Predictably Irrational, Revised and Expanded Edition:
The Hidden Forces That Shape Our Decisions by Dan
Ariely 2008
1.
Opening Thoughts
2.
Table of Contents
3.
Further Reviews and Summaries
4.
Quotes from the Book
 |
| Predictably Irrational |
If you have been following my book reviews you will
know if have a preference for books on helping me understand how my mind
works…or does not work. Dan Ariely adds
a twist to the mix as he seeks to explain how our logical minds are not only no
logical but can be “predictably irrational” at times. His stated goal is to challenge your
presuppositions as to what makes people “tick.”
His work in behavioral economics places him in a special role of trying
to understand what motivates the decisions we make. Part of his premise is that this
irrationality is predictable, given the same circumstances we can accurately
predict that all most all people will end up making that same choice.
What frightens me is to the degree science has been
able to isolate these issues and to the degree that commerce is able to
capitalize on them. For instance, if you
want people to “choose” a certain price you simply bracket that by two other
prices…most people choose the middle.
Hedonic Adaptation is the process of becoming used to your
environment. This is why moving up to
that bigger and better house soon loses its thrill as we adapt to the “new”
standard. The same goes with other
things like fuel prices, food prices, cars, travel etc. Our brains need context in order to compare
things.
…we are always looking at the things around us in
relation to others. We can’t help it. This holds true not only for physical
things—toasters, bicycles, puppies, restaurant entrées, and spouses—but for
experiences such as vacations and educational options, and for ephemeral things
as well: emotions, attitudes, and points of view.
Ariely reinforces much of what I have read in other
books. While we think our conscious mind
is the King of the Brain, in fact, it is more akin to the Prime Minister. It does not make independent choices uninformed
from the unconscious mind where the King really resides. Understanding why we do what we do can help
us gain greater control of feeding information into the unconscious. Because it is the unconscious that builds up
the narrative of our life and the uses that narrative to inform and sometimes,
force decisions on us. It is all very
true, what goes in comes out: but not in the way you think. As we absorb the world around us our
narrative that guides much of our actions is constantly being adjusted,
challenged, reinforced and/or changed.
This is a good read!
Table of
Contents
Introduction How an Injury Led Me to
Irrationality and to the Research Described Here
Ch. 1 The Truth about Relativity: Why
Everything Is Relative
Ch. 2 The Fallacy of Supply and Demand: Why
the Price of Pearls - and Everything Else
Ch. 3 The Cost of Zero Cost: Why We Often Pay
Too Much When We Pay Nothing
Ch. 4 The Cost of Social Norms: Why We Are
Happy to Do Things,
Ch. 5 The Influence of Arousal: Why Hot Is
Much Hotter Than We Realize
Ch. 6 The Problem of Procrastination and
Self-Control
Ch. 7 The High Price of Ownership: Why We
Overvalue What We Have
Ch. 8 Keeping Doors Open: Why Options
Distract Us from Our Main Objective
Ch. 9 The Effect of Expectations: Why the
Mind Gets What It Expects
Ch. 10 The Power of Price: Why a 50-Cent
Aspirin Can Do What a Penny Aspirin Can't
Ch. 11 The Context of Our Character, Part I:
Why We Are Dishonest
Ch. 12 The Context of Our Character, Part II:
Why Dealing with Cash Makes Us Honest
Ch. 13 Beer and Free Lunches: Where
Are the Free Lunches?
Reflections and Anecdotes about Some of the
Chapters 245
Notes 341
Bibliography and Additional Readings 345
Index 355
Further Reviews and
Summaries
Short Review in the New
Yorker
Quotes from
the Book
Moreover, these irrational behaviors of ours are
neither random nor senseless. They are systematic, and since we repeat them
again and again, predictable.
..humans rarely choose things in absolute terms. We
don’t have an internal value meter that tells us how much things are worth.
Rather, we focus on the relative advantage of one thing over another, and
estimate value accordingly.
