Predictably Irrational

Overall a fantastic book detailing human behavior from a psychological and economic point of view. My favorite chapter was Cost of Social Norms, as it opened my eyes to a new point of view on interactions in a professional context. Dan Ariely does an amazing job detailing caveats of human irrationality throughout the book and I would say a must read for anyone.

Summary

Chapter 1: The Truth About Relativity

  • Objectivity is nearly impossible
    • how much is something actually worth?
  • People make relative decisions on worth.
    • They like the better of some options but not the best
    • Think bread makers - when they don’t sell because they are new, introduce a second, more expensive bread maker and the cheaper one will sell.

Chapter 2: The Fallacy of Supply & Demand

  • Demand can be manufactured
    • Black pearls made in high demand simply by positioning.
  • Anchoring - the first price you hear foro a product or category tends to stick.
  • Starbucks
    • Positioned itself differently to remove Dunkin Donuts’ price anchor for coffee (why should I pay $4 for a cup of coffee?)
    • Once you go a few times, your decision making for going again is akin to seeing a line out the front door (it’s clearly popular because I’ve been.)
  • Tom Sawyer showed a low supply product (painting fence) and raised demand.
  • What if we are the sum of our first, na├»ve, myopic decisions?
  • Continually question our decisions
    • How much benefit does something actually bring?
  • Prices can influence willingness to pay
    • Demand is not entirely separate from supply
  • People like to make well thought out decisions but want to arrive at a, probably, preconceived conclusion

Chapter 3: Cost of Zero Cost

  • Zero! is a powerful marketing tactic
  • The laws of demand tend to break down with Zero!
  • So powerful, sometimes (or often) makes consumers miscalculate outcomes
  • All transactions have upside and downside. Free has no downside with some guaranteed upside.
  • AMZN shipping for free vs $.20
    • Massive difference in spending when free, even though 20 cents (1 Franc) was next to nothing.
  • Zero calories vs. 1 calorie
  • Paying for dinner
    • Each incremental dollar paid is less pain (diminishing sensitivity) and thus it’s always better for one person to pay the whole bill instead of split.

Chapter 4: The Cost of Social Norms

  • Social norms vs. market norms
    • Social much stronger but they cannot be mixed
    • Once market norms are brought in, social norms will likely not return
  • Do work as favor is okay & fair wage okay, but for small $ amount won’t work
  • Gifts work, but not when a price tag is attached
  • When price tag attached, gifts just the same as market norms
  • Doing tasks after having heard sentences like “High paying salary” lead people to be more market minded & less social (compared to phrases like “It’s cold outside”)
    • Ask for help less
    • Less likely to offer help
    • Thus even mentioning prices move us into market norms.
  • Picking up kids @ daycare: social vs $ penalty
    • Once reversed from social -> market -> social, the parental behavior didn’t change.
    • Social norm goes away for a long time.
  • Gifts vs. Cash bonuses
  • Police & firefighters vs. border / customs agents
  • Education goals
  • Burning man & sharing economy
  • Seinfeld maid & dating.
  • Filene’s basement dress sale
    • All social norms go out the window b/c of huge savings
  • Cookies from coworker
    • When free, I’ll consider hunger, calories, love of cookies, social pressures of taking too many.
    • When they cost $0.05 I won’t consider social norms
  • Starburst experiment
    • $0.01 per candy obeys demand laws
    • Free people take FEWER! (odd because doesn’t follow rational market economics)
  • When price is not part of exchange, we become less selfish maximizers & care about welfare of others
    • Last sushi piece
  • Effort is somewhere between market and social norms
  • Carbon taxes skews the line because it may increase carbon.
  • When emotions are piqued it’s hard to take others emotions into account.

Chapter 6: Influence of Arrousal

  • When aroused, choices are different than when not
    • Hard to predict behavior
  • Maybe true for other emotions as well

Chapter 7: The Problem of Procrastination & Self Control

  • Credit usually defaults or becomes expensive due to procrastination
  • US personal saving rates are < 0%
  • Impulses divert from long term goals
  • Pro - for; cras -> tomorrow
  • Study allowing students to set deadlines (A) vs imposed deadlines (B) vs no deadlines (end of semester) ©
    • Grades, in order, were B, A, C
  • Parental voice causes us to pay attention
  • Precommitting to healthcare (e.g. refunded deposit to get cholesterol checked) may help us actually get it done.
  • Ford cars needed checkups, but differed per model
    • Made the 5,000; 10,000; 25,000 mile checkups
      • Perfect mix of authoritative & self imposed
    • Initially a tough sell internally b/c mustang is different from F-150

