Predictably Irrational: The Hidden Forces That Shape Our Decisions

by Dan Ariely

Let me start with a fundamental observation: most people don't know what they want unless they see it in context.

We don't even know what we want to do with our lives—until we find a relative or a friend who is doing just what we think we should be doing. Everything is relative, and that's the point.

we not only tend to compare things with one another but also tend to focus on comparing things that are easily comparable—and avoid comparing things that cannot be compared easily. That may be a confusing thought, so let me give you an example. Suppose you're shopping for a house in a new town. Your real estate agent guides you to three houses, all of which interest you. One of them is a contemporary, and two are colonials. All three cost about the same; they are all equally desirable; and the only difference is that one of the colonials (the “decoy”) needs a new roof and the owner has knocked a few thousand dollars off the price to cover the additional expense. So which one will you choose? The chances are good that you will not choose the contemporary and you will not choose the colonial that needs the new roof, but you will choose the other colonial.

Flustered by poor sales, the manufacturer of the bread machine brought in a marketing research firm, which suggested a fix: introduce an additional model of the bread maker, one that was not only larger but priced about 50 percent higher than the initial machine. Now sales began to rise (along with many loaves of bread), though it was not the large bread maker that was being sold. Why? Simply because consumers now had two models of bread makers to choose from. Since one was clearly larger and much more expensive than the other, people didn't have to make their decision in a vacuum.

An ironic aspect of this story is that in 1993, federal securities regulators forced companies, for the first time, to reveal details about the pay and perks of their top executives. The idea was that once pay was in the open, boards would be reluctant to give executives outrageous salaries and benefits. This, it was hoped, would stop the rise in executive compensation, which neither regulation, legislation, nor shareholder pressure had been able to stop. And indeed, it needed to stop: in 1976 the average CEO was paid 36 times as much as the average worker. By 1993, the average CEO was paid 131 times as much. But guess what happened. Once salaries became public information, the media regularly ran special stories ranking CEOs by pay. Rather than suppressing the executive perks, the publicity had CEOs in America comparing their pay with that of everyone else. In response, executives' salaries skyrocketed. The trend was further “helped” by compensation consulting firms (scathingly dubbed “Ratchet, Ratchet, and Bingo” by the investor Warren Buffett) that advised their CEO clients to demand outrageous raises. The result? Now the average CEO makes about 369 times as much as the average worker

The good news is that we can sometimes control the “circles” around us, moving toward smaller circles that boost our relative happiness.

Similarly, we find it easy to spend $3,000 to upgrade to leather seats when we buy a new $25,000 car, but difficult to spend the same amount on a new leather sofa (even though we know we will spend more time at home on the sofa than in the car). Yet if we just thought about this in a broader perspective, we could better assess what we could do with the $3,000 that we are considering spending on upgrading the car seats. Would we perhaps be better off spending it on books, clothes, or a vacation? Thinking broadly like this is not easy, because making relative judgments is the natural way we think. Can you get a handle on it?

James has made a lot of money, and he sees even more money all around him. One of his good friends, in fact, is a founder of PayPal and is worth tens of millions. But Hong knows how to make the circles of comparison in his life smaller, not larger. In his case, he started by selling his Porsche Boxster and buying a Toyota Prius in its place.4 “I don't want to live the life of a Boxster,” he told the New York Times, “because when you get a Boxster you wish you had a 911, and you know what people who have 911s wish they had? They wish they had a Ferrari.”

the more we have, the more we want. And the only cure is to break the cycle of relativity.

as Mark Twain once noted about Tom Sawyer, “Tom had discovered a great law of human action, namely, that in order to make a man covet a thing, it is only necessary to make the thing difficult to attain.”

NFTs!

Did the digits from the social security numbers serve as anchors? Remarkably, they did: the students with the highest-ending social security digits (from 80 to 99) bid highest, while those with the lowest-ending numbers (1 to 20) bid lowest. The top 20 percent, for instance, bid an average of $56 for the cordless keyboard; the bottom 20 percent bid an average of $16. In the end, we could see that students with social security numbers ending in the upper 20 percent placed bids that were 216 to 346 percent higher than those of the students with social security numbers ending in the lowest 20 percent

We see the manufacturer's suggested retail price (MSRP) for cars, lawn mowers, and coffeemakers. We get the real estate agent's spiel on local housing prices. But price tags by themselves are not necessarily anchors. They become anchors when we contemplate buying a product or service at that particular price. That's when the imprint is set. From then on, we are willing to accept a range of prices—but as with the pull of a bungee cord, we always refer back to the original anchor.

Another person walks by. He sees three people standing in line and thinks, “This must be a fantastic restaurant,” and joins the line. Others join. We call this type of behavior herding. It happens when we assume that something is good (or bad) on the basis of other people's previous behavior, and our own actions follow suit. But there's also another kind of herding, one that we call self-herding. This happens when we believe something is good (or bad) on the basis of our own previous behavior. Essentially, once we become the first person in line at the restaurant, we begin to line up behind ourself in subsequent experiences.

I was able to take an ambiguous experience (and if you could hear me recite poetry, you would understand just how ambiguous this experience is) and arbitrarily make it into a pleasurable or painful experience. Neither group of students knew whether my poetry reading was of the quality that is worth paying for or of the quality that is worth listening to only if one is being financially compensated for the experience (they did not know if it is pleasurable or painful). But once the first impression had been formed (that they would pay me or that I would pay them), the die was cast and the anchor set.

