Predictably Irrational by Dan Ariely: Notes10 min read

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Predictably Irrational explains the hidden forces that really drive how we make decisions, which are far less rational than we think, but can help us stay on top of our finances, interact better with others and live happier lives, once we know about them.

Dan is  a professor of psychology and behavioral economics and researches on how we make choices. How we decide what things are worth to us, what influences the way we experience the world and how we tackle long-term goals are all shockingly irrational, and this book sheds some light on just how incoherent we are, so you can be more reasonable in the future.

#3 lessons

  • We compare whatever we can, so give others easy comparisonsto pick you.
  • Free is really just another price, but a powerful one.
  • You overvalue what you own.

Lesson 1: Give others easy comparisons, so they’ll value you more highly.

Imagine you’re trying to buy a new lawnmower, one of those fancy ones you can sit on and drive around. The local brick and mortar store around the corner has some, but just one model, and it’s priced at $3,000. Is that good or bad?

It’s really tough to say, isn’t it, without having something to compare it against to?

Let’s say you walk down the street and find another store, which has two different models, the first one you saw at the first store, and another one, which has slightly better functionality and looks better, but costs more than double, $7,000! This makes it a lot easier to pick the first one, doesn’t it?

We’re wired to compare things, and our brains do so in the easiest way possible.

We compare what’s right in front of us, not necessarily what we should think about or look at that might not be around at the time.

So if you give people options to compare yourself or your products to, which are slightly worse, they’ll pick you more often.

For example, if you’re single, and you show up at the club with a friend, who looks similar, but slightly less attractive than you, people will always compare the two of you against one another. It’s a lot easier to compare you two than to compare one of you with all the other, different looking people, or people they saw a week ago at another club, so if you can get people to think you’re hotter than your friend, they’ll likely even think you’re the prettiest person at the club!

Offering comparisons means selling, and while experiments like the one above are fun, you shouldn’t abuse this. Plus, for the sake of your own happiness, it’s best to try and stop comparing altogether.

Lesson 2: Free is just another kind of price, but a very powerful one.

When people hear something is free they go insane. Do you have a box at home with free gifts you’ve collected over the years, that you never use, but still keep? Or do you always go for the “buy one, get one free” deal when it’s offered to you?

Dan Ariely says free is a powerful emotional trigger, but at its core, it’s just another price – the price of zero dollars.

However, the difference between $0 and even just $0.01 is huge. When Dan did a study offering people to buy a Lindt truffle for $0.26 or a Hershey’s kiss for $0.01, the groups were split evenly (40% for each of the chocolates, with 20% of people buying nothing). But when they reduced both prices by one cent, making the cost of the truffle $0.25, but the cost of the Hershey’s kisses $0.00 (=free), 90% decided to go for the Hershey’s kisses, even though the difference in price was the same.

This has to do with our incredibly strong tendency to avoid losses wherever possible. If we buy something and it’s bad, we lose money. But if we get something for free, the potential downside is zero, but it still might be good for us, so we value free items disproportionately high.

Lesson 3: The endowment effect causes you to overvalue what you own.

In a funny video of one of his shows, famous stand up comedian George Carlin says about how we look at other people’s possessions: “Have you ever noticed that their stuff is shit and your shit is stuff?”

In a nutshell, this expresses the economic concept of the endowment effect – the fact that we value things more highly once we own them.

For example, if you bought that Lindt truffle in the above example for $0.26 cents, chances are you wouldn’t sell it to me at that price after you’ve had it for even just a minute. You’d likely quote me a price that’s somewhere around twice as high, maybe $0.50.

At Duke University, this phenomenon was investigated with baseball tickets. To get one you have to enter a lottery, so all participants are equally likely to get a ticket, or not. But once the tickets have been distributed, those who won them wouldn’t sell them for less than a staggering $2,400, while those who didn’t win any wouldn’t pay more than $170.

That’s the endowment effect at work and it’s based on three things:

We love what we own, simply because of our memories and fantasies about it (“I loved wearing this shirt at work/I’ll have so much fun at the game”).

We hate losing things we own, whereas we don’t mind missing out on something all that much.

