Predictably Irrational: Book Review

Predictably Irrational: The Hidden Forces That Shape Our Decisions, Dan Ariely, 2008.

Introduction: How an Injury Led Me to Irrationality and to the Research Described Here. Ariely was horribly burned and suffered from his long hospital stays. He thought the nurses were being irrational in treating him. “Science is an empirical endeavor in which all the participants, including a new student like myself, could come up with alternative theories, as long as they found empirical ways to test these theories” (p. xiv); ergo, the nurses had a bad theory dealing with pain. Ariely ended up in behavioral economics, roughly adding psychology to combat the idea of rational decision making, with market forces key. “We are not only irrational, but predictably irrational” (p. xx).

Chapter 1: The Truth About Relativity: Why Everything is Relative—Even When it Shouldn’t Be. “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. … Most people don’t know what they want unless they see it in context. … Given three choices, most people will take the middle choice” (p. 2). People compare things that are easily comparable: two things that are similar plus a “decoy.” The decoy effect is used often.

Regulators forced executives to report their salaries assuming this would shame them to accept “reasonable compensation.” Nope, they wanted more than competitors.

Chapter 2: The Fallacy of Supply and Demand: Why the Price of Pearls—and Everything Else—is Up in the Air. A merchant obtained black pearls for which there was no market. Proper advertising resulted in great demand at an outrageous price.

Goslings imprint on the first moving object they encounter: imprinting. This is similar to an anchor, the first price, which has an effect on our willingness to want a product. People will imprint on their own social security number (say last 4 digits are high or low as an anchor), arbitrary coherence. Herding: something is good or bad based on other people’s behavior. Self-herding: attitude based on own previous behavior (like addicted to Starbucks). This violates the economic theory of knowing fundamental values. Willingness to pay can be manipulated.

Chapter 3: The Cost of Zero Cost: Why We Often Pay Too Much When We Pay Nothing. “Zero is an emotional hot button” (p. 55). The Babylonians came up with the zero, then India using zero as a place holder for double digits. Experiment: Lindt truffle for 14 cents or a free Kiss. Most took the kiss. The common, “free second pair.” “When something is free we forget the downside” (p. 60). Amazon offers free shipping (shipping for 1 cent was ignored). Then free museum day, zero calories.

Chapter 4; The Cost of Social Norms: Why We Are Happy to do Things, but not when we are paid to do them. Social norms versus market norms. For market transactions, more money increases motivation. Volunteers work about as hard as well-paid workers and more than poorly paid workers. Lawyers would not work for lower rates for seniors, but would do pro bono work. Gifts are a method of exchange for social norms. Experiment results: “no one is offended by a small gift … in the social exchange world” (p. 80). Paid workers were more self-reliant, less willing to ask for help, and less willing to help others. Treating customers socially results in loyalty. “Money is often the most expensive way to motivate people. Social norms are cheaper, but often more effective” (p. 94).

Chapter 5: The Power of a Free Cookie: How Free Can Make Us Less Selfish. “When we offer a financial payment in a situation that is governed by social norms, the added payment could actually reduce their motivation to engage and help out” (p. 105). Economic exchanges are selfish and can be unfair. An exchange without price reduces selfishness. Experiment with chocolate charging 1 cent (selfish), free (polite acceptance).

Chapter 6: The Influence of Arousal: Why Hot is Much Hotter Than We Realize. Rational thinking disappears when aroused (think sex). The men “in a cold, rational, superego-driven state, respected women.  …The magnitude of underprediction by the participants was substantial. … Prevention, protection, conservatism, and morality disappeared. … Jekyll and Hyde” (p. 127), a dark self, underpredicting effect of passion on behavior. The same was expected when angry, hungry, or frightened. Safe driving was problematic, especially for teenagers.

Chapter 7. The Problem of Procrastination and Self-Control: Why We Can’t Make Ourselves Do What We Want to Do. Savings rates are high in Japan and China, and pretty good at 20% in Europe. It’s a poor 5% in the US. Easy credit and rampant consumerism are the problems, immediate gratification versus long-term goals. Student deadlines for classes worked best when rigid. Ditto, automatic payments into retirement, especially for raises. Oscar Wilde: “I never put off till tomorrow what I can do the day after.” BF Skinner had his “schedules of reinforcement” for his Skinner-box tests, using schedules to feed mice, with variable schedules working best for motivation. Delayed gratification also a problem with patient drugs, resulting in lack of medical compliance.