Let me start with a fundamental observation: most
people don’t know what they want unless they see it in context.
But Sam also knows that given three choices, most
people will take the middle choice
It’s this: we not only tend to compare things with
one another but also tend to focus on comparing things that are easily
comparable—and avoid comparing things that cannot be compared easily.
RELATIVITY HELPS US make decisions in life. But it
can also make us downright miserable. Why? Because jealousy and envy spring
from comparing our lot in life with that of others.
This might just be the toughest commandment to
follow, considering that by our very nature we are wired to compare.
The Fallacy of Supply and Demand
The basic idea of arbitrary coherence is this:
although initial prices (such as the price of Assael’s pearls) are “arbitrary,”
once those prices are established in our minds they will shape not only present
prices but also future prices
This, then, is what we call arbitrary coherence. Initial
prices are largely “arbitrary” and can be influenced by responses to random
questions; but once those prices are established in our minds, they shape not
only what we are willing to pay for an item, but also how much we are willing
to pay for related products (this makes them coherent).
They become anchors when we contemplate buying a
product or service at that particular price. That’s when the imprint is set.
From then on, we are willing to accept a range of prices—but as with the pull
of a bungee cord, we always refer back to the original anchor.
It happens when we assume that something is good (or
bad) on the basis of other people’s previous behavior, and our own actions
follow suit.
But what are the main lessons from these experiments
about our lives in general?
Descartes said, Cogito ergo sum—“I think, therefore
I am.” But suppose we are nothing more than the sum of our first, naive, random
behaviors.
We should also pay particular attention to the first
decision we make in what is going to be a long stream of decisions (about
clothing, food, etc.).
but in fact the power of the first decision can have
such a long-lasting effect that it will percolate into our future decisions for
years to come.
Perhaps it’s time to inventory the imprints and
anchors in our own life.
It’s no secret that getting something free feels
very good. Zero is not just another price, it turns out. Zero is an emotional
hot button—a source of irrational excitement.
I believe the answer is this. 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 than it really is. Why? I think it’s because humans
are intrinsically afraid of loss. The real allure of FREE! is tied to this
fear.
WHEN CHOOSING BETWEEN two products, then, we often
overreact to the free one.
The difference between two cents and one cent is
small. But the difference between one cent and zero is huge!
Here is the main point: because both products were
discounted by the same amount, their relative difference would be unchanged.
This is how the pattern of choice should look, if
the only forces at play were those of a rational cost-benefit analysis. The
fact that the results from our experiments are so different tells us loud and
clear that something else is going on, and that the price of zero plays a
unique role in our decisions.
As Margaret Clark, Judson Mills, and Alan Fiske
suggested a long time ago, the answer is that we live simultaneously in two
different worlds—one where social norms prevail, and the other where market
norms make the rules. The social norms include the friendly requests that
people make of one another.
When we keep social norms and market norms on their
separate paths, life hums along pretty well.
A FEW YEARS ago, James Heyman and I decided to explore the effects of social and
market norms.
There are many examples to show that people will
work more for a cause than for cash.
When money was mentioned, the lawyers used market
norms and found the offer lacking, relative to their market salary. When no
money was mentioned they used social norms and were willing to volunteer their
time.
Are gifts methods of exchange that keep us within
the social exchange norms?
As it turned out, all three experimental groups
worked about equally hard during the task, regardless of whether they got a
small Snickers bar (these participants dragged on average 162 circles), the
Godiva chocolates (these participants dragged on average 169 circles), or
nothing at all (these participants dragged on average 168 circles
The conclusion: no one is offended by a small gift,
because even small gifts keep us in the social exchange world and away from
market norms.
They reacted to the explicitly priced gift in
exactly the way they reacted to cash, and the gift no longer invoked social
norms—by the mention of its cost, the gift had passed into the realm of market
norms.
THESE RESULTS SHOW that for market norms to emerge,
it is sufficient to mention money
thinking about money in this manner be sufficient to
change the way participants behave?
