Predictably Irrational: The Hidden Forces That Shape Our Decisions

by Dan Ariely

behavioral economics, or judgment and decision making (JDM).

the basic assumption that most economists and many of us hold about human nature—the simple and compelling idea that we are capable of making the right decisions for ourselves.

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

In conventional economics, the assumption that we are all rational implies that, in everyday life, we compute the value of all the options we face and then follow the best possible path of action. What if we make a mistake and do something irrational? Here, too, traditional economics has an answer: “market forces” will sweep down on us and swiftly set us back on the path of righteousness and rationality.

we are really far less rational than standard economic theory assumes. Moreover, these irrational behaviors of ours are neither random nor senseless. They are systematic,

most people don’t know what they want unless they see it in context.

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.

CAN WE DO anything about this problem of relativity? The good news is that we can sometimes control the “circles” around us,

If we are thinking about buying a new car, we can focus on the models that we can afford, and so on.

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).

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.

Understand that relativity is everywhere, and that we view everything through its lens—rose-colored or otherwise.

“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.”

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.).

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.

If you accept the premise that market forces and free markets will not always regulate the market for the best, then you may find yourself among those who believe that the government (we hope a reasonable and thoughtful government) must play a larger role in regulating some market activities, even if this limits free enterprise. Yes, a free market based on supply, demand, and no friction would be the ideal if we were truly rational. Yet when we are not rational but irrational, policies should take this important factor into account.

WHEN CHOOSING BETWEEN two products, then, we often overreact to the free one.

we live simultaneously in two different worlds—one where social norms prevail, and the other where market norms make the rules.

people will work more for a cause than for cash.

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

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.

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.

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.

Open-source software shows the potential of social norms.

IN TREATING THEIR EMPLOYEES—much as in treating their customers—companies must understand their implied long-term commitment. If employees promise to work harder to achieve an important deadline (even canceling family obligations for it), if they are asked to get on an airplane at a moment’s notice to attend a meeting, then they must get something similar in return—something like support when they are sick, or a chance to hold on to their jobs when the market threatens to take their jobs away.

The point is that while gifts are financially inefficient, they are an important social lubricant. They help us make friends and create long-term relationships that can sustain us through the ups and downs of life. Sometimes, it turns out, a waste of money can be worth a lot.

overtly stating the prices of these items changes the workplace from a social environment in which the employer and employee have a deep commitment to each other to a transactional relationship.

The basic lesson, then, is that when we offer people a financial payment in a situation that is governed by social norms, the added payment could actually reduce their motivation to engage and help out.

Once money is introduced into the exchange, you stop thinking about what’s socially right

and wrong,

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

the dark side of putting a price on pollution. If a company can be charged for spewing poisons into the environment, it might well decide, after a cost-benefit analysis, that it can go ahead and pollute a lot more. Once pollution is a market and companies pay for their right to pollute, morality and concern for the environment are nonissues.

when public policy or environmental issues are at stake, our task is to figure out which of the two—social or market norms—will produce the most desirable outcome. In particular, policy makers should be careful not to add market norms that could undermine the social ones.

that every one of us, regardless of how “good” we are, underpredicts the effect of passion on our behavior.

America’s top killer isn’t cancer or heart disease, nor

is it smoking or obesity. It’s our inability to make smart choices and overcome our own self-destructive behaviors.9 Ralph estimates that about half of us will make a lifestyle decision that will ultimately lead us to an early grave.

The trick is to find the right behavioral antidote for each problem.

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.

Upton Sinclair once noted, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

By the time we comprehend and digest information, it is not necessarily a true reflection of reality. Instead, it is our representation of reality, and this is the input we base our decisions on.