Summary and Analysis of Predictably Irrational: The Hidden Forces That Shape Our Decisions: Based on the Book by Dan Ariely
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Summary and Analysis of Predictably Irrational: The Hidden Forces That Shape Our Decisions: Based on the Book by Dan Ariely
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This short summary and analysis of Predictably Irrational includes:
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Predictably Irrational, the New York Times bestseller by Duke psychology and behavioral economics professor Dan Ariely, challenges the idea that we always make perfectly rational decisions. Featuring examples from daily life alongside results of his fascinating experiments, Ariely explains how emotional, psychological, and social factors can lead to irrational behavior—which can be damaging to ourselves and others.
From the coffee we drink or the medicine we take, to the companies we support and the relationships we value, we make irrational decisions every day that can cost us in the long run.
Ariely reveals not only when and how we tend to act irrationally, but why, so we can learn from our mistakes and design ways to facilitate smarter decision-making.
The summary and analysis in this ebook are intended to complement your reading experience and bring you closer to a great work of nonfiction.
Product Details
| ISBN-13: | 9781504044882 |
|---|---|
| Publisher: | Worth Books |
| Publication date: | 03/28/2017 |
| Series: | Smart Summaries |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 30 |
| File size: | 2 MB |
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Summary and Analysis of Predictably Irrational: The Hidden Forces That Shape Our Decisions
Based on the Book by Dan Ariely
By Worth Books
OPEN ROAD INTEGRATED MEDIA
Copyright © 2017 Open Road Integrated Media, Inc.All rights reserved.
ISBN: 978-1-5040-4488-2
CHAPTER 1
Summary
Introduction
When he was a teenager living in Israel, an explosion left more than 70% of Dan Ariely's body covered in third-degree burns. For three years, unable to participate in normal, daily life routines while undergoing treatments, he began observing how people around him acted and made decisions. One of the most painful parts of his recovery was the daily bath during which nurses ripped off the bandages covering his burns. Years later, as a student at Tel Aviv University, he decided to study the nature of pain — specifically, Was tearing off the bandages as quickly as possible the best strategy for a patient's well-being? He found that, contrary to his nurses' beliefs, people were better able to endure a lower level of pain over a longer period of time. When he discussed the results with his former nurses, one suggested that they ripped the bandages off quickly because it shortened the time of their own agony watching patients suffer.
Ariely realized that decisions — even those made in a hospital, an environment supposedly governed by rational science — were often made for irrational reasons. He wondered in what other situations people made such decisions — and if it would be possible to predict the circumstances under which we might act irrationally.
Need to Know: Behavioral economics is the study of how psychological, emotional, and other forces affect our decision-making.
Chapter 1: The Truth about Relativity
Why Everything Is Relative — Even When It Shouldn't Be
To demonstrate how comparisons and relativity affect decision-making, Ariely conducted an experiment using an offer he saw for subscription options to The Economist magazine. Given three choices ($59 for online-only access, $125 for a print-only subscription, or $125 for both print and online), study participants overwhelmingly chose the third option. However, when he conducted a study offering only the $59 online-only option and the $125 print-and-online choice, the majority opted for the first choice. Without having the middle option (a so-called "decoy") that established the value of print-only at $125, people couldn't compare the relative value of online-only versus print and online.
Companies use this strategy to encourage customers to spend more all the time. For example, when the kitchen supply store Williams-Sonoma introduced their first bread machine at the relatively expensive price of $275, it didn't sell — buyers had little knowledge of the bread-machine market, and no basis for comparison. However, when the company offered a second model at a 50% higher price, sales of the $275 model surged. In comparison, the cheaper model appeared to be a good value.
This concept of relative worth has societal implications. In 1993, federal security regulators began to require that companies reveal the pay of their top executives to stop outrageous salaries and benefits. The regulation ended up having the opposite effect. Now that CEOs could see how much their competitors were making — thus learning their relative value — they demanded to earn as much as their higher-paid peers. Currently, the average CEO makes three times as much as before their salaries were public.
Need to Know: We aren't very good at deciding the value of an item in a vacuum. Instead, we largely use comparisons to other items to determine its relative worth, or relative advantage — generally determining the value of an object based on its comparison to a similar, yet nonidentical, object. When we are aware of the theory of relative value, we can be more attuned to marketing strategies designed to take advantage of our innate desire to make comparisons.
Chapter 2: The Fallacy of Supply and Demand
Why the Price of Pearls — and Everything Else — Is Up in the Air
After World War II, Italian diamond dealer James Assael partnered with a Frenchman who offered him a large supply of black pearls. Although there was then no market for them, Assael enlisted his friend, jeweler Harry Winston, to help create demand. Winston advertised the black pearls alongside diamonds, rubies, and emeralds — and gave them an equally high price tag. This pricing gave consumers an "anchor" — and convinced them the pearls were of equal value to the gemstones. Assael and Winston were able to establish a high price-point for a product for which there was previously no demand.