Thinking about money, then, made the participants in
the “salary” group more self-reliant and less willing to ask for help.
Indeed, just thinking about money makes us behave as
most economists believe we behave—and less like the social animals we are in
our daily lives.
SO WE LIVE in two worlds: one characterized by
social exchanges and the other characterized by market exchanges. And we apply
different norms to these two kinds of relationships. Moreover, introducing
market norms into social exchanges, as we have seen, violates the social norms
and hurts the relationships.
But once the fine was imposed, the day care center
had inadvertently replaced the social norms with market norms. Now that the
parents were paying for their tardiness, they interpreted the situation in
terms of market norms. In other words, since they were being fined, they could
decide for themselves whether to be late or not, and they frequently chose to
be late.
This experiment illustrates an unfortunate fact:
when a social norm collides with a market norm, the social norm goes away for a
long time. In other words, social relationships are not easy to reestablish.
Here are some answers. Asking a friend to help move
a large piece of furniture or a few boxes is fine. But asking a friend to help
move a lot of boxes or furniture is not—especially if the friend is working
side by side with movers who are getting paid for the same task. In this case,
your friend might begin to feel that he’s being used. Similarly, asking your
neighbor (who happens to be a lawyer) to bring in your mail while you’re on
vacation is fine. But asking him to spend the same amount of time preparing a
rental contract for you—free—is not.
What’s the upshot? If you’re a company, my advice is
to remember that you can’t have it both ways. You can’t treat your customers
like family one moment and then treat them impersonally—or,
My feeling so far is that standardized testing and
performance-based salaries are likely to push education from social norms to
market norms.
We should probably first rethink school curricula,
and link them in more obvious ways to social goals (elimination of poverty and
crime, elevation of human rights, etc.), technological goals (boosting energy
conservation, space exploration, nanotechnology, etc.), and medical goals
(cures for cancer, diabetes, obesity, etc.) that we care about as a society.
This way the students, teachers, and parents might see the larger point in
education and become more enthusiastic and motivated about it.
MONEY, AS IT turns out, is very often the most
expensive way to motivate people.
The answer, I believe, is not to re-create society
as Burning Man, but to remember that social norms can play a far greater role
in society than we have been giving them credit for. If we contemplate how
market norms have gradually taken over our lives in the past few decades—with
their emphasis on higher salaries, more income, and more spending—we may
recognize that a return to some of the old social norms might not be so bad
after all.
Beset by this nightmarish vision, Robert Louis
Stevenson screamed in his sleep in the early hours of an autumn morning in
1885. Immediately after his wife awoke him, he set to work on what he called a
“fine bogey tale”—Dr. Jekyll and Mr. Hyde—in which he said, “Man is not truly
one, but truly two.”
In Freudian terms, each of us houses a dark self, an
id, a brute that can unpredictably wrest control away from the superego.
every one of us, regardless of how “good” we are,
underpredicts the effect of passion on our behavior.
A better strategy, for those who want to guarantee
that teenagers avoid sex, is to teach teenagers that they must walk away from
the fire of passion before they are close enough to be drawn in. Accepting this
advice might not be easy, but our results suggest that it is easier for them to
fight temptation before it arises than after it has started to lure them in. In
other words, avoiding temptation altogether is easier than overcoming it.
But to make informed decisions we need to somehow
experience and understand the emotional state we will be in at the other side
of the experience. Learning how to bridge this gap is essential to making some
of the important decisions of our lives.
We need to explore the two sides of ourselves; we
need to understand the cold state and the hot state; we need to see how the gap
between the hot and cold states benefits our lives, and where it leads us
astray.
IN CHAPTER 5 we discussed how emotions grab hold of
us and make us view the world from a different perspective. Procrastination
(from the Latin pro, meaning for; and cras, meaning tomorrow) is rooted in the
same kind of problem. When we promise to save our money, we are in a cool state.
