Predictably Irrational by Dan Ariely

1. Relative comparisons; no absolutes

Pick relative comparisons vs. absolute: People have a very hard time evaluating absolute value of a choice so they instead try to compare it to something else that is similar

  • Ex. people compare price of TV to other TV’s and computers to other computers; but not TV’s to computers

Avoid complicated relative comparisons: People try to avoid complicated comparisons; and would prefer to pick option A over B if they are easy to compare, even if option C might be better than A and B in absolute terms but hard to compare

Hard to make any decision without comparisons:Very hard to choose any option, even if it great options, without something to compare it to

  • Trick: decoy comparisons ; ex. instead of selling a bread baker (which people don’t know if they want), sell two bread bakers. Have decoy bread baker cost $50 more with trivial feature added to it; people are more likely to buy the first one.

2. Anchor bias

Imprinting: Whatever the first price of an item (ex. pearls) that we see is, we will compare all future pearls to that first price; The first price, however, can be completely random, it doesn’t matter

  • This creates Anchor bias

Arbitrary Coherence: Once we are anchored to price, say $100, we assume that future pearls are expensive when higher than $100 or cheap when less than $80, in order for us to have coherence; but that $100 is arbitrary; if it was $60, and then $80 pearls would seem expensive

  • Trick: Make sure first price they see in category is high!
  • Habits are particularly susceptible to this, once we get used to paying $5 for coffee, it is easy to pay $5.05 and then $5.10 and forget that it might be better to just get the free office coffee

3. Free >> $0.01!

Our brains are wired to love free things because we don’t have to make a choice. Even paying $0.01 makes us have to think about cost / benefit

  • Trick - Buy 1 for $10, get 1 free; will sell more than Buy 2 for $10

The Pain of Paying: Large mental hurdle to paying for something (e.g., dinner among friends), but once we are paying for something, it doesn’t really matter how much it is; Similar is true when someone else pays

  • Trick: Pay for lots of small items, get others to pay for one big thing; When out with friends, take turns paying entire bill vs. splitting

4. Social Norms vs. Market Norms

Market Norms: Getting paid for work we do tends to create transactional relationships where people do what’s in their own self interest

Social Norms: We help others because we enjoy it, feel more connected to people, gain satisfaction in helping others, take pride in work,….

As soon as market norms are added to an activity, we almost immediately remove the social norm component and switch to market norms

  • Ex. If we volunteer at a food shelter, we feel good about ourselves; but if someone offered to pay us $5 / hour to work at food shelter we would then say it wasn’t worth it
  • Ex. Teachers, firefighters, soldiers, etc. typically do their jobs because of the social norms involved (e.g., pride, honor, etc.); if we introduce pay-for-performance, we might take away those social norm benefits, and then we might want more money to risk their life

Companies can benefit when they have employees bought into mission of company because they might be willing to work hard for less money, but this can be double edge sword because if those people feel like they are treated unfairly, even on something small, they will switch to market norms and feel betrayed

Gifts play on social norms, but once cost of gift is brought up, it switches to market norms

5. Endowment effect

= When you own something, you value it more than you otherwise would

  • Power of loss aversion from not having that item is typically greater than unknown of what you could do with that money
  • You get nostology with items you already own; personal stories are often highly tied to possessions (e.g., first car, first house, etc.)
  • Ex. Duke basketball tickets are given out for free by lottery yet once someone wins they demand a much higher price to sell them (often 10x+) than what losers would buy them for

Partial ownership can also create this effect and can start as early as when you bid on an item at auction, or when you use the free trial period for a product, or even when you see an advertisement and picture yourself owning item

Ideological endowment: Similar effect happens with ideas, we become rigidly attached to them and over-value / fear losing them

Upgrading easier than downgrading: Very hard to downgrade in life (e.g., big house to small house), because of loss aversion and endowment effect

Positivity Bias: People naturally over-value and over-estimate anything having to do with themselves (ex. most believe to be above avg. drivers)

6. Mindset bias

Burning the ships Leaving options open actually makes it harder to achieve our primary objectives. Classic military strategy / legends involve generals burning their own ships so that soldiers know that they either have to defeat the opposing army or die trying (there is no turning back)

  • Choosing between two good options is one of hardest decisions people have to make (ex. joke - hungry donkey dies of starvation when in middle of barn with two similar haystacks on opposite ends)

You get what you expect: Naturally biased to self-fulfilling prophecies.

  • Stereotypes – Ex. On a math exam, students who were reminded that they were women before the exam did worse than students that were reminded that they were Asian-American.

Priming: If we think of certain words or ideas prior to performing task, more likely to reflect the ideas we were thinking

  • Ex. study showed that NYU students that played game to de-scramble words like Florida, Bingo, Ancient, would walk slower down hallway after game than students who didn’t see those words
  • Ex. Ambiance Effect: restaurant ambiance influences perceived taste of food, wearing black tux impacts quality of opera music
  • Placebo effect: 75% of effectiveness of 6 leading anti-depressants can be replicated by using a placebo; Placebo’s use
    • Power of suggestion: i.e. because people believe in them; Ex. Royal Touch – Pope LEO III in 800 AD would heal people just by touching them; this continued through 1820’s
    • Conditioning: Similar to Pavlov’s dog salivating when it hears bell, our mind/body begins to release chemicals to prepare us for expected effect of drug
  • Price signaling: Perceived effectiveness of pain medicine or surgery goes up when the drug is more expensive; i.e. we believe in it more

7. Contextual Morality

When societies have trust, they are more likely to buy, lend, and do business with each other; also reduces need for expensive legal contracts

Cycle of Distrust: People have learnt to be highly skeptical of marketers

  • Ex. Free money stand – researchers handed out free $1 bills, almost no one stopped; when they offered $50, only 19% of people stopped

Tragedy of the Commons: Occurs when there is a shared resource (ex. fishing ocean) but in order to maximize societal good (i.e. not over-fish), each individual must limit what they catch despite their large incentive to cheat (i.e. become defectors );

  • Once trust is broken once, all new transactions based on mis-trust
  • Distrust is infectious, it can very quickly impact unrelated areas
  • Customers who read a report about the “Azur” stereo system from the manufacturer Cambridge Audio were only willing to pay $282 for the system, same report in Consumer Reports, they would pay $407

Moral Context Willing to lie, cheat, or steal a little in some contexts but not too much; our moral radar only kicks in for big issues (e.g., might borrow a pen from the office but wouldn’t take a whole case of pens)

  • Ex study: If participants play game and self-report number of questions right, they will cheat (but just a little bit); if they read, the 10 commandments right before though, they don’t cheat at all; similarly if they sign their name to honor code prior to taking it
  • Cash triggers morality > non-cash: People are very good at rationalizing petty dishonesty (e.g., stealing a pen from work) but much harder to do with cash (e.g., stealing a dollar from penny cash) but just need to be one step removed from cash to avoid trigger
  • Ex study – Participants in self-reported game would either get $0.50 per right answer or get a token and then walk across room and exchange for $0.50; those who got token cheated much more
  • Exaggerate insurance claims value, expense non-work items; If give receipts to admin to expense, likely to slip in debatable receipts

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