Predictably Irrational: The Hidden Forces That Shape Our Decisions

by Dan Ariely

Once you see how systematic certain mistakes are—how we repeat them again and again—I think you will begin to learn how to avoid some of them.

we are all economists. I don’t mean that each of us can intuitively develop complex game-theoretical models or understand the generalized axiom of revealed preference (GARP); rather, I mean that we hold the basic beliefs about human nature on which economics is built.

My further observation is that we are not only irrational, but predictably irrational—that our irrationality happens the same way, again and again. Whether we are acting as consumers, businesspeople, or policy makers, understanding how we are predictably irrational provides a starting point for improving our decision making and changing the way we live for the better.

My suggestion to you is to pause at the end of each chapter and consider whether the principles revealed in the experiments might make your life better or worse, and more importantly what you could do differently, given your new understanding of human nature. This is where the real adventure lies.

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.

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.

Is the human brain, then, wired like that of a gosling? Do our first impressions and decisions become imprinted? And if so, how does this imprinting play out in our lives? When we encounter a new product, for instance, do we accept the first price that comes before our eyes? And more importantly, does that price (which in academic lingo we call an anchor) have a long-term effect on our willingness to pay for the product from then on?

NOW THAT WE know we behave like goslings, it is important to understand the process by which our first decisions translate into long-term habits. To illustrate this process, consider this example. You’re walking past a restaurant, and you see two people standing in line, waiting to get in. “This must be a good restaurant,” you think to yourself. “People are standing in line.” So you stand behind these people. 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.

Descartes said, Cogito ergo sum—“I think, therefore I am.” But suppose we are nothing more than the sum of our first, naive, random behaviors. What then?

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

We should also pay particular attention to the first decision we make in what is going to be a long stream of decisions (about clothing, food, etc.). When we face such a decision, it might seem to us that this is just one decision, without large consequences; but in fact the power of the first decision can have such a long-lasting effect that it will percolate into our future decisions for years to come. Given this effect, the first decision is crucial, and we should give it an appropriate amount of attention.

The results of all the experiments presented in this chapter (and the basic idea of arbitrary coherence itself) challenge these assumptions. First, according to the standard economic framework, consumers’ willingness to pay is one of the two inputs that determine market prices (this is the demand). But as our experiments demonstrate, what consumers are willing to pay can easily be manipulated, and this means that consumers don’t in fact have a good handle on their own preferences and the prices they are willing to pay for different goods and experiences.

this process of readjustment could be accelerated if the price change were to also be accompanied by other changes, such as a new grade of gas, or a new type of fuel (such as corn-based ethanol fuel).

But if our choices are often affected by random initial anchors, as we observed in our experiments, the choices and trades we make are not necessarily going to be an accurate reflection of the real pleasure or utility we derive from those products.

Zero is not just another price, it turns out. Zero is an emotional hot button—a source of irrational excitement.

When we pay—regardless of the amount of money—we feel some psychological pain, which social scientists call the “pain of paying.” This is the unpleasantness associated with giving up our hard-earned cash, regardless of the circumstances. It turns out that the pain of paying has two interesting features. First, and most obviously, when we pay nothing (for example, when someone else foots the bill) we don’t feel any pain of paying. Second, and less obviously, the pain of paying is relatively insensitive to the amount that we pay. This means that we feel more pain of paying as the bill increases, but every additional dollar on the bill pains us less. (We call this “diminishing sensitivity.”

So if we are dining with others, we are happiest when we pay nothing (free!); we are less happy when we have to pay something; and the additional dollars we fork over cause us a smaller and smaller additional amount of pain as the size of the bill increases. The logical conclusion is that one person should pay the whole bill.

This is how the pattern of choice should look, if the only forces at play were those of a rational cost-benefit analysis. The fact that the results from our experiments are so different tells us loud and clear that something else is going on, and that the price of zero plays a unique role in our decisions.

The social norms include the friendly requests that people make of one another.

When social and market norms collide, trouble sets in. Take sex again. A guy takes a girl out for dinner and a movie, and he pays the bills. They go out again, and he pays the bills once more. They go out a third time, and he’s still springing for the meal and the entertainment. At this point, he’s hoping for at least a passionate kiss at the front door. His wallet is getting perilously thin, but worse is what’s going on in his head: he’s having trouble reconciling the social norm (courtship) with the market norm (money for sex). On the fourth date he casually mentions how much this romance is costing him. Now he’s crossed the line. Violation! She calls him a beast and storms off. He should have known that one can’t mix social and market norms—especially in this case—without implying that the lady is a tramp. He should also have remembered the immortal words of Woody Allen: “The most expensive sex is free sex.”

Because once market norms enter our considerations, the social norms depart.

THESE RESULTS SHOW that for market norms to emerge, it is sufficient to mention money (even when no money changes hands). But, of course, market norms are not just about effort—they relate to a broad range of behaviors, including self-reliance, helping, and individualism.

Indeed, just thinking about money makes us behave as most economists believe we behave—and less like the social animals we are in our daily lives.

SO WE LIVE in two worlds: one characterized by social exchanges and the other characterized by market exchanges. And we apply different norms to these two kinds of relationships. Moreover, introducing market norms into social exchanges, as we have seen, violates the social norms and hurts the relationships.

