Predictably Irrational: The Hidden Forces That Shape Our Decisions

by Dan Ariely

individuals make repeated mistakes—without being able to learn much from their experiences.

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

rational economic model,

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.

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.

irrational behaviors of ours are neither random nor senseless. They are systematic, and since we repeat them again and again, predictable.

humans rarely choose things in absolute terms.

we focus on the relative advantage of one thing over another, and estimate value accordingly. (For

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

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

in order to make a man covet a thing, it is only necessary to make the thing difficult to attain.”

goslings make initial decisions based on what’s available in their environment, but that they stick with a decision once it has been made.

imprinting.

arbitrary coherence.

In Behavioral Economics, "arbitrary coherence" is when in arbitrary, randomly chosen number, influences the amount purchasers are willing to pay for a product.

although initial prices (such as the price of Assael’s pearls) are “arbitrary,” once those prices are established in our minds they will shape not only present prices but also future prices (this makes them “coherent”).

price tags

become anchors when we contemplate buying a product or service at that particular price.

we always refer back to the original anchor.

Thus the first anchor influences not only the immediate buying decision but many others that follow.

our first decisions resonate over a long sequence of decisions.

herding.

when we assume that something is good (or bad) on the basis of other people’s previous behavior, and our own actions follow suit.

self-herding.

Now that you have gotten used to paying more for coffee, and have bumped yourself up onto a new curve of consumption, other changes also become simpler.

If you stopped to think about this, it would not be clear whether you should be spending all this money on coffee at Starbucks instead of getting cheaper coffee at Dunkin’ Donuts or even free coffee at the office. But you don’t think about these trade-offs anymore. You’ve already made this decision many times in the past, so you now assume that this is the way you want to spend your money. You’ve herded yourself—lining up behind your initial experience at Starbucks—and now you’re part of the crowd.

separate Starbucks from other coffee shops, not through price but through ambience.

designed Starbucks from the very beginning to feel like a continental coffeehouse.

once the first decision had been made, other decisions followed in what seemed to be a logical and coherent manner.

Could it be that the lives we have so carefully crafted are largely just a product of arbitrary coherence?

You might begin by questioning that habit.

Second, ask yourself what amount of pleasure you will be getting out of it.

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.).

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.

what consumers are willing to pay can easily be manipulated,

market prices themselves that influence consumers’ willingness to pay.

we make decisions in the marketplace that may not reflect how much pleasure we can get from different items.

sometimes we want our decisions to have a rational veneer when, in fact, they stem from a gut feeling—what we crave deep down.

Zero is an emotional hot button—a source of irrational excitement.

compute the relative net benefits

people will work more for a cause than for cash.

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.

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

Thinking about money, then, made the participants in the “salary” group more self-reliant and less willing to ask for help. But these participants were also less willing to help others.

more selfish and self-reliant; they wanted to spend more time alone; they were more likely to select tasks that required individual input rather than teamwork;

introducing market norms into social exchanges, as we have seen, violates the social norms and hurts the relationships.

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

The people who run the workplace want us to think about work while we’re driving home and while we’re in the shower. They’ve given us laptops, cell phones, and BlackBerries to bridge the gap between the workplace and home.

There are social rewards that strongly motivate behavior—and one of the least used in corporate life is the encouragement of social rewards and reputation.

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.