relation to the original anchor. Our self value for services rendered can also be affected by anchor prices; we can irrationally price our abilities or services based on an anchor price proposed.

The Problem of Procrastination and Self Control

Over the last decade, Americans have shown surprisingly little self-control. Ariely blames this lack of self control on peoples two states in which they make their judgements. Our cool state or rational state of being in which we make rational long term decisions . In our hot state we give into immediate gratification and put off our decisions made in the cool state. Ariely describes putting off these goals for immediate gratifiaction as procratstionation. With proper motivations such as deadlines and penalties, people are more willing to meet those deadlines or long term goals. He applies his theories to other aspects in life such as healthcare. Having to pay a deposit at the doctors office would make people more likely not to procrastinate and show up for their appointments. Ariely goes on to say that if more consequences were put into effect, people would be more likely to meet their goals, appointments, deadlines, etc. made in a cool state.

The Cost of FREE!

Dan Ariely explicates how humans react to the words FREE! and zero. Humans make decisions without rationalizing the outcomes of their choices. To illustrate this point, Ariely conducted multiple experiments. The outcome was consistent: when faced with multiple choices, the FREE! option was commonly chosen. With the opportunity to receive something for FREE! the actual value of the product or service is no longer considered. Ariely claims, “Most transactions have an upside and a downside, but when something is FREE! we forget the downside. FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable that it really is.” [Ariely, "Predictably Irrational", 54] This concept of FREE! and zero applies not only to monetary and quantitative costs, but also to time. Ultimately, he demonstrates how such a simple concept can be used to drive business and social policy. Ariely recommends the consideration of the net benefits of the choices we make regarding both preference and money. Perhaps we would get the better deal and even save money if we did not react to FREE! the way we do.

The High Price of Ownership

Ariely approaches the idea that we over value what we have. In other words, the idea of ownership influences us to perceive the value of an object much higher than not owning the object. This example illustrates the phenomenon of the “endowment effect” which theorizes that people place a higher value on property once possession has been assigned. He begins by using an example of how a lottery for highly sought after Duke University basketball tickets inflates students’ sense of value for the tickets. The students who actually received the tickets valued them ten times more than the students who did not receive them. Ariely points out that because ownership is such a big part of our society we tend to focus on what we may lose rather than gain. The connection we feel to our possessions makes it difficult to let go of the things we already have. Ariely suggests that we should simply be aware that the idea of ownership can influence how we value objects. To avoid the endowment effect, he advices to create distance between ourselves and the material things we are tempted by every day.

Being Paid vs. A Friendly Favor

Ariely speaks in great detail of the differences between socialnorms--which include friendly requests with instant payback not being required-- and market norms--which account for wages, prices, rents, cost benefits, and repayment being essential-- and how combining the two only create troubling situations. He proves rationally that people are happy to do things, but occasionally not when they are paid to do them.The author describes situations where work output is negatively affected by payment of small amounts of money, when other tests showed work done as a “favor” produced much better results.
Ariely talks about how social norms are making their way into the market norm. For example, State Farm's slogan, “Like a good neighbor, State Farm is there,” proves that companies are trying to connect with people on a social level in order to gain trust and allow the customer to overlook minor infractions.

Break the Cycle of Relativity

We are always looking at the things around us in relation to others; it is the way we are wired. Ariely gives us examples of the ways we make choices when given options. Ariely states that in marketing, the decoy effect (or asymmetric dominance effect) is the phenomenon whereby consumers will tend to have a specific change in preference between two options when also presented with a third option that is asymmetrically dominated. One realizes that this decoy effect is the secret agent in more decisions we can imagine. The author uses examples to emphasize that the decoy is used as a point of comparison between choices and further helps us make decisions by using the examples such as the photo shop face experiment. Ariely finishes with “the more we have, the more we want” (21) and his answer to cure this is to break the cycle of relativity. To break the cycle we can control what goes on around us, and change our focus from narrow to broad.

Emotion in Decision Making

Ariely collaborates with close friend George Loewenstein, a professor of economics and psychology from Carnegie Mellon University, to test the influence of arousal on decision making in high-emotion situations. Ariely and Loewenstein choose to test the effects of sexual arousal on decision-making in college-aged men at University of California, Berkeley. By using computers to stimulate sexual arousal, they determined that in a stimulated state, the young men tested were more likely to undergo an action that they would not normally consider. Using the data, Ariely argues that other high-emotion situations such as anger, frustration, and hunger have the potential to trigger similar effects on decision-making. Furthermore, Ariely presents ideas to improve our decision-making abilities in other emotion-provoking situations such as safe sex, safe driving, and making other life decisions. For example, Ariely proposes an OnStar system that could potentially lower the number of car accidents in teenagers by performing tasks such as changing the car’s temperature or dialing the teenager’s mother when the car exceeds a set speed.

External links

* [http://www.predictablyirrational.com/ Official website]

References