Chapter 8: The High Price of Ownership: Why We Overvalue What We Have. “Endowment effect”: when we own something we value it more than other people. His example was a valuable ticket: people were willing to pay $170, but they wanted on average $2400. “Aversion to loss,” pride of ownership, advertising industry claims “virtual ownership.” In 2007-8 home values collapsed, while owners believed the value of their home went up.

Chapter 9: Keeping Doors Open: Why Options Distract Us From Our Main Objective. In 210 BC, Chinese general Xiang Yu burned his fleet before attacking the Chine army, telling his army win or die, there was no other options. Most people want options, but often keep options open too long, the “door game.” That includes the irrational desire to chase worthless options or spreading too thin. Congress can gridlock over trivial details.

Chapter 10: The Effect of Expectations: Why the Mind Gets What It Expects. “Violence is not rare. It happens so frequently that we rarely stop to ask ourselves why. … Is there something fundamentally irrational in us that encourages conflict, that causes us to look at the same event and see it in totally different terms?” (p. 201). His experiment involved beer tasting. Tell the subject it will be distasteful and their agree, because that becomes their expectations. Those told after drinking liked it better. In the coffee experiment the free coffee tasted better in fancy containers. Suggestion: add small things to food that sound exotic and fashionable like chipotle-mango sauce.

Presentation is important. Fast food tastes better if it is placed on nice dishes. Building a brand reputation is what marketing is about: heighten anticipation and real pleasure. Coke marketing showed consumer preference when they could see what they were drinking, with red trademark. Coke over Pepsi was based on Coke’s brand. Expectations shape stereotypes (“primed with a label,” a way to categorize information). This can expect test taking. Experiments use tasks based on aggressive or rude versus honor or considerate. Music can be a filter. The appropriate setting if important to appreciate live music. Alexander Pope: “Blesses is he who expects nothing for he shall never be disappointed.”

Chapter 11: The Power of Price: Why a 50-Cent Aspirin Can Do What a Penny Aspirin Can’t. Doctors sometimes used placebo (Latin for “I shall please”) procedures: 1950 heart surgery: “traditional procedures seemed to provide some short-term relief—but so did the placebo, neither procedure provided significant long-term relief” (p. 226). Expectations can be shaped by belief or conditioning like Pavlov’s dogs. Expectations can unleash hormones and neurotransmitters that block pain. His experiments produced placebo effects on pain and drinks to reduce fatigue. Historically “the royal touch” of kings and others. “Placebos pose dilemmas for marketeers, too. Their profession requires them to create perceived value” (p. 242). Few surgical procedures are tested scientifically.  

Chapter 12: The Cycle of Distrust: Why We Don’t Believe What Marketers Tell Us. Experiment: offering free money: at $1 only 1% checked it out; at $50, it was only 19% of passersby. Presumably, most people thought it was a trick. Common land for grazing was common in the Middle Ages. “The tragedy of the commons” “defectors” betraying the social contract overgrazed and ruined the land. Overfishing depletes the population. “Participants liked the stereo more if they were told that favorable information came from Consumer Reports” (p. 264). Proactively addressing consumer complaints like J&J’s Tylenol poisoning can be effective. False claims increase distrust.

Chapter 13: The Context of Our Character, Part I: Why We Are Dishonest, and What We Can Do About It. Employee theft and fraud about $600 billion annually, plus $24 billion in bogus insurance claims. IRS loses $350 billion a year.

Do honest people cheat? On certain tests people might cheat a little. Control groups got 32.6 of 50 correct, cheating might at 3.6 questions. Fraud: people internalize social virtues. Apparently, this is important for big transgressions. Professions promote codes of ethics. If the organizations disappear, so do the codes. Lawyers are problematic ethically, but doctors often get away with transgressions. The US ranked 20th in world integrity in 2002.

Chapter 14: The Context of Our Character, Part II; Why Dealing with Cash Makes Us More Honest. Companies and executives cheat, as do lobbyists and drug companies; cheating is easier a but removed from money. He ran an experiment on paying for correct exam questions. The use of tokens instead of money substantially increased cheating. There is a lower boundary of dishonesty.

Chapter 15: Beer and Free Lunches: What is Behavioral Economics, and Where Are the Free Lunches? Standard economics assumes rationality and complete information. Behavioral economics assumes context effects, irrelevant influences, and other irrationalities. The acquisition of information is not the same as reality.