When we promise to exercise and watch our diet, again we’re cool. But then the
lava flow of hot emotion comes rushing in: just when we promise to save, we see
a new car, a mountain bike, or a pair of shoes that we must have. Just when we
plan to exercise regularly, we find a reason to sit all day in front of the
television. And as for the diet? I’ll take that slice of chocolate cake and
begin the diet in earnest tomorrow. Giving up on our long-term goals for
immediate gratification, my friends, is procrastination
What do these results suggest? First, that students
do procrastinate (big news); and second, that tightly restricting their freedom
(equally spaced deadlines, imposed from above) is the best cure for procrastination.
But the biggest revelation is that simply offering the students a tool by which
they could precommit to deadlines helped them achieve better grades.
Interestingly, these results suggest that although
almost everyone has problems with procrastination, those who recognize and
admit their weakness are in a better position to utilize available tools for
precommitment and by doing so, help themselves overcome it.
students—failing over and over to reach our
long-term goals. Why? Because without precommitments, we keep on falling for
temptation.
It seems that the best course might be to give
people an opportunity to commit up front to their preferred path of action.
This approach might not be as effective as the dictatorial treatment, but it
can help push us in the right direction
What’s the bottom line? We have problems with
self-control, related to immediate and delayed gratification—no doubt there.
But each of the problems we face has potential self-control
WHAT OTHER PROCRASTINATION problems might
precommitment mechanisms solve?
A few years ago, for instance, I heard about the
“ice glass” method for reducing credit card spending. It’s a home remedy for
impulsive spending. You put your credit card into a glass of water and put the
glass in the freezer. Then, when you impulsively decide to make a purchase, you
must first wait for the ice to thaw before extracting the card.
But this caveat aside, we still believed that in
general the ownership of something increases its value in the owner’s eyes.
tickets—so dramatically? OWNERSHIP PERVADES
OUR lives and, in a strange way, shapes many of
the things we do.
The second quirk is that we focus on what we may
lose, rather than what we may gain.
Our aversion to loss is a strong emotion,
The third quirk is that we assume other people will
see the transaction from the same perspective as we do.
CHAPTER 8 Keeping Doors Open Why Options Distract Us
from Our Main Objective
Xiang Yu explained to his troops that without the
pots and the ships, they had no other choice but to fight their way to victory
or perish. That did not earn Xiang Yu a place on the Chinese army’s list of
favorite commanders, but it did have a tremendous focusing effect on his
troops: grabbing their lances and bows, they charged ferociously against the
enemy and won nine consecutive battles, completely obliterating the main-force
units of the Qin dynasty.
In the context of today’s world, we work just as
feverishly to keep all our options open.
In running back and forth among the things that
might be important, we forget to spend enough time on what really is important.
What is it about options that is so difficult for
us? Why do we feel compelled to keep as many doors open as possible, even at
great expense? Why can’t we simply commit ourselves?
HOW CAN WE unshackle ourselves from this irrational
impulse to chase worthless options? In 1941 the philosopher Erich Fromm wrote a
book called Escape from Freedom. In a modern democracy, he said, people are
beset not by a lack of opportunity, but by a dizzying abundance of it. In our
modern society this is emphatically so. We are continually reminded that we can
do anything and be anything we want to be. The problem is in living up to this
dream.
But even stranger is our compulsion to chase after
doors of little worth—opportunities that are nearly dead, or that hold little
interest for us.
In our experiments, we proved that running
helter-skelter to keep doors from closing is a fool’s game. It will not only
wear out our emotions but also wear out our wallets. What we need is to
consciously start closing some of our doors. Small doors,
We have an irrational compulsion to keep doors open.
It’s just the way we’re wired.
CHAPTER 9 The Effect of Expectations Why the Mind
Gets What It Expects
a series of simple experiments to explore how
previously held impressions can cloud our point of view.
The moral, as you might expect, is that if you tell
people up front that something might be distasteful, the odds are good that
they will end up agreeing with you—not because their experience tells them so
but because of their expectations.
When the coffee ambience looked upscale, in other
words, the coffee tasted upscale as well.