Chapter 8: The High Price of Ownership

  • Duke basketball tickets
    • People stand inline for a long long time to join a lottery
    • Those who get tix value the tickets really high because of an emotional response
    • Those who don’t value them really low because they see the monetary value.
    • Difference is large ($2400 vs. $175)
  • We fall in ove with what we already have
  • We focus on what we may lose instead of gain (when selling)
  • We assume others will see transaction from our perspective
  • Virtual ownership
    • Think long running eBay auctions (like I already own it)
    • Upgrading for free for a limited time (downgrade rarely happens)
  • Moving from ownership to pre ownership feels like a loss

Chapter 9: Keeping Doors Open

  • We work hard to keep doors open
    • Buy bless and whistles just in case
    • Picking majors in school
  • Maximizing profit while clicking (game, experiment)
    • People always try to keep doors open even if those doors don’t maximize profit
  • Sad side are when we don’t realize there are slowly closing doors
    • Kids growing up
  • Donkey starving to death between two bales of hay

Chapter 10: Effect of expectations

  • Beer test with adding balsamic vinegar
    • If not told, peple prefer balsamic to crappy beer
    • If told about vinegar before, people hate it
    • If told about afterward, people like it as much as if never told
  • Expectations drive results
    • Joshua Bell in subway
    • Do settings really matter (probably)
  • Names on menus
  • Pepsi Challenge
  • Expectations & stereotypes
    • Asians good at math, women bad at math; When Asian women asked to do math, it depended on precondition – were they thinking about their cultural background or gender background before?
  • Alexander Pope: Blessed is he who expects nothing

Chapter 11: The Power of Price

  • Placebo surgeries can sometimes prove the surgery has not added benefit
  • A more expensive medication (even if medication is a placebo) has a stronger effect
  • If a placebo is primed (SoBe causes better test taking) the higher price still has a stronger effect
  • Divine touch from kings
  • Physicians prescribe placebos a lot (antibiotic placebos for viral infections)
  • Are placebos good or bad?
    • W/o using placebos we can’t improve or test
    • W/ placebos people may die now
  • Airborne was placebo that worked (but ended up being screwed up by warnings on the packaging.)

Chapter 12: The Cycle of Distrust

  • Spam email; fine print; marketing ploys
  • Free money experiment
    • Giving away free money (printed on sign how much)
    • Only 1% of people walking by stopped for $1, only 19% for $50
    • All believed there was a catch
  • Tragedy of the commons & game theory
  • Snake oil salesmen
  • Lying on dating sites – You’re expected to lie so when you don’t it’s bad
  • True statements when “endorsed” by companies (DNC, RNC, P&G) breed mistrust
    • Same statements w/o endorsements do not.
  • Listening to speakers with brochure vs consumer reports – people tended to think the speakers were better with consumer report instead of brochure.
  • Transparency is rare for a company

Chapter 13: The Context of Our Character, Part 1

  • People steal, a lot
  • Difference between robbing & white collar crime
    • Think over deducting on taxes vs. bank robbery
  • Experiments tempting people to cheat
    • When tempted, people cheat a little, but could do a lot more
    • When asked to remember 10 commandments, no cheating!
      • Even if they didn’t know more than a couple of them – just the thought of a code of laws was enough.
  • Seems superego keeps people from cheating egregiously
    • Cheating a little does not activate superego
  • Problem is some cheat a lot
  • Could professional oaths help solve issue?
    • Degradation of proffesions with oaths (doctors, lawyers)
    • Seems people are tempted to cheat for personal gains (Tragedy of Commons)
  • Asking people to sign a non-existant honor code stopped cheating
    • Thus, just thinking about existence of a code stops people

Chapter 14: The Context of Our Character, Part 2

  • Dollar bills make people more honest
  • Removing direct link to money (coca cola in fridge) makes people less so
  • Would Enron guys have robbed from old ladies? (no) but they took money from them indirectly from pension funds.
  • Experiment: Give tokens worth $.50 that could be exchanged 12 feet away vs giving $.50 directly. Way more cheating in former case.
  • Cheating when reporting losses, wardrobing, expense reports
  • Human nature can cause people to be dishonest when not directly connected with $$$
  • Frequent flyer miles BS with airlines; Credit card companies
    • Essentially robbery, but not directly so feels more okay.
  • What happens when we no longer use cash directly?

Chapter 15: Beer & Free Lunches

  • People try to make unique orders (in our culture, not necessarily in others)
  • Best utility when ordering is to order first, or at least say your desire out load to get “dibs” on it.
  • Free lunches shouldn’t exist because they should be eaten already