Book Learnings: Predictably Irrational

Below are my notes from the book ‘Predictably Irrational’ by Dan Ariely, which i found to be one of the best books on behavioural science. In case you have read the book, this would be a good revision for you. If not, and you have it on your reading list for the longest, hope the below piques your interest further!

Chapter 1 – The Truth About Relativity

• The concept of absolute choice does not exist. All choices are relative. Not only do we compare, but we take a shortcut and compare things that are more easily comparable, and make that as our universe of choices, disregarding the option not similar to the group of comparables.
• The ‘decoy effect’ takes advantage of this fallacy by positioning itself as the most expensive choice that no one will choose to subtly guide the user to the second most expensive choice which is similar to the one most expensive.

Chapter 2 – The Fallacy of Supply and Demand

• Anchoring can happen even with respect to unrelated activities, also called arbitrary coherence. Work consists of whatever a body is obliged to do, and that play consists of whatever a body is not obliged to do. Strong analogy of Tom Sawyer making his friends whitewash fences.
• the sensitivity we show to price changes might in fact be largely a result of our memory for the prices we have paid in the past and our desire for coherence with our past decisions—not at all a reflection of our true preferences or our level of demand.

Chapter 3 – The Cost of Zero Cost

• Most transactions have an upside and a downside, but when something is FREE! we forget the downside, FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is.
• I think it’s because humans are intrinsically afraid of loss. The real allure of FREE! is tied to this fear. There’s no visible possibility of loss when we choose a FREE! item (it’s free). But suppose we choose the item that’s not free. Uh-oh, now there’s a risk of having made a poor decision—the possibility of a loss. And so, given the choice, we go for what is free. Zero is not just another discount.
• Zero is a different place. The difference between two cents and one cent is small. But the difference between one cent and zero is huge. The critical issue arises when FREE! becomes a struggle between a free item and another item—a struggle in which the presence of FREE! leads us to make a bad decision.

Chapter 4 – The Cost of Social Norms

• Overall, the participants in the “salary” group showed many of the characteristics of the market: they were 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; 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.
• There are many examples to show that people will work more for a cause than for cash.
• No one is offended by a small gift, because even small gifts keep us in the social exchange world and away from market norms.
• 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 re-establish. Once the bloom is off the rose—once a social norm is trumped by a market norm—it will rarely return.

Chapter 5 – The Influence of Arousal

• In Freudian terms, each of us houses a dark self, an id, a brute that can unpredictably wrest control away from the superego. Thus a pleasant, friendly neighbour, seized by road rage, crashes his car into a semi. A teenager grabs a gun and shoots his friends. A priest rapes a boy. All these otherwise good people assume that they understand themselves. But in the heat of passion, suddenly, with the flip of some interior switch, everything changes.
• Moreover, the study suggested that our inability to understand
• ourselves in a different emotional state does not seem to improve with experience; we get it wrong even if we spend as much time in this state as our Berkeley students spend sexually aroused. Sexual arousal is familiar, personal, very human, and utterly commonplace. Even so, we all systematically under predict the degree to which arousal completely negates our superego, and the way emotions can take control of our behaviour.

Chapter 6 – The Problem of Procrastination and Self Control

• But the biggest revelation is that simply offering the students a tool by which they could recommit to deadlines helped them achieve better grades.
• Honda started lumping all 18,000 services into specific time frame or mileage run. But the biggest revelation is that simply offering the students a tool by which they could recommit to deadlines helped them achieve better grades.  It was a true procrastination-buster, as it instructed customers to get their service done at specific times and mileages. It guided them along. And it was so simple that any customer could understand it. Customers were no longer confused. They no longer procrastinated. Servicing their Hondas on time was easy.

Chapter 7 – The High Price of Ownership

• The first quirk is that we fall in love with what we already have. Suppose you decide to sell your old VW bus. What do you start doing? Even before you’ve put a FOR SALE sign in the window, you begin to recall trips you took. You were much younger, of course; the kids hadn’t sprouted into teenagers. A warm glow of remembrance washes over you and the car. This applies not only to VW buses, of course, but to everything else. And it can happen fast.
• The second quirk is that we focus on what we may lose, rather than what we may gain. When we price our beloved VW, therefore, we think more about what we will lose (the use of the bus) than what we will gain (money to buy something else). Likewise, the ticket holder focuses on losing the basketball experience, rather than imagining the enjoyment of obtaining money or on what can be purchased with it. Our aversion to loss is a strong emotion, and as I will explain later in the book, one that sometimes causes us to make bad decisions.
• Ikea Effect – In fact, I can say with a fair amount of certainty that pride of ownership is inversely proportional to the ease with which one assembles the furniture; wires the high-density television to the surround-sound system; installs software; or gets the baby into the bath, dried, powdered, diapered, and tucked away in the crib.
• Another peculiarity is that we can begin to feel ownership even before we own something. Think about the last time you entered an online auction.