WHEN WE BELIEVE beforehand that something will be good,
therefore, it generally will be good—and when we think it will be bad, it will
bad.
AS YOU SEE, expectations can influence nearly every
aspect of our life.
That’s what marketing is all about—providing
information that will heighten someone’s anticipated and real pleasure.
Whenever a person received a squirt of Coke or
Pepsi, the center of the brain associated with strong feelings of emotional
connection—called the ventromedial prefrontal cortex, VMPFC—was stimulated. But
when the participants knew they were going to get a squirt of Coke, something
additional happened. This time, the frontal area of the brain—the dorsolateral
aspect of the prefrontal cortex, DLPFC, an area involved in higher human brain
functions like working memory, associations, and higher-order cognitions and
ideas—was also activated. It happened with Pepsi—but even more so with Coke
(and, naturally, the response was stronger
It is also interesting to consider the ways in which
the frontal part of the brain is connected to the pleasure center. There is a
dopamine link by which the front part of the brain projects and activates the
pleasure centers.
EXPECTATIONS ALSO SHAPE stereotypes. A stereotype,
after all, is a way of categorizing information, in the hope of predicting
experiences. The brain cannot start from scratch at every new situation. It
must build on what it has seen before. For that reason, stereotypes are not
intrinsically malevolent. They provide shortcuts in our never-ending attempt to
make sense of complicated surroundings.
In one notable study, John Bargh, Mark Chen, and
Lara Burrows had participants complete a scrambled-sentence task, rearranging
the order of words to form sentences
Those who had worked with the set of polite words
patiently waited for about 9.3 minutes before they interrupted, whereas those
who had worked with the set of rude words waited only about 5.5 minutes before
interrupting.
CHAPTER 10 The Power of Price Why a 50-Cent Aspirin
Can Do What a Penny Aspirin Can’t
PLACEBO COMES FROM the Latin for “I shall please.”
The term was used in the fourteenth century to refer to sham mourners who were
hired to wail and sob for the deceased at funerals. By 1785 it appeared in the
New Medical Dictionary, attached to marginal practices of medicine. One of the
earliest recorded examples of the placebo effect in medical literature dates
from 1794. An Italian physician named Gerbi made an odd discovery: when he
rubbed the secretions of a certain type of worm on an aching tooth, the pain
went away for a year.
The truth is that placebos run on the power of
suggestion. They are effective because people believe in them.
IN GENERAL, TWO mechanisms shape the expectations
that make placebos work. One is belief—our confidence or faith in the drug, the
procedure, or the caregiver.
The second mechanism is conditioning. Like Pavlov’s
famous dogs (that learned to salivate at the ring of a bell), the body builds
up expectancy after repeated experiences and releases various chemicals to
prepare us for the future.
In the case of pain, expectation can unleash
hormones and neurotransmitters, such as endorphins and opiates, that not only
block agony but produce exuberant highs (endorphins trigger the same receptors
as morphine).
We tried this in a series of experiments, and found
that consumers who stop to reflect about the relationship between price and
quality are far less likely to assume that a discounted drink is less effective
In AD 800, Pope Leo III crowned Charlemagne emperor
of the Romans, thus establishing a direct link between church and state. From
then on the Holy Roman emperors, followed by the kings of Europe, were imbued
with the glow of divinity. Out of this came what was called the “royal
touch”—the practice of healing people. Throughout the Middle Ages, as one
historian after another chronicled, the great kings would regularly pass
through the crowds, dispensing the royal touch.
But, there is nothing “just” about the power of a
placebo, and in reality it represents the amazing way our mind controls our
body. How the mind achieves these amazing outcomes is not always very clear.*
Some of the effect, to be sure, has to do with reducing the level of stress,
changing hormonal secretions, changing the immune system, etc. The more we
understand the connection between brain and body, the more things that once
seemed clear-cut become ambiguous. Nowhere is this as apparent as with the
placebo.
But we’ve seen that the perception of value, in
medicine, soft drinks, drugstore cosmetics, or cars, can become real value.