This bit of history illuminates three important concepts of behavioral economics. The first, anchor price, refers to the initial price we see for a product, which establishes its value in our minds. The second, imprinting, is the natural phenomenon of influence by initial stimulus: like a baby gosling follows the first moving object it sees, linking that with "mother" in its mind, customers linked Harry Winston's glamorous display of black pearls to their worth. The third, arbitrary coherence, is the idea that no matter what factors affect our anchor price, once it's set in our minds, it will continue to influence how much we think the product is worth. This goes against the traditional economic theory that price is determined when supply and demand reach equilibrium.
Ariely and his colleagues conducted an experiment using participants' social security numbers to set pricing to prove just how arbitrary anchor prices can be. Participants first wrote down the last two digits of their social security numbers, and then wrote the prices they would pay for a number of items the experimenters presented — such as a high- and low-end wine, a keyboard, and a cordless trackball. All the participants' offers were logical — such as being willing to pay more for the higher end wine — but those whose social security numbers ended in higher numbers tended to price all the items higher.
Need to Know: The basis of the free market economy — in which we trade goods and services based on an assumption that all players in the market know the absolute value of them — is inherently flawed, since we don't always perceive value in the same way, and these perceptions can be influenced by the most meaningless of factors.
Chapter 3: The Cost of Zero Cost
Why We Often Pay Too Much When We Pay Nothing
Consumers are naturally loss-averse. Ariely hypothesizes that we are emotionally drawn to things that are "free" because we feel there is no risk of loss. "Free," in fact, is such a powerful concept that it erodes our ability to make rational decisions based on cost-benefit analysis. It often even ends up costing us money, as when we buy something we don't need because it comes with a "free gift," or buy an item we don't like to take advantage of a "buy one get one free" promotion.
In one experiment, Ariely sets up a table in a public building offering Lindt truffles for 15 cents and Hershey's Kisses for 1 cent. As the truffles are of a much higher quality than the Kisses and were offered at a better value, most people made the rational choice, and bought the truffles. However, when the prices were changed to 14 cents for a truffle, with Kisses free, more people took the Kisses. The price differential was the same, but the option of having something for free is powerful enough to trump absolute value in our calculations.
When Amazon.com first offered free shipping for orders over a certain price, their average order price increased in nearly all markets, as people opted for additional items to qualify for the free shipping. However, this did not happen in France, where Amazon made the promotional shipping price 1 franc (about 20 cents) for orders above that same threshold. Even though that shipping price was negligible, customers were not motivated to buy more to reach it. But once Amazon offered free shipping in France, the French followed suit. The offer of "free" once again proved powerful enough for consumers to buy items they may not have previously wanted or needed.
Ariely argues that this natural attraction to "free" can be used for positive change in social policy. For instance, offering free registration and inspection for hybrid cars could encourage consumers to purchase these more energy-efficient vehicles, which would have a net positive effect on our environment. Free health-care screenings could save lives and health-care costs, as they would draw in people who might not otherwise want to spend money at a doctor to be screened for cancer or other potentially fatal diseases.
Need to Know: Though offering something for "free" will cause people to disregard a traditional cost-benefit analysis, this can be used for good when "free" items encourage people to take actions beneficial to society.
Chapter 4: The Cost of Social Norms
Why We Are Happy to Do Things, but Not When We Are Paid to Do Them
Introducing market norms to social situations can powerfully weaken social bonds. In one study, an Israeli day care introduced a fine for parents who were late picking up their children. However, once parents viewed their lateness as a pure financial transaction, they no longer felt guilty for inconveniencing the teachers. In fact, they were late more often, because they saw the fine as payment for a service, rather than a penalty for being inconsiderate. Even when the penalty was lifted, parents continued to arrive late. Once the day care had changed to a market relationship with the parents, and not a social bond, it was difficult to reverse.
In a similar situation, the AARP asked lawyers to perform legal services for senior citizens for $30 an hour, far less than their normal rates. Most said no. In market terms, it made little sense for lawyers to accept a lower price for services for which they would normally be paid much more. However, when the AARP asked the lawyers to perform the same services for seniors for free, they overwhelmingly agreed. When social norms replaced market norms, they saw the service not as a financial transaction, but as a compassionate act.
Seeing this benefit, companies have begun to use social norms in their marketing to try to appear as a "friend" to customers. However, if their actual behavior to the customer isn't consistent with these social norms, customers will revert to seeing the relationship as a simple financial transaction. By the same token, employers can create social bonds with their employees by offering benefits and incentives (such as a great cafeteria, or better health care) rather than depending on raises to boost morale and productivity.
Need to Know: There are cases where market norms — traditional financial rules that assume goods and services have economic value and should be paid for accordingly — are trumped by social norms that affect our behavior as social animals, such as our relationships, communities, and obligations to others.
Chapter 5: The Power of a Free Cookie
How Free Can Make Us Less Selfish
The power of social norms described in the previous chapter can be used to positively influence the behavior of individuals as well as institutions.
