Predictably Irrational

When we make decisions, we believe that we are in control. We think we are making rational and intelligent choices. But are we? Dan Ariely discusses some common assumptions about our behaviors and shows us how we are not usually rational! Through various experiments, he presents his results and reveals the human behavior, which although not rational many times, is not also random or meaningless.

Why this research began

Ariely became interested in economics in a surprising and strange way. When he was just 18, an accidental blast of a magnesium flame left him with severe burns on most of his body. In his recovery, he had to endure the daily removal of the bandages.

Later in high school, he applied scientific rigor to the theory of his former nurses on how to remove the bandages causing less pain overall. He proved that their method (a quick removal of the bandages) was very uncomfortable for the patients.

This was his first encounter with the study of "cases where individuals make repeated mistakes - without learning much from their experiences. "

Ariely's nurses were worried about the patient's pain, and even with decades of experience accumulated, none of them found facts that demonstrated a less painful way of removing the bandages.

If these well-meaning people - people who worked with science - got accustomed to the empirically incorrect answer, who else in the world is doing the wrong things?

Each succeeding topic addresses a different issue, things we have come to accept, but which must be viewed from different perspectives to see the correct and true answers.

Human relativism

Ariely begins with information that everyone can understand: "We don't have an internal gauge, which tells us how much things are worth. Instead, we focus on the relative advantages of one thing over another and value it that way. "This is a simple truth of the human experience, which explains why its an insult to tell someone that you would never marry them, if he/she was the last person on earth.

Comparisons of simple values ​​aren't always made. We usually "focus on comparing things that are easily comparable - and avoid comparing things that can not be compared so easily. "

Its when we, unhappy citizens, find things relatively incomparable to our previous experiences, that we are open to manipulation. For example, marketers only need to advertise a lower but similar item next to an item they want to sell, and this will increase sales of the main item even if no one can figure out its value. Our perceptions of the target item are highlighted merely by the presence of an obvious comparison. It is a subtle and false way to control our evaluation, but overcoming this comparative impression requires a lot of mental activity.

The fallacy of supply and demand

It began, as did many schemes, with a conversation between two wealthy men on a private tropical island. Jean-Claude Brouillet had discovered a multitude of oysters that gave him black pearls in the waters of that island. He approached the pearl magnate, Salvador Assael, and the two began working together.

Since there was never a demand for black pearls, Assael was unable to sell them - until he tried to sell them for an extravagant price in a shop window on Fifth Avenue (New York). After that, the black pearl market exploded.

This example illustrates "arbitrary coherence." Although initial prices (such as Assael's pearl prices) are arbitrary, once these prices are made official in our minds, they will shape not only current prices but also future prices (this makes them consistent).

Many commodities have coherent and arbitrary value. Gold is an example. The surprise is that, as individuals, our first arbitrary price impressions define how we will interpret monetary value in numerous decisions, even when we make those decisions in a market that proves that our definitions are wrong, too high or too low.

This isn't the type of print you can skip in the supermarket for example. These decisions influenced by your first impression can last for months or years.

The "zero" cost of things

You may believe that identifying your settings will allow you to have more logical control over your purchasing estimates.

Ariely's findings show that our value judgments change substantially when something is free. When Amazon.com offered free delivery on orders over a certain amount, their sales grew worldwide, except in France.

When Amazon investigated, they found the French site wasn't offering free delivery, charging 20 cents. That's almost nothing, and it's a great value for deliveries - but that's not the point. When Amazon offered free delivery, sales in France rose like sales in the rest of the world.

The difference between twenty cents and a penny is small. But the difference between a penny and zero is huge! To understand how this works in the traditional economy, you need to imagine a traditional supply and demand curve. It's a straight diagonal line - when prices fall; demand goes up. Repeat this, and the rate of change remains constant.

If suppliers can have a large peak in demand by reducing the prices of certain parts of their offerings from 1 to zero, then the notion that the supply-demand curve is linear goes out the window.

Social rules and their costs

How is the separation between your social life and your business? Ariely shows that the line between the two spheres is well defined but easily crossed.