Chapter 8 – Keeping Doors Open

• In the end, we tried another sort of experiment, one that smacked of reincarnation. In this condition, a door would still disappear if it was not visited within 12 clicks. But it wasn’t gone forever. Rather, a single click could bring it back to life. In other words, you could neglect a door without any loss. Would this keep our participants from clicking on it anyhow? No. To our surprise, they continued to waste their clicks on the “reincarnating” door, even though its disappearance had no real consequences and could always be easily reversed. They just couldn’t tolerate the idea of the loss, and so they did whatever was necessary to prevent their doors from closing.
• In a modern democracy, he said, people are beset not by a lack of opportunity, but by a dizzying abundance of it. In our modern society this is emphatically so. We are continually reminded that we can do anything and be anything we want to be. The problem is in living up to this dream. We must develop ourselves in every way possible; must taste every aspect of life; must make sure that of the 1,000 things to see before dying, we have not stopped at number 999. But then comes a problem—are we spreading ourselves too thin? The temptation Fromm was describing, I believe, is what we saw as we watched our participants racing from one door to another.
• THE OTHER SIDE of this tragedy develops when we fail to realize that some things really are disappearing doors, and need our immediate attention. We may work more hours at our jobs, for instance, without realizing that the childhood of our sons and daughters is slipping away.

Chapter 9 – The Effect of Expectations

• But the interesting thing was that when the odd condiments were offered in the fancy containers, the coffee drinkers were much more likely to tell us that they liked the coffee a lot, that they would be willing to pay well for it, and that they would recommend that we should start serving this new blend in the cafeteria. When the coffee ambience looked upscale, in other words, the coffee tasted upscale as well.
• Whenever a person received a squirt of Coke or Pepsi, the center of the brain associated with strong feelings of emotional connection was stimulated. But when the participants knew they were going to get a squirt of Coke, something additional happened. This time, the frontal area of the brain, an area involved in higher human brain functions like working memory, associations, and higher-order cognitions and ideas—was also activated. It happened with Pepsi—but even more so with Coke (and, naturally, the response was stronger in people who had a stronger preference for Coke). Conclusion – Excessive Advertising and Marketing works.
• The women in one group were asked questions related to their gender. The women in the second group were asked questions related to their race. thereby priming the women’s thoughts for race-related issues. The performance of the two groups differed in a way that matched the stereotypes of both women and Asian- Americans. Those who had been reminded that they were women performed worse than those who had been reminded that they were Asian-American. These results show that even our own behavior can be influenced by our stereotypes, and that activation of stereotypes can depend on our current state of mind and how we view ourselves at the moment.

Chapter 10 – The Power of Price

• 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.
• In general, 2 mechanisms shape the expectations that make placebos work – belief and conditioning.
• At $2.50 almost all our participants experienced pain relief from the pill. But when the price was dropped to 10 cents, only half of them did. 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. Conclusion: Placebo acts on the price of the pill too.

Chapter 11 and 12 – The Context of Our Character

• We care about honesty and we want to be honest. The problem is that our internal honesty monitor is active only when we contemplate big transgressions, like grabbing an entire box of pens from the conference hall. For the little transgressions, like taking a single pen or two pens, we don’t even consider how these actions would reflect on our honesty and so our superego stays asleep.
• We are primed to not indulge in dishonesty with respect to cash, since exchange of cash represents an honor code, while non monetary items are not honor bound.
• The scary thought is that if we did the experiments with nonmonetary currencies that were not as immediately convertible into money as tokens, or with individuals who cared less about their honesty, or with behavior that was not so publicly observable, we would most likely have found even higher levels of dishonesty. In other words, the level of deception we observed here is probably an underestimation of the level of deception we would find across a variety of circumstances and individuals.
• People who were asked to recount Ten Commandments were more honest in the experiment than those who were asked to recount something not related to honesty.

Chapter 13 – Beer and Free Lunches

• One of the main differences between standard and behavioural economics involves this concept of “free lunches.” According to standard economics, all human decisions are rational and informed, motivated by an accurate concept of the worth of all goods and services and the amount of happiness (utility) all decisions are likely to produce. As a consequence, economic theory asserts that there are no free lunches—if there were any, someone would have already found them and extracted all their value. Behavioral economists, on the other hand, believe that people are susceptible to irrelevant influences from their immediate environment (which we call context effects), irrelevant emotions, shortsightedness, and other forms of irrationality. What good news can accompany this realization? The good news is that these mistakes also provide opportunities for improvement.
• In essence we are limited to the tools nature has given us, and the natural way in which we make decisions is limited by the quality and accuracy of these tools.
• A second main lesson is that although irrationality is commonplace, it does not necessarily mean that we are helpless. Once we understand when and where we may make erroneous decisions, we can try to be more vigilant, force ourselves to think differently about these decisions, or use technology to overcome our inherent shortcomings.

Hope the above has been helpful to you! Feel free to add anything else that you recollect in the comments below. Book recommendations are also welcome!