We expect others to think highly of the same things we do (“If I like this carpet, I’m sure all my friends will like it too).

Predictably Irrational by Dan Ariely

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Detailed Summary

Many of our behaviors are misguided.

But they’re not random; they’re systematic and predictable.

By recognizing our irrational patterns, we can make better decisions in life and business.

The Five Big Ideas

We tend to focus on what we may lose, rather than what we may gain.

With everything you do, you should train yourself to question your repeated behaviors.

We assume other people will see monetary transactions from the same perspective as we do.

People will work more for a cause than for cash.

Giving up on our long-term goals for immediate gratification is procrastination.

Predictably Irrational Summary

“Humans rarely choose things in absolute terms.”

We tend to focus on the relative advantage of one thing over another, and estimate value accordingly.

“Most people don’t know what they want unless they see it in context.”

Gregg Rapp, a restaurant consultant, discovered high-priced entrées on the menu boost revenue for the restaurant—even if no one buys them. Why? Because even though people generally won’t buy the most expensive dish on the menu, they will order the second most expensive dish.

“We are always looking at the things around us in relation to others.”

“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.”

“The more we have, the more we want. And the only cure is to break the cycle of relativity.”

“Once we buy a new product at a particular price, we become anchored to that price.”

“The basic idea of arbitrary coherence is this: although initial prices are ‘arbitrary,’ once those prices are established in our minds they will shape not only present prices but also future prices (this makes them ‘coherent’).”

“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).”

Price tags become anchors when we contemplate buying a product or service at that particular price.

“The first anchor influences not only the immediate buying decision but many others that follow.”

Herding 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.

Self-herding happens when we believe something is good (or bad) on the basis of our own previous behavior.

To improve an irrational behavior, ask yourself, “How did it begin? Second, ask yourself, “What amount of pleasure will I be getting out of it. Is the pleasure as much as I thought I would get?”

With everything you do, you should train yourself to question your repeated behaviors.

Ariely on decision-making:

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.). When we face such a decision, it might seem to us that this is just one decision, without large consequences; 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. Given this effect, the first decision is crucial, and we should give it an appropriate amount of attention.

“The sensitivity we show to price changes might in fact be largely a result of our memory for the prices we have paid in the past and our desire for coherence with our past decisions—not at all a reflection of our true preferences or our level of demand.”

According to Margaret Clark, Judson Mills, and Alan Fiske, we live simultaneously in two different worlds—one where social norms prevail, and the other where market norms make the rules.

People will work more for a cause than for cash.

“No one is offended by a small gift, because even small gifts keep us in the social exchange world and away from market norms.”

“When a social norm collides with a market norm, the social norm goes away for a long time.”

“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.”

Giving up on our long-term goals for immediate gratification is procrastination.

When Ariely offered his students a tool by which they could pre commit to deadlines, they achieved better grades.

A good course of action is to give people an opportunity to commit upfront to their preferred path of action.

The endowment effect is our tendency to value what we own more than other people do.

Our aversion to loss is a strong emotion and one that sometimes causes us to make bad decisions.

We assume other people will see monetary transactions from the same perspective as we do.

The more work you put into something, the more ownership you begin to feel for it.

We can begin to feel ownership even before we own something (this applies to points of view, too).

Given a simple setup and a clear goal, all of us are quite adept at pursuing the source of our satisfaction.

“Research on stereotypes shows not only that we react differently when we have a stereotype of a certain group of people, but also that stereotyped people themselves react differently when they are aware of the label that they are forced to wear (in psychological parlance, they are “primed” with this label).”

“Since people engage in a cost-benefit analysis with regard to honesty, they can also engage in a cost-benefit analysis to be dishonest.”

“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.”

“Cheating is a lot easier when it’s a step removed from money.”

“People are sometimes willing to sacrifice the pleasure they get from a particular consumption experience in order to project a certain image to others.”

Recommended Reading

If you like Predictably Irrational, you may also enjoy the following books:

Contagious: Why Things Catch On by Jonah Berger

Drive: The Surprising Truth About What Motivates Us by Daniel H. Pink

To Sell Is Human: The Surprising Truth About Persuading, Convincing, and Influencing Others by Daniel H Pink

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