Summary and Analysis of Predictably Irrational: The Hidden Forces That Shape Our Decisions

Based on the Book by Dan Ariely

• Publisher: Worth Books
• Year: 2017
• ISBN:
  9781504044882
• Topic: Commerce
• Subtopic: Comportement du consommateur

So much to read, so little time? This brief overview of Predictably Irrational tells you what you need to know—before or after you read Dan Ariely's book. Crafted and edited with care, Worth Books set the standard for quality and give you the tools you need to be a well-informed reader. This short summary and analysis of Predictably Irrational includes:

• Historical context
• Chapter-by-chapter overviews
• Important quotes
• Fascinating trivia
• Glossary of terms
• Supporting material to enhance your understanding of the original work

About Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely: Predictably Irrational, the New York Times bestseller by Duke psychology and behavioral economics professor Dan Ariely, challenges the idea that we always make perfectly rational decisions. Featuring examples from daily life alongside results of his fascinating experiments, Ariely explains how emotional, psychological, and social factors can lead to irrational behavior—which can be damaging to ourselves and others. From the coffee we drink or the medicine we take, to the companies we support and the relationships we value, we make irrational decisions every day that can cost us in the long run. Ariely reveals not only when and how we tend to act irrationally, but why, so we can learn from our mistakes and design ways to facilitate smarter decision-making. The summary and analysis in this ebook are intended to complement your reading experience and bring you closer to a great work of nonfiction.

Summary

Introduction

When he was a teenager living in Israel, an explosion left more than 70% of Dan Ariely’s body covered in third-degree burns. For three years, unable to participate in normal, daily life routines while undergoing treatments, he began observing how people around him acted and made decisions. One of the most painful parts of his recovery was the daily bath during which nurses ripped off the bandages covering his burns. Years later, as a student at Tel Aviv University, he decided to study the nature of pain—specifically, Was tearing off the bandages as quickly as possible the best strategy for a patient’s well-being? He found that, contrary to his nurses’ beliefs, people were better able to endure a lower level of pain over a longer period of time. When he discussed the results with his former nurses, one suggested that they ripped the bandages off quickly because it shortened the time of their own agony watching patients suffer.

Ariely realized that decisions—even those made in a hospital, an environment supposedly governed by rational science—were often made for irrational reasons. He wondered in what other situations people made such decisions—and if it would be possible to predict the circumstances under which we might act irrationally.

Need to Know: Behavioral economics is the study of how psychological, emotional, and other forces affect our decision-making.

Chapter 1: The Truth about Relativity

Why Everything Is Relative—Even When It Shouldn’t Be

To demonstrate how comparisons and relativity affect decision-making, Ariely conducted an experiment using an offer he saw for subscription options to The Economist magazine. Given three choices ($59 for online-only access, $125 for a print-only subscription, or $125 for both print and online), study participants overwhelmingly chose the third option. However, when he conducted a study offering only the $59 online-only option and the $125 print-and-online choice, the majority opted for the first choice. Without having the middle option (a so-called “decoy”) that established the value of print-only at $125, people couldn’t compare the relative value of online-only versus print and online.

Companies use this strategy to encourage customers to spend more all the time. For example, when the kitchen supply store Williams-Sonoma introduced their first bread machine at the relatively expensive price of $275, it didn’t sell—buyers had little knowledge of the bread-machine market, and no basis for comparison. However, when the company offered a second model at a 50% higher price, sales of the $275 model surged. In comparison, the cheaper model appeared to be a good value.

This concept of relative worth has societal implications. In 1993, federal security regulators began to require that companies reveal the pay of their top executives to stop outrageous salaries and benefits. The regulation ended up having the opposite effect. Now that CEOs could see how much their competitors were making—thus learning their relative value—they demanded to earn as much as their higher-paid peers. Currently, the average CEO makes three times as much as before their salaries were public.

Need to Know: We aren’t very good at deciding the value of an item in a vacuum. Instead, we largely use comparisons to other items to determine its relative worth, or relative advantage—generally determining the value of an object based on its comparison to a similar, yet nonidentical, object. When we are aware of the theory of relative value, we can be more attuned to marketing strategies designed to take advantage of our innate desire to make comparisons.

Chapter 2: The Fallacy of Supply and Demand

Why the Price of Pearls—and Everything Else—Is Up in the Air

After World War II, Italian diamond dealer James Assael partnered with a Frenchman who offered him a large supply of black pearls. Although there was then no market for them, Assael enlisted his friend, jeweler Harry Winston, to help create demand. Winston advertised the black pearls alongside diamonds, rubies, and emeralds—and gave them an equally high price tag. This pricing gave consumers an “anchor”—and convinced them the pearls were of equal value to the gemstones. Assael and Winston were able to establish a high price-point for a product for which there was previously no demand.

This bit of history illuminates three important concepts of behavioral economics. The first, anchor price, refers to the initial price we see for a product, which establishes its value in our minds. The second, imprinting, is the natural phenomenon of influence by initial stimulus: like a baby gosling follows the first moving object it sees, linking that with “mother” in its mind, customers linked Harry Winston’s glamorous display of black pearls to their worth. The third, arbitrary coherence, is the idea that no matter what factors affect our anchor price, once it’s set in our minds, it will continue to influence how much we think the product is worth. This goes against the traditional economic theory that price is determined when supply and demand reach equilibrium.

Ariely and his colleagues conducted an experiment using participants’ social security numbers to set pricing to prove just how arbitrary anchor prices can be. Participants first wrote down the last two digits of their social security numbers, and then wrote the prices they would pay for a number of items the experimenters presented—such as a high- and low-end wine, a keyboard, and a cordless trackball. All the participants’ offers were logical—such as being willing to pay more for the higher end wine—but those whose social security numbers ended in higher numbers tended to price all the items higher.

Need to Know: The basis of the free market economy—in which we trade goods and services based on an assumption that all players in the market know the absolute value of them—is inherently flawed, since we don’t always perceive value in the same way, and these perceptions can be influenced by the most meaningless of factors.

Chapter 3: The Cost of Zero Cost

Why We Often Pay Too Much When We Pay Nothing

Consumers are naturally loss-averse. Ariely hypothesizes that we are emotionally drawn to things that are “free” because we feel there is no risk of loss. “Free,” in fact, is such a powerful concept that it erodes our ability to make rational decisions based on cost-benefit analysis. It often even ends up costing us money, as when we buy something we don’t need because it comes with a “free gift,” or buy an item we don’t like to take adv...