Predictably Irrational: The Hidden Forces That Shape Our Decisions

by Dan Ariely

I believe that recognizing where we depart from the ideal is an important part of the quest to truly understand ourselves, and one that promises many practical benefits. Understanding irrationality is important for our everyday actions and decisions, and for understanding how we design our environment and the choices it presents to us.

My further observation is that we are not only irrational, but predictably irrational—that our irrationality happens the same way, again and again.

humans rarely choose things in absolute terms. We don't have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly.

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. Like an airplane pilot landing in the dark, we want runway lights on either side of us, guiding us to the place where we can touch down our wheels.

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.

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

That's a lesson we can all learn: the more we have, the more we want. And the only cure is to break the cycle of relativity.

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.”

once we buy a new product at a particular price, we become anchored to that price.

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.

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

In other words, the sensitivity we show to price changes might in fact be largely a result of our memory for the prices we have paid in the past and our desire for coherence with our past decisions—not at all a reflection of our true preferences or our level of demand.

After all, FREE! can lead us into trouble: things that we would never consider purchasing become incredibly appealing as soon as they are FREE! For instance, have you ever gathered up free pencils, key chains, and notepads at a conference, even though you'd have to carry them home and would only throw most of them away? Have you ever stood in line for a very long time (too long), just to get a free cone of Ben and Jerry's ice cream? Or have you bought two of a product that you wouldn't have chosen in the first place, just to get the third one for free?

Most transactions have an upside and a downside, but when something is FREE! we forget the downside, FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is. Why? I think it's because humans are intrinsically afraid of loss. The real allure of FREE! is tied to this fear. There's no visible possibility of loss when we choose a FREE! item (it's free).

Zero is not just another discount. Zero is a different place. The difference between two cents and one cent is small. But the difference between one cent and zero is huge! If you are in business, and understand that, you can do some marvelous things. Want to draw a crowd? Make something FREE! Want to sell more products? Make part of the purchase FREE!

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

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.

MONEY, AS IT turns out, is very often the most expensive way to motivate people. Social norms are not only cheaper, but often more effective as well.

Our experiment at Berkeley revealed not just the old story that we are all like Jekyll and Hyde, but also something new—that every one of us, regardless of how “good” we are, underpredicts the effect of passion on our behavior.

results suggest that although almost everyone has problems with procrastination, those who recognize and admit their weakness are in a better position to utilize available tools for precommitment and by doing so, help themselves overcome it.

The second quirk is that we focus on what we may lose, rather than what we may gain.

The third quirk is that we assume other people will see the transaction from the same perspective as we do.

OWNERSHIP ALSO HAS what I'd call “peculiarities.” For one, the more work you put into something, the more ownership you begin to feel for it.

Another peculiarity is that we can begin to feel ownership even before we own something. Think about the last time you entered an online auction. Suppose you make your first bid on Monday morning, for a wristwatch, and at this point you are the highest bidder. That night you log on, and you're still the top dog. Ditto for the next night. You start thinking about that elegant watch. You imagine it on your wrist; you imagine the compliments you'll get. And then you go online again one hour before the end of the auction. Some dog has topped your bid! Someone else will take your watch! So you increase your bid beyond what you had originally planned.

“Virtual ownership,” of course, is one mainspring of the advertising industry.

There's another way that we can get drawn into ownership. Often, companies will have “trial” promotions. If we have a basic cable television package, for instance, we are lured into a “digital gold package” by a special “trial” rate (only $59 a month instead of the usual $89).

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.

My own approach is to try to view all transactions (particularly large ones) as if I were a nonowner, putting some distance between myself and the item of interest. In this attempt, I'm not certain if I have achieved the uninterest in material things that is espoused by the Hindu sannyasi, but at least I try to be as Zen as I can about it.

In 1941 the philosopher Erich Fromm wrote a book called Escape from Freedom. In a modern democracy, he said, people are beset not by a lack of opportunity, but by a dizzying abundance of it. In our modern society this is emphatically so. We are continually reminded that we can do anything and be anything we want to be. The problem is in living up to this dream.

EXPECTATIONS ALSO SHAPE stereotypes. A stereotype, after all, is a way of categorizing information, in the hope of predicting experiences. The brain cannot start from scratch at every new situation. It must build on what it has seen before. For that reason, stereotypes are not intrinsically malevolent. They provide shortcuts in our never-ending attempt to make sense of complicated surroundings. This is why we have the expectation that an elderly person will need help using a computer or that a student at Harvard will be intelligent.* But because a stereotype provides us with specific expectations about members of a group, it can also unfavorably influence both our perceptions and our behavior.

even our own behavior can be influenced by our stereotypes, and that activation of stereotypes can depend on our current state of mind and how we view ourselves at the moment.

