Book Review: “Predictable Irrational: The Hidden Forces That Shape Our Decisions” by Dan Ariely

The is a fun book to read and listen to. I enjoyed and learned a few things. Specifically, the chapter on relativity opened my eyes to how people make decisions. The topic on social norm vs. market norm helped me understand how open-source movement worked and their delicate balance. The experiments on how much we’re willing to keep options open sounded silly but realistic. The chapter on the expectations and placebo effect confirmed my belief on many things I encountered in my life like spiritual healing, religious miracle and even use of vitamins. Summary of the book is as follows:

The truth about relativity: We are always comparing one to another (like Economist’ print & web pricing) and we tend to focus on comparing things that are easily comparable (introduction of a decoy) – and avoid comparing things that cannot be compared easily. Comparison causes envies like CEOs’ salaries. To counter this, you can either reduce the circle of comparison or enlarge it. The more we have, the more we want – break the circle of relativity.

The fallacy of supply and demand: Use of anchoring to bring out arbitrary coherence; we tend to stick to the initial price (Social Security number experiment). Anchors we we encountered along the way and were swayed by remain with us long after the initial decision itself. Herding and self herding (habitual, how Starbucks succeeded). We should pay particular attention to the first decision we make in what is going to be a long stream of decisions.

The cost of zero cost: Zero is an emotional hot button – a source of irrational excitement. Most transactions have an upside and a downside, but when something is free, we forget the downside because we humans are intrinsically afraid of loss.

The cost of social norms: vs. Market norms. People tend to be more self-reliant and less willing to help other when operating in the market norms. Market norms takes over social norms if not careful. Money is the most expensive way to motivate people.

The influence of arousal. People turn into monsters (Hyde from Dr. Jekyll) and less cautious when in an arousal state. We systematically under-predict the degree to which arousal completely negates our superego, the way emotions can take control of our behavior as in sexual arousal, driving. We need to explore the two sides of ourselves: the cold state and hot state.

The problem of procrastination and self control: Why we can’t make ourselves do what we want to do.
“Almost everyone has problems with procrastination, those who recognized and admit their weakness are a better position to utilize available tools for precommitments.” Bundling our medical tests, car services so that people remember to do that is far smarter. Author suggests the use of self-control credit card.

The high price of ownership (material or ideas): why we overvalue what we have.
Three reasons: 1. We’re attached to what we have (especially those we have put work into) and we haven’t got yet (eBay or trial ownership) and, 2. we focus on what we may lose (30-day money-back guarantee) rather than what we may gain. 3. we assume other people will see the transaction from the same perspective we have.

Keeping doors open: why options distract us from our main objective.
We have an irrational compulsion to keep doors (opportunities, relationships, jobs, and etc.) open. Choosing two similar options are very difficult (two stacks of hays to a donkey, US Congress) and may be easier to just toss a coin and do away with the opportunity costs.

The effect of expectations: Why the mind gets what it expects
If you tell people up front that something might be distasteful, the odds are good that they will end up agreeing with you because of the expectation. When the coffee ambiance looked upscale the coffee tasted upscale as well. Coke was liked more with the brand was known – the associations were more powerful, allowing the part of the brain that represents these associations to enhance activity in the brain’s pleasure center. We should acknowledge that we are all biased, trapped in our own perspective – may require a neutral third party.

The power of price: Why a 50-cent aspirin can do what a penny aspirin can’t
Two mechanisms shape the expectations that make placebos work: belief – our confidence or faith on the drop, the procedure, or the caregiver, conditioning – the body builds up expectancy after repeated experiences and releases various chemicals to prepare us for the future. Price can change the experience. When it comes to medicines, you get what you pay for.

The context of our character: why we are dishonest and what we can do about it
We care about honesty and we want to be honest. But our internal honesty monitor is active only when we contemplate big transgressions. The only defense we have against this is a rational cost-benefits analysis. Remind people of the 10 Commandments or other vows or honor codes helps to promote honesty. Much of the dishonesty is one step removed from cash. When given a chance, people cheat.

Beer and free lunches: what is behavioral economics, and where are the free lunches?
When people order out loud in sequence (in a restaurant), they choose differently (more varieties) from when they order in private, to convey uniqueness. People are sometimes willing to sacrifice the pleasure they get from a particular consumption experience in order to project a certain image to others.