Mark Twain came to the same conclusions: “If Tom had been a great and wise philosopher, like the writer of this book, he would now have comprehended that work consists of whatever a body is obliged to do, and that play consists of whatever a body is not obliged to do.” Mark Twain further observed: “There are wealthy gentlemen in England who drive four-horse passenger-coaches twenty or thirty miles on a daily line in the summer because the privilege costs them considerable money; but if they were offered wages for the service, that would turn it into work, and then they would resign.”

But what are the main lessons from these experiments about our lives in general? Could it be that the lives we have so carefully crafted are largely just a product of arbitrary coherence? Could it be that we made arbitrary decisions at some point in the past (like the goslings that adopted Lorenz as their parent) and have built our lives on them ever since, assuming that the original decisions were wise? Is that how we chose our careers, our spouses, the clothes we wear, and the way we style our hair? Were they smart decisions in the first place? Or were they partially random first imprints that have run wild?

With everything you do, in fact, you should train yourself to question your repeated behaviors.

Socrates said that the unexamined life is not worth living. Perhaps it's time to inventory the imprints and anchors in our own life. Even if they once were completely reasonable, are they still reasonable? Once the old choices are reconsidered, we can open ourselves to new decisions—and the new opportunities of a new day. That seems to make sense.

It seems then that instead of consumers' willingness to pay influencing market prices, the causality is somewhat reversed and it is market prices themselves that influence consumers' willingness to pay. What this means is that demand is not, in fact, a completely separate force from supply.

How could zero dollars be more attractive than $30? When money was mentioned, the lawyers used market norms and found the offer lacking, relative to their market salary. When no money was mentioned they used social norms and were willing to volunteer their time. Why didn't they just accept the $30, thinking of themselves as volunteers who received $30? Because once market norms enter our considerations, the social norms depart.

no one is offended by a small gift, because even small gifts keep us in the social exchange world and away from market norms.

What would happen if we blended the market norm with the social norm? In other words, if we said that we would give them a “50-cent Snickers bar” or a “five-dollar box of Godiva chocolates,” what would the participants do? Would a “50-cent Snickers bar” make our participants work as hard as a “Snickers bar” made them work; or would it make them work halfheartedly, as the 50-cents made them work? Or would it be somewhere in the middle? The next experiment tested these ideas. As it turned out, the participants were not motivated to work at all when they got the 50-cent Snickers bar, and in fact the effort they invested was the same as when they got a payment of 50 cents. They reacted to the explicitly priced gift in exactly the way they reacted to cash,

People are willing to work free, and they are willing to work for a reasonable wage; but offer them just a small payment and they will walk away.

A few years ago, they studied a day care center in Israel to determine whether imposing a fine on parents who arrived late to pick up their children was a useful deterrent. Uri and Aldo concluded that the fine didn't work well, and in fact it had long-term negative effects. Why? Before the fine was introduced, the teachers and parents had a social contract, with social norms about being late. Thus, if parents were late—as they occasionally were—they felt guilty about it—and their guilt compelled them to be more prompt in picking up their kids in the future. (In Israel, guilt seems to be an effective way to get compliance.) But once the fine was imposed, the day care center had inadvertently replaced the social norms with market norms. Now that the parents were paying for their tardiness, they interpreted the situation in terms of market norms. In other words, since they were being fined, they could decide for themselves whether to be late or not, and they frequently chose to be late. Needless to say, this was not what the day care center intended.

Once the fine was removed, the behavior of the parents didn't change. They continued to pick up their kids late. In fact, when the fine was removed, there was a slight increase in the number of tardy pickups (after all, both the social norms and the fine had been removed). This experiment illustrates an unfortunate fact: when a social norm collides with a market norm, the social norm goes away for a long time. In other words, social relationships are not easy to reestablish. Once the bloom is off the rose—once a social norm is trumped by a market norm—it will rarely return.

What was really surprising, though, was that in all our phone calls, not a single person was willing to sell a ticket at a price that someone else was willing to pay. What did we have? We had a group of students all hungry for a basketball ticket before the lottery drawing; and then, bang—in an instant after the drawing, they were divided into two groups—ticket owners and non-ticket owners. It was an emotional chasm that was formed, between those who now imagined the glory of the game, and those who imagined what else they could buy with the price of the ticket. And it was an empirical chasm as well—the average selling price (about $2,400) was separated by a factor of about 14 from the average buyer's offer (about $175).

OWNERSHIP IS NOT limited to material things. It can also apply to points of view. Once we take ownership of an idea—whether it's about politics or sports—what do we do? We love it perhaps more than we should. We prize it more than it is worth. And most frequently, we have trouble letting go of it because we can't stand the idea of its loss. What are we left with then? An ideology—rigid and unyielding.

without foreknowledge about the vinegar, most of them chose the vinegary MIT Brew. But when they knew in advance that the MIT Brew had been laced with balsamic vinegar, their reaction was completely different. At the first taste of the adulterated suds, they wrinkled their noses and requested the standard beer instead. The moral, as you might expect, is that if you tell people up front that something might be distasteful, the odds are good that they will end up agreeing with you—not because their experience tells them so but because of their expectations.

But there's reason for hope. In our experiments, tasting beer without knowing about the vinegar, or learning about the vinegar after the beer was tasted, allowed the true flavor to come out. The same approach should be used to settle arguments: The perspective of each side is presented without the affiliation—the facts are revealed, but not which party took which actions. This type of “blind” condition might help us better recognize the truth.