When stripping away our preconceptions and our previous knowledge is not possible, perhaps we can at least acknowledge that we are all biased. If we acknowledge that we are trapped within our perspective, which partially blinds us to the truth, we may be able to accept the idea that conflicts generally require a neutral third party—who has not been tainted with our expectations—to set down the rules and regulations. Of course, accepting the word of a third party is not easy and not always possible; but when it is possible, it can yield substantial benefits. And for that reason alone, we must continue to try.

PLACEBO COMES FROM the Latin for “I shall please.” The term was used in the fourteenth century to refer to sham mourners who were hired to wail and sob for the deceased at funerals. By 1785 it appeared in the New Medical Dictionary, attached to marginal practices of medicine. One of the earliest recorded examples of the placebo effect in medical literature dates from 1794. An Italian physician named Gerbi made an odd discovery: when he rubbed the secretions of a certain type of worm on an aching tooth, the pain went away for a year. Gerbi went on to treat hundreds of patients with the worm secretions, keeping meticulous records of their reactions. Of his patients, 68 percent reported that their pain, too, went away for a year. We don't know the full story of Gerbi and his worm secretions, but we have a pretty good idea that the secretions really had nothing to do with curing toothaches.

IN GENERAL, TWO mechanisms shape the expectations that make placebos work. One is belief—our confidence or faith in the drug, the procedure, or the caregiver. Sometimes just the fact that a doctor or nurse is paying attention to us and reassuring us not only makes us feel better but also triggers our internal healing processes. Even a doctor's enthusiasm for a particular treatment or procedure may predispose us toward a positive outcome. The second mechanism is conditioning. Like Pavlov's famous dogs (that learned to salivate at the ring of a bell), the body builds up expectancy after repeated experiences and releases various chemicals to prepare us for the future.

FROM OUR EXPERIMENTS with our “pharmaceuticals” we saw how prices drive the placebo effect.

When people think about a placebo such as the royal touch, they usually dismiss it as “just psychology.” But, there is nothing “just” about the power of a placebo, and in reality it represents the amazing way our mind controls our body.

In reality, physicians provide placebos all the time. For instance, a study done in 2003 found that more than one-third of patients who received antibiotics for a sore throat were later found to have viral infections, for which an antibiotic does absolutely no good (and possibly contributes to the rising number of drug-resistant bacterial infections that threaten us all14

We care about honesty and we want to be honest. The problem is that our internal honesty monitor is active only when we contemplate big transgressions, like grabbing an entire box of pens from the conference hall. For the little transgressions, like taking a single pen or two pens, we don't even consider how these actions would reflect on our honesty and so our superego stays asleep.

when we are removed from any benchmarks of ethical thought, we tend to stray into dishonesty. But if we are reminded of morality at the moment we are tempted, then we are much more likely to be honest.

We can hope to surround ourselves with good, moral people, but we have to be realistic. Even good people are not immune to being partially blinded by their own minds. This blindness allows them to take actions that bypass their own moral standards on the road to financial rewards.

in the larger context, we need to wake up to the connection between nonmonetary currency and our tendency to cheat. We need to recognize that once cash is a step away, we will cheat by a factor bigger than we could ever imagine. We need to wake up to this—individually and as a nation, and do it soon.

THROUGHOUT THIS BOOK, I have described experiments that I hoped would be surprising and illuminating. If they were, it was largely because they refuted the common assumption that we are all fundamentally rational. Time and again I have provided examples that are contrary to Shakespeare's depiction of us in “What a piece of work is a man.”

But, as the results presented in this book (and others) show, we are all far less rational in our decision making than standard economic theory assumes. Our irrational behaviors are neither random nor senseless—they are systematic and predictable. We all make the same types of mistakes over and over, because of the basic wiring of our brains.

Wouldn't economics make a lot more sense if it were based on how people actually behave, instead of how they should behave? As I said in the Introduction, that simple idea is the basis of behavioral economics, an emerging field focused on the (quite intuitive) idea that people do not always behave rationally and that they often make mistakes in their decisions.

In my opinion, studying human behavior is a fantastic gift because it helps us better understand ourselves and the daily mysteries we encounter. Although the topic is important and fascinating, it is not easy to study, and there is still a lot of work ahead of us. As the Nobel laureate Murray Gell-Mann once said, “Think how hard physics would be if particles could think.”