Predictably Irrational

??Week 36: Predictably Irrational by Dan Ariely ??

Discover the hidden forces that shape our decisions.?

We don’t have an internal value meter that tells us how much things are worth. Rather we focus on the relative advantages of one thing over another and estimate value accordingly.

RELATIVITY:

We not only 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.

IMPRINTING:

When we encounter a new product do we accept the first price that comes before our eyes and does that price (the anchor) have a long-term effect on our willingness to pay for the product from then on?

ANCHORING:

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

ARBITRARY COHERENCE:

Initial prices although arbitrary, once established in our minds shape both present and future prices (making them coherent)?

BEHAVIOUR HERDING:

Standing in line at restaurants or nightclubs assuming that something is good (or bad) on the basis of other people’s behaviour.

Self-herding is when we believe something is good (or bad) on the basis of our own previous behaviour.

Once an initial decision is made (an anchor), other decisions seem to follow in a logical and coherent manner. We use our first decision as input for subsequent decisions.

An initial decision can have long-lasting effects that will percolate into our future decisions for years to come. Example: Paying $1 for coffee and Dunkin Donuts vs $5 at Starbucks. Once you purchase at Starbucks $5 is a price you are willing to pay for coffee.

This challenges the economic assumptions that pricing is the result of a balance between production (supply) and purchasing (demand) which is supposed to be the price at which these two factors meet.

Most transactions have an upside and a downside, but when something is FREE!, we forget the downside.

SOCIAL NORMS VS MARKET NORMS:

Social norms include friendly requests people make of one another. Reciprocity is not immediately required.?

Market norms imply comparable benefits and prompt payment.

For market norms to emerge, you only need to mention the idea of compensation. Even phrases related to money change behaviour. Showing different characteristics of selfishness, self-reliance, individual input vs teamwork - just thinking about money makes us behave differently.

We live in two different worlds, one characterised by social exchanges and one by market exchanges and we apply different norms to these two kinds of relationships.

There is a delicate balance between market and social norms. You can’t have it both ways. Can’t treat customers like family one moment and then treat them impersonally - or even worse - like a nuisance or competitor - a moment later when it becomes convenient or profitable.

Money is often the most expensive way to motivate people. Social norms are not only cheaper but are more effective.?

To make good informed decisions we need to somehow experience and understand the emotional state we will be in on the other side of the experience and learn how to bridge that gap.

Resisting temptation and instilling self-control are general human goals we repeatedly fail to achieve because without precommitments we keep falling for temptation.

Ownership pervades our lives and shapes many of the things we do. The 3 irrationalities of ownership:?

1. We overvalue what we already have
2. We focus on what we may lose rather than what we may gain. As soon as we begin thinking about giving up our valued possessions we are already mourning the loss.
3. We assume other people will see the transaction from the same perspective as we do.

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

Becoming the highest bidder at auctions creates “virtual ownership”

Virtual ownership is one mainspring of the advertising industry and how they sell.

Ownership is not limited to material things, it can also apply to points of view. Once we take ownership of an idea we can’t stand the idea of its loss.

In our modern world people are beset, not by a lack of opportunity, but by a dizzying abundance of it.

Expectations can influence nearly every aspect of our lives. Exotic and fashionable food descriptions influence our taste when we are given pre-knowledge.

Marketing is about providing information that will heighten someone's anticipated and real pleasure.

A stereotype is a way of categorising information in the hope of predicting experiences because the brain cannot start from scratch at every new situation.

Expectations shape stereotypes.

DISHONESTY:

As we grow up in a society, we internalise social virtues, leading to the development of the super-ego. In general, this makes us feel good when we comply with society's ethics, and unhappy when we don’t.

When primed with a question asking students to recall as many of the 10 commandments as possible an experiment that allowed people to cheat on a test revealed that no one cheated when primed vs. a control group that cheated approx 33% of the time.

People cheat when they have a chance to, but they don’t cheat as much as they could, however, once they begin thinking about honesty, they don’t cheat at all.?

TRUST IN BUSINESS:

The culture in Iran is one of distrust. No one pays in advance, no one offers credit, and no one is willing to take risks. There is a large amount of nepotism as people hire within their families because at least some level of trust exists.?

People are susceptible to irrelevant influences from their immediate environment (known as context effects), irrelevant emotions, shortsightedness and other forms of irrationality.?

Summary:

The book contains a number of experiments that prove many of the concepts written here. How we manage to fool ourselves, get fooled and change our values of things all the time.

1 Key Takeaway/Insight:

Initial prices although arbitrary, once established in our minds shape both present and future prices (making them coherent)?

Rating: 8 out of 10

Author: Dan Ariely

Link to purchase:?https://www.amazon.com/Predictably-Irrational-Revised-Expanded-Decisions/dp/0061353248

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