CHAPTER 11 The Context of Our Character, Part I Why
We Are Dishonest, and What We Can Do about It
Sigmund Freud explained it this way. He said that as
we grow up in society, we internalize the social virtues. This internalization
leads to the development of the superego. In general, the superego is pleased
when we comply with society’s ethics, and unhappy when we don’t.
we want to be honest. The problem is that our
internal honesty monitor is active only when we contemplate big transgressions,
like grabbing an entire box of pens from the conference hall. For the little
transgressions, like taking a single pen or two pens, we don’t even consider
how these actions would reflect on our honesty and so our superego stays
asleep.
What especially impressed me about the experiment
with the Ten Commandments was that the students who could remember only one or
two Commandments were as affected by them as the students who remembered nearly
all ten. This indicated that it was not the Commandments themselves that
encouraged honesty, but the mere contemplation of a moral benchmark of some
kind.
So we learned that people cheat when they have a
chance to do so, but they don’t cheat as much as they could. Moreover, once
they begin thinking about honesty—whether by recalling the Ten Commandments or
by signing a simple statement—they stop cheating completely. In other words,
when we are removed from any benchmarks of ethical thought, we tend to stray
into dishonesty. But if we are reminded of morality at the moment we are tempted,
then we are much more likely to be honest.
I said in Chapter 4 that when social norms collide
with market norms, the social norms go away and the market norms stay. Even if
the analogy is not exact, honesty offers a related lesson: once professional
ethics (the social norms) have declined, getting them back won’t be easy.
Another path is to first recognize that when we get
into situations where our personal financial benefit stands in opposition to
our moral standards, we are able to “bend” reality, see the world in terms
compatible with our selfish interest, and become dishonest.
CHAPTER 12 The Context of Our Character, Part II Why
Dealing with Cash Makes Us More Honest
When we look
at the world around us, much of the dishonesty we see involves cheating that is
one step removed from cash.
When we deal with money, we are primed to think
about our actions as if we had just signed an honor code.
But look at the latitude we have with nonmonetary
exchanges. There’s always a convenient rationale. We can take a pencil from
work, a Coke from the fridge—we can even backdate our stock options—and find a
story to explain it all. We can be dishonest without thinking of ourselves as
dishonest. We can steal while our conscience is apparently fast asleep.
CHAPTER 13 Beer and Free Lunches What Is Behavioral
Economics, and Where Are the Free Lunches?
But, as the results presented in this book (and others)
show, we are all far less rational in our decision making than standard
economic theory assumes. Our irrational behaviors are neither random nor
senseless—they are systematic and predictable. We all make the same types of
mistakes over and over, because of the basic wiring of our brains.
Behavioral economists, on the other hand, believe
that people are susceptible to irrelevant influences from their immediate
environment (which we call context effects), irrelevant emotions,
shortsightedness, and other forms of irrationality (see any chapter in this
book or any research paper in behavioral economics for more examples).
IF I WERE to distill one main lesson from the
research described in this book, it is that we are pawns in a game whose forces
we largely fail to comprehend. We usually think of ourselves as sitting in the
driver’s seat, with ultimate control over the decisions we make and the
direction our life takes; but, alas, this perception has more to do with our
desires—with how we want to view ourselves—than with reality.
Visual illusions are also illustrative here. Just as
we can’t help being fooled by visual illusions, we fall for the “decision
illusions” our minds show us. The point is that our visual and decision
environments are filtered to us courtesy of our eyes, our ears, our senses of
smell and touch, and the master of it all, our brain. By the time we comprehend
and digest information, it is not necessarily a true reflection of reality.
Instead, it is our representation of reality, and this is the input we base our
decisions on.
A second main lesson is that although irrationality
is commonplace, it does not necessarily mean that we are helpless. Once we
understand when and where we may make erroneous decisions, we can try to be
more vigilant, force ourselves to think differently about these decisions, or
use technology to overcome our inherent shortcomings.