When money is mentioned to people before a task, they can operate by market standards: one's performance grows with pay, self-sufficiency rises but less likely to help a random person.

When researchers measured the performance of those working under the market social norms - the task was presented as a favor rather than a job. Those who do favors work as hard as people who work for a salary.

Why not receiving compensation motivates someone more than getting paid? It would be logical to say it's better to get paid than not at all.

When our brains understand that they need to think regarding the market, we automatically strive to be compensated. When someone asks a favor in social terms, we work on a much higher standard; at least as high as a paid job.

The power of free things

There are two demand drivers in classical economics. First, demand increases as price falls, because more buyers can enter the market. Second, with lower prices, each buyer can buy more units.

These are reasonable assumptions about consumer behavior. However, what Ariely learned was that there is a low price that makes the second law of demand stop working.You can guess the price: zero.

When something is offered at declining prices, the number of buyers and the units that each buyer buys, go up. When some things are freely offered, the first law remains.

When something is offered at no cost - and it isn't offered along with other costly items - we behave better, as responsible members of society.

This reverses the traditional notion of economic scarcity. Because resources are finite, the traditional model says that we will act with selfishness and get what we want, since we can afford it. Free items, however, are more affordable than those that cost a few cents, yet we treat them with more responsibility, with a community concern about scarcity.

Excitement's influence in our moral decisions

This chapter is about one of the most controversial studies you have ever heard. Ariely recruited a sample group of young men, UC Berkeley students. He asked them about sexual excitement and the chance to act sexually irresponsible - having unprotected sex, unconventional sex, or even rape and that was not the controversial issue.

The second part of the experiment startled everyone. Each participant answered the same questions while masturbating.

They received computers full of pornographic images, and received instructions like "make sure you're alone."

It was, in fact, a very well planned experiment. The findings of what people can do when they are in a state of excitement were impressive,

"In all cases," writes Ariely, "in all questions about unprotected sex, sexual contact with animals, rape, etc.," our young participants responded very differently when they were excited compared to when they were in a normal state.

In other words, the study suggests that each moral preference becomes flexible in times of excitement.

The problems with the self discipline

MIT students,  intelligent people, were part of Ariely's experiments because of her position at the university. Ariely offered three grades, varying degrees of flexibility over deadlines for three exercises. For a class, students could determine their own deadlines, but they would need to accept them after the decision. The second class had no deadlines. They just had to turn in the three exercises at the end of the semester, all together. The third class received traditional deadlines decided by the teacher.

The resulting scores were in line with the degree of freedom that each class had. Those who received deadlines set by the teacher did better, those who could choose their deadlines came in second, and those with more freedom delivered the worst jobs.

This demonstrates how bad people are with self-discipline. We are better at accomplishing tasks with goals when an outside force dictates our commitments or penalties.

The price difference between buyers and sellers

This chapter describes the "donation effect," the observation that when we own something - whether it is a car, a violin or a cat - we begin to value this thing more than others.

Ariely offered to buy and sell tickets for a basketball game, a good commodity, for which students need to go through a long lottery process just to have a chance to buy. The sample group included only lottery participants, so all members of the sample group wanted those tickets.

Ariely offered to buy the tickets from those who had tickets available and then offered to sell them to those who didn't. The discrepancy in value shows the power of the "donation effect." Students who didn't have the ticket would buy for an average of $ 175 each. For a simple college basketball game, this was a great price.

But not according to ticket sellers. The average selling price was $ 2,400; about 14 times the current value of the purchase.

Although Ariely disregarded the potential that buyers and sellers could be lousy negotiators, we should consider that the distorted view of the ticket value from the sellers went beyond bad negotiation. Each group offered completely different prices.

How options distract us from our objectives

"How can we free ourselves from this irrational urge to run after useless options?" Ariely raises this question after providing evidence for the presence of options, even options that have already proved worthless in every way.

Ariely used a computerized simulation that closed virtual doors to demonstrate this, but we all know from experience that it can be difficult to give up anything - a class, a hobby, a relationship - even when we leave things for something we know to be better.

