Predictably Irrational


Predictably Irrational

The Hidden Forces That Shape Our Decisions

book by Dan Ariely

 

This outline was written by Chris Yeh, made free as part of the The Book Outline Wiki.

 


 

Chapter 1: The Truth About Relativity

We always seek to draw comparisons, and we are often unaware as to how seemingly irrelevant factors such as the simple presentation of options, actually influence what we select.

 

Thus, given three choices, A, B (very distinct, but equally as attractive as A), and A- (similar to A, but inferior), we will almost always choose A, because it is clearly superior to A-.

Watch out for relative thinking; it comes naturally to all of us.

 

Chapter 2: The Fallacy of Supply and Demand

Anchoring has a major long-term effect on our willingness to pay.

Knowing the impact of anchoring, you should train yourself to question your repeated behaviors.  You should also pay particular attention to the first decision in a long stream of decisions.  It may seem like it is just one decision, but that first decision may have impact on future decisions for years to come.

The bigger picture is that supply and demand are not independent; supply-side variables like MSRP can impact willingness to pay.  Price "memory" can also have a major impact. Doubling the price of milk and halving the price of wine would have a major short-term impact, but it's unlikely to have a long-term impact on consumption patterns. And if you induced amnesia about the previous prices, it might have nearly no impact at all.

 

Chapter 3: The Cost of Zero Cost

Why we often pay too much when we pay nothing

Zero/free is a source of irrational excitement.  This is called the "zero price effect."

 

Chapter 4: The Cost of Social Norms

Why we are happy to do things, but not when we are paid to do them.

Imagine the scene if, after Thanksgiving dinner at your mother-in-law's house, you pulled out your wallet and asked, "How much do I owe you?"

 

Chapter 5: The Influence of Arousal

Why Hot Is Much Hotter Than We Realize

 

Chapter 6: The Problem of Procrastination and Self-Control

Why We Can't Make Ourselves Do What We Want To Do

 

Chapter 7: The High Price of Ownership

Why We Overvalue What We Have

The "endowment effect" means that when we own something, we begin to value it more than other people do.

Ariely and Carmon conducted an experiment on Duke students, who sleep out for weeks to get basketball tickets; even those who sleep out are still subjected to a lottery at the end.  Some students get tickets, some don't.

There are three fundamental quirks of human nature:

Peculiarities of ownership:

To counteract the endowment effect, try to view all transactions as a non-owner. (Editor's note: This explains the efficacy of one of my favorite questions: "Assuming you hadn't done X, would you still do it now?")

 

Chapter 8: Keeping Doors Open

Why Options Distract Us from Our Main Objective

In 210 BC, Xiang Yu led an army against the Ch'in Dynasty.  While his troops slept, he burned his ships and smashed all the cooking pots.  He explained to his troops that they had to either fight their way to victory or die.  His troops won 9 consecutive battles.  Eliminating options improved the focus of his troops.

We feel compelled to preserve options, even at great expense, even when it doesn't make sense.

Ariely and Shin conducted an experiment on MIT students. They devised a computer game which offered players three doors: Red, Blue, and Green. You started with 100 clicks. You clicked to enter a room. Once in a room, each click netted you between 1-10 cents. You could also switch rooms (at the cost of a click). The rooms were programmed to provide different levels of rewards (there was variation within each room's payoffs, but it was pretty easy to tell which one provided the best payout).

"What we need to do is to consciously start closing some of our doors....We ought to shut them because they draw energy and commitment from the doors that should be left open--and because they drive us crazy."

Editor's note: This particular irrationality is covered well in "The Paradox of Choice" (alas, no outline yet).

 

Chapter 9: The Effect of Expectations

Why The Mind Gets What It Expects

Previously held expectations can cloud our point of view.

Ariely, Lee, and Frederick conducted yet another experiment on MIT students. They let students taste two different beers, and then choose to get a free pint of one of the brews.  Brew A was Budweiser.  Brew B was Budweiser, plus 2 drops of balsamic vinegar per ounce.

Ariely, Ofek, and Bertini then conducted another experiment, this time on Sloan students. They offered students a free cup of coffee and asked them to indicate how much they liked the coffee, and how much they'd be willing to pay for it. They also set out a table of condiments, some usual, some unusual (cloves, nutmeg, cardamom, etc.).

When we believe something will be good, it generally will be good, and when we think it will be bad, it will be bad.  But does finding out the truth after the experience change one's mind?

Ariely conducted the beer experiment again, but with a twist.  The students would taste the beer first.  Only then they would be told the truth.  And after that, they would be asked their opinions.

How can you use this knowledge?

Stereotypes

Policy implications for conflicts between groups

 

Chapter 10: The Power of Price

Why a 50-Cent Aspirin Can Do What A Penny Aspirin Can't

The placebo effect is well-known and real.  It's not just a matter of fooling oneself; placebos can actually trigger endorphins and opiates and other biological reactions that actually change body and experience. What is interesting, however, is that price has an impact on efficacy.

Ariely, Waber, Shiv, and Carmon made up a fake painkiller, Veladone-Rx. An attractive woman in a business suit (with a faint Russian accent) told subjects that 92% of patients receiving VR reported significant pain relief in 10 minutes, with relief lasting up to 8 hours.

 

Chapter 11: The Context of Our Character, Part 1

Why We Are Dishonest, and What We Can Do About It

Ariely conducted an experiment on Harvard students. He gave students a 50-question, multiple-choice quiz.  They would take the quiz, then transfer the answers to a Scantron sheet.  The students received $0.10 for each correct answer.  The results were as follows:

 

Chapter 12: The Context of Our Character, Part 2

Why Dealing With Cash Makes Us More Honest

Ariely conducted an experiment on MIT's communal refrigerators.

Ariely returned to the honesty tests, but with a twist: Students told the proctor their score.  The proctor gave them tokens.  The students would then walk to another experimenter and trade the tokens for cash.

We have no idea how dishonest we are

 

Chapter 13: Beer and Free Lunches

What Is Behavioral Economics, and Where Are the Free Lunches?

Experiment 1: Beer ordering.  A group of 4 is offered a choice of 4 different beers.

"We are all far less rational in our decisionmaking than standard economic theory assumes. Our irrational behaviors are neither random nor senseless--they are systematic and predictable.  So wouldn't economics make a lot more sense if it were based on how people actually behave?  That simple idea is the basis of behavioral economics."