In an experiment Ariely conducted at the MIT student center, he first set up a table with a sign offering Starbursts for a penny. Students who came to the table bought an average of 3.5 candies. But when Ariely set up a new table offering free Starbursts, though more students came to the table (the power of "free"), on average, they took only 1.1 candies. When money wasn't part of the equation, students made their decision based on social norms and not market terms — they did not want to seem greedy, and felt a social obligation to leave some for others.
However, market norms also have the power to corrupt situations involving communal resources. Consider the Cap and Trade system, which is designed to reduce carbon emissions by requiring companies to pay for producing carbon emissions above a certain threshold (cap). Companies who do not use all their allowances can profit by selling them to other companies (trade). However, once you turn the danger of pollution into a financial transaction, companies may decide that the cost of these allowances is worth polluting the environment, because they no longer consider keeping the environment clean a social obligation.
Need to Know: Situations involving social norms encourage people to act communally, while decisions governed by market norms bring out selfishness and self-interest. When we consider communal resources that fall at the intersection of social and market norms — such as health care, clean water, electricity, etc. — it's important to understand how linking these goods with market norms instead of social responsibility can lead to greediness.
Chapter 6: The Influence of Arousal
Why Hot Is Much Hotter Than We Realize
In a study on the effect of arousal, Ariely had a group of heterosexual male college students in a "cold," or dispassionate, state imagine they were sexually aroused, and then answer three sets of questions involving a battery of sexual activities. The first set concerned the attractiveness of less socially sanctioned behavior ("Can you imagine having sex with a 60-year-old woman?," "Can you imagine having sex with a man?," etc.); the second, the likelihood of engaging in immoral behaviors ("Would you encourage your date to drink to increase the chance that she would have sex with you?," "Would you keep trying to have sex after your date says 'no'?," etc.); and the third, the likelihood they would use birth control in unsafe situations ("Would you always use a condom if you didn't know the sexual history of a new sexual partner?," etc.).
The participants were then assigned a new task: to answer the questions again, this time at home, while masturbating, and in a state of high arousal. The responses to the questions this time were markedly different. The subjects were 72% more likely to find the questionable activities attractive; 136% more likely to engage in immoral behaviors like date rape; and 25% more likely to engage in intercourse without protection. In short, in a "cold" state, students failed to predict the effect arousal would have on their responses to the questions.
While we may not be able to predict how we'll actually act in an aroused state, knowing our willingness to engage in certain behaviors can vary dramatically allow us to put restraints in place that will prevent needing to make decisions in a state of high arousal, or create mitigating factors for when we do. Ariely suggests this information could be put to use to discourage unsafe behaviors in teenagers like dangerous driving and unsafe sex. In terms of safe sex, Ariely explains why teaching abstinence ignores how teens will actually behave during a moment of high sexual arousal. Instead, he advocates strictures that will allow teens to avoid such situations in the first place, and also equipping them with free condoms to safely deal with urges once they, inevitably, occur. For unsafe driving, teens' cars, he suggests, could be equipped with a system that would detect unsafe behavior like speeding or blasting music, and respond by changing the radio channel to classical music, activating the air conditioner in winter or the heat in the summer, or automatically calling the driver's parents. With these consequences in mind, teens could become more aware of their unsafe behaviors, and refrain.
Need to Know: In literature, Robert Louis Stevenson's Dr. Jekyll and Mr. Hyde dramatizes the conflict between one's proper, public self and the beast within. Freud theorized that we all have an id, a dark self that would do immoral things we'd never rationally consider, and a superego that enforces self-criticism and social standards on this id. But though culture and psychology have long addressed the idea of two selves — one rational and one driven by immoral desires — we fail to believe this applies to ourselves.
Chapter 7: The Problem of Procrastination and Self-Control
Why We Can't Make Ourselves Do What We Want
Procrastination and failures in self-control are the result of irrational decisions that prioritize immediate gratification over long-term success. To demonstrate how best to defeat procrastination, Ariely performed an experiment on students in three of his classes at MIT. He assigned all classes three papers over the course of the semester. The first class had to choose three due dates for themselves, up to and including the last day of class. The second had no deadlines — all three papers just had to be submitted by the last day of class. In his third class, he gave students three set deadlines over the course of the semester. At the end of the semester, he found that students with set deadlines received the best grades, the students with no deadlines had the worst grades, and those who could choose their own deadlines fell somewhere in the middle. (Within that last group, those students who set evenly spaced deadlines for themselves performed better than the students who set all three deadlines to the last day of class.) Ariely concludes that restricting freedom — whether imposed by the professor or set by students who recognize their own tendencies to procrastinate — improves self-control and performance.
(Continues...)
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Table of Contents
Contents
Context,Overview,
Summary,
Direct Quotes and Analysis,
Trivia,
What's That Word?,
Critical Response,
About Dan Ariely,
For Your Information,
Bibliography,
Copyright,