Thanks to the innumerable irrational behaviors of the human brain, the urge to pursue worthless options cannot be eliminated. However, we can consider them if we are honest.

How expectations influence us

In countless preferences tests, a certain expectation was that our tastes were engraved in our minds, explicitly or implicitly. In a beer taste test, the "secret" ingredient was revealed before or after tasting. In the famous "Pepsi Challenge," a popular taste test between two famous cola brands, participants had to determine, using a magnetic resonance imaging machine, which of the drinks stimulated more pleasure in the brain.

In any case, expectations influence the taste perception - even on a psychological level. For example, Coca Cola's legendary marketing campaigns increase your sense of pleasure.

Our brains naturally use our preconceptions as shortcuts to decipher the world around us. This can be extremely useful, but as members of a society, we know that we need to use our rationality to overcome destructive prejudices.

The quantitative effects of stereotypes are striking. Outside prejudice can influence our performance. If we are good at something, but stereotypes say we arent, we are reminded of them, and our minds work against us.

The placebo effect

With regards to placebos, the biggest problem is what is real or not. A ligature - tying an artery - was considered an ineffective procedure when a cardiac surgeon performed it one group of patients and to another group, two small incisions in the same place. All patients experienced the same relief, but they still had the same heart problem. So the procedure proved useless.

Still, the placebo effect works like a scalpel that cuts in two directions. It can mask real medical problems with false results, obviously with destructive potential. But when its applied as a low cost and low-risk cure, it cannot be ignored.

Ariely argues that the medical establishment has many placebos that mask treatments, and that even doctors believe in them. Unknown placebos should be eradicated, but the power of placebos raises a question: is false medicine necessarily bad if it is still a remedy?

Traditional economy is proved wrong

Several students set up a table on the street giving "free money." They weren't vouchers worth money, nor discounts, but actual bills of up to $ 50. People just needed to get close to the table and get a note.

Even with the 50 dollars, only 19% of those who passed by the table, stopped and took a bill. If you've ever wondered how distrustful Americans are about marketing campaigns, that's the answer.

This simple and surprising experiment conducted by Ariely in Boston directly questions economic standards. He notes that traditional economists would say, "There are no $ 100 bills thrown on the street; if they existed, someone would have caught. "

Contrary to reason, the day was over and the tables were still full of $ 50 bills, and they couldn't persuade anyone to pick them up.

Dishonesty moral reminders

Several groups of students have proved themselves capable of cheating (but only a little) if they have the opportunity. After this initial discovery, Ariely and her assistant added a task before the opportunity to cheat was offered. Participants were to list all ten commandments they could remember, and on another occasion, they had to sign an agreement to honor the code of honor.

On both occasions, cases of cheating were eliminated quantitatively.

When we talk about macroeconomics, it is difficult to avoid important information, and the effect of moral reminders to avoid cheating. The dominant force in a democratic world is economic development. In the 19th and 20th centuries, economic development models were based on rational thinking and rationalization has been the only acceptable way of public policy since the Enlightenment.

Remembering a religious commandment, or simply a moral appeal against selfishness has power over our minds. A reason may be the best guide to our questions, but we must consider whether the modern world has thrown away and no longer uses the irrational solutions of the ancient world simply because they are old or because they are inefficient.

Final Notes

People are more likely to steal goods and not money, though the goods are not as valuable as money. The clear demonstration of this discovery happens when Ariely uses the same incentive to cheat in the experiment that showed people were affected by the ten commandments.

Essentially, participants were given the same chance to steal extra tokens where they could steal extra cents. In this experiment, they would need to convert tokens into real money at one station, just a few steps away. As a result of this adjustment, people's propensity to steal has doubled.

In a comparison with the previous experiment, Ariely writes that "When we deal with money, we are led to think of our actions as if we had signed a code of honor."

This is threatening in an economy where transactions are increasingly digital. Money is disappearing, and it may be that our moral judgments disappear with it.

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