But here’s what I find strange: although companies have poured billions of dollars into marketing and advertising to create social relationships—or at least an impression of social relationships—they don’t seem to understand the nature of a social relationship, and in particular its risks.

If you’re a company, my advice is to remember that you can’t have it both ways. You can’t treat your customers like family one moment and then treat them impersonally—or, even worse, as a nuisance or a competitor—a moment later when this becomes more convenient or profitable. This is not how social relationships work. If you want a social relationship, go for it, but remember that you have to maintain it under all circumstances.

In that case, stick to a simple value proposition: state what you give and what you expect in return.

If companies want to benefit from the advantages of social norms, they need to do a better job of cultivating those norms. Medical benefits, and in particular comprehensive medical coverage, are among the best ways a company can express its side of the social exchange. But what are many companies doing? They are demanding high deductibles in their insurance plans, and at the same time are reducing the scope of benefits. Simply put, they are undermining the social contract between the company and the employees and replacing it with market norms. As companies tilt the board, and employees slide from social norms to the realm of market norms, can we blame them for jumping ship when a better offer appears? It’s really no surprise that “corporate loyalty,” in terms of the loyalty of employees to their companies, has become an oxymoron.

If corporations started thinking in terms of social norms, they would realize that these norms build loyalty and—more important—make people want to extend themselves to the degree that corporations need today: to be flexible, concerned, and willing to pitch in. That’s what a social relationship delivers.

when price is not a part of the exchange, we become less selfish maximizers and start caring more about the welfare of others.

Giving up on our long-term goals for immediate gratification, my friends, is procrastination.

not everyone understands their tendency to procrastinate, and even those who do recognize their tendency to procrastinate may not understand their problem completely. Yes, people may set deadlines for themselves, but not necessarily the deadlines that are best for getting the best performance.

Resisting temptation and instilling self-control are general human goals, and repeatedly failing to achieve them is a source of much of our misery. When I look around, I see people trying their best to do the right thing, whether they are dieters vowing to avoid a tempting dessert tray or families vowing to spend less and save more. The struggle for control is all around us. We see it in books and magazines. Radio and television airwaves are choked with messages of self-improvement and help.

We have problems with self-control, related to immediate and delayed gratification—no doubt there. But each of the problems we face has potential self-control mechanisms, as well. If we can’t save from our paycheck, we can take advantage of our employer’s automatic deduction option; if we don’t have the will to exercise regularly alone, we can make an appointment to exercise in the company of our friends.

Misalnya (1) belanja sebulan sekali aja, (2) bilang jauh-jauh hari ke tim kalau mau cuti.

Dear Sumi, This e-mail is to draw your attention to the fact that your husband, Dan Ariely, who is generally an upright citizen, has exceeded his spending limit on chocolate of $50 per month by $73.25. With best wishes, The self-control credit card team

the more work you put into something, the more ownership you begin to feel for it.

a fair amount of certainty that pride of ownership is inversely proportional to the ease with which one assembles the furniture; wires the high-definition television to the surround-sound system; installs software; or gets the baby into the bath, dried, powdered, diapered, and tucked away in the crib. My friend and colleague Mike Norton (a professor at Harvard) and I have a term for this phenomenon: the “Ikea effect.”

WHEN WE BELIEVE beforehand that something will be good, therefore, it generally will be good—and when we think it will be bad, it will bad. But how deep are these influences? Do they just change our beliefs, or do they also change the physiology of the experience itself? In other words, can previous knowledge actually modify the neural activity underlying the taste itself, so that when we expect something to taste good (or bad), it will actually taste that way?

They learned about the vinegar only after their taste was established, at which point, if expectations change our experience, it was too late for the knowledge to affect the sensory perceptions.

We can add small things that sound exotic and fashionable to our cooking (chipotle-mango sauces seem all the rage right now, or try buffalo instead of beef). These ingredients might not make the dish any better in a blind taste test; but by changing our expectations, they can effectively influence the taste when we have this pre-knowledge.

EXPECTATIONS ALSO SHAPE stereotypes. A stereotype, after all, is a way of categorizing information, in the hope of predicting experiences.

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.

Research on stereotypes shows not only that we react differently when we have a stereotype of a certain group of people, but also that stereotyped people themselves react differently when they are aware of the label that they are forced to wear (in psychological parlance, they are “primed” with this label).

Anak akuntansi pasti jago ngitung.

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.

As it turns out, positive expectations allow us to enjoy things more and improve our perception of the world around us. The danger of expecting nothing is that, in the end, it might be all we’ll get.

The truth is that placebos run on the power of suggestion. They are effective because people believe in them. You see your doctor and you feel better. You pop a pill and you feel better. And if your doctor is a highly acclaimed specialist, or your prescription is for a new wonder drug of some kind, you feel even better. But how does suggestion influence us?

But will you really look for bargains when it comes to your health? Putting the common cold aside for the moment, are many of us going to pinch pennies when our lives are at risk? No—we want the best, for ourselves, our children, and our loved ones.

Moreover, it turns out that this relationship between price and placebo effect was not the same for all participants, and the effect was particularly pronounced for people who had more experience with recent pain. In other words, for people who had experienced more pain, and thus depended more on pain medications, the relationship was more pronounced: they got even less benefit when the price was discounted. When it comes to medicines, then, we learned that you get what you pay for. Price can change the experience.