Posts Tagged ‘Predictably Irrational’

Some Things I Learned From Dan Ariely’s “Predictably Irrational”

June 16, 2009

Picture 25I just finished Dan Ariely’s Predictably Irrational: The Hidden Forces That Shape Our Decisions, which is in the recent tradition of popular behavioral economics-type books (which includes Freakonomics, Buyology, Logic of Life, Nudge…all which are pretty worthwhile). Ariely focuses on the predictable ways in which we are ridiculous.

Here are a few insights/ideas that struck me:

  • Decoy Effect: Ariely describes how we don’t choose on the basis of absolutes (“How good is this thing?”) but instead focus on the relative advantages of one thing over another (“Is this thing better than that thing?”). As a result, our preference to make comparisons between things that are similar can influence when we’re confronted between two options that aren’t similar (and furthermore how pricing strategists take advantage of this preference). For example, it’s difficult to compare(and thus choose between) similarly priced vacations to Paris that’ll include free breakfast and one to Rome that will also include free breakfast.  However, if you introduce a third option, a trip to Rome without free breakfast (the decoy), people will tend to choose the trip to Rome with free breakfast over the similarly priced and breakfasted trip to Paris. He uses the alarming example of a kitchen equipment store that couldn’t sell the one bread machine model they had. The solution: add another bread machine, but one that’s 50% more expensive. As a result, the original model start selling. He also notes how you can use this decoy effect for evil in singles situations by hanging out with a friend slightly less attractive or witty. By comparison, you come out far more appealing than you would otherwise. The way to overcome this effect is to think more broadly.  Sure the cheaper bread machine is more appealling, but do you really need a bread machine period.
  • Endowment Effect: This effect describes how we tend to value what we own more than others would. Areily proves this phenomenon with a few of his own experiments (BTW … If I were a student of M.I.T., I’d be really weary about becoming duped by one of this guy’s “experiments,” most which occur on campus and involve some degree of manipulation … but they’re still fun to read about.) Ariely connects this over-valuation to our fear of change and of loss. It’s a psychological myopia that it would be best to be detached from. Perhaps with yoga? 
  • Imprinting/Arbitrary Coherence: Apparently, when it comes to pricing we’re like goslings. Just like when a gosling hatches and unquestioningly assumes the first moving thing it sees is Mom (called imprinting), just so do we uncritically accept the price of a new product we’ve never seen before. After which, they assume an “arbitrary coherence,” meaning however arbitrary the initial price was, once established and “imprinted,” it will shape the present and future price (thus its coherence). Phenomena like this debunk the traditional notion that the market forces of supply and demand determines optimal price. Since free markets won’t maximize our utility, government regulation becomes really attractive.

These was also a chapter on how we split the world into 2 parts, one where market norms rule, and the other where social norms. For a really neat take on the latter, I strongly suggest The Gift: Creativity and the Artist in the Modern World by Lewis Hyde, which talks about the gift economy and how it functions in creative production.

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