Introduction

We are not only irrational, but predictably irrational – that our irrationality happens the same way, again and again. Whether we are acting as consumers, business-people, or policymakers, understanding how we are predictably irrational provides a starting point for improving our decision-making and changing the way we live for the better.

Dan Ariely tells us a story: When he was eighteen, he was the victim of an explosion of ‘a large magnesium flare’. Medical treatments in the aftermath and the ensuing isolation left him with an inquisitive and thoughtful nature–and a boatload of painful remedies.

One such remedy was his daily ‘bath’. During this ‘bath’, bandages soaked in disinfectant were removed from his body, and new ones put on. When lacking skin, as he did at the time, this is an excruciating experience. In dealing with the pain, the nurses who removed his bandages were confronted with two options:

1. Remove the bandage quickly and immediately, suffering the patient a sharp burst of pain
2. Remove the bandage slowly, spreading the pain out over a longer period of time, but perhaps increasing the total pain suffered

This is a familiar dilemma to us all, even if you don’t realize it immediately. The nurses preferred option 1, and reading it initially, I agreed.

Dan eventually recovered, but as he advanced his scholarly career, he kept this dilemma in his mind. He later learned that the nurses were wrong, or that ’they were most likely the victims of inherent biases in their perceptions of their patients pain’ as he put it. The opposite was true, and he had empirically proven it–as a good scientist would. When he pursued this with his (now, former) nurses, by and large most were shocked and changed their ways.

Dan’s point in bringing this up is that, if even these extremely experienced nurses didn’t realize their methods were wrong, their behaviors were irrational, then perhaps we often similarly–wrongly–deal with common problems, repeatedly. In Dan’s words, most of our mistakes are predictably irrational, and by understanding the behaviors that lead to them better, we can make less of these mistakes.

Chapter 1

As H. L. Mencken, the twentieth-century journalist, satirist, social critic, cynic, and freethinker noted, a man’s satisfaction with his salary depends on whether he makes more than his wife’s sister’s husband. Why the wife’s sister’s husband? Because this is a comparison that is salient and readily available.

Our decisions are typically informed not by absolute values, but by comparison with other items. This is especially true when, say, we’re purchasing an item about which we’re not experts on–we look for the closest item about which we are reasonably well-informed about, and base our purchase on that.

Dan gives us an interesting example: he read three offers on The Economist’s website once that piqued his interest: a $59 internet-only subscription; a $125 print-only subscription; and a $125 print AND internet subscription. He quizzed his students on which plan they would pick: 16 chose the first; 0 chose the second; and 84 chose the final option. This makes some sense: who would pick the print-only subscription when the print and internet subscription is the exact same cost? But is there any specific rationale for why more students selected the last option than the first?

To figure this out, Dan ran another test:

• a $59 internet-only subscription
• a $125 print AND internet subscription

If you thought the results would be similar, you’d be wrong! 68 students selected the first option, and only 32 chose the second. Why is this?

Well that’s because, as Dan puts it, ‘we not only tend to 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’. Basically, given three options, two of which are similar but of which one is visibly better, we would select the one that is better, disregarding the third option entirely! For example, if you have three choices: A, B, and B’–where B is a better version of B’, and A is completely distinct from the two–you are more likely to pick B!

This has immediate psychological importance for which Dan offers an interesting example:

in 1993, federal securities regulators forced companies, for the first time, to reveal details about the pay and perks of their top executives. The idea was that once pay was in the open, boards would be reluctant to give executives outrageous salaries and benefits. […] But guess what happened. Once salaries became public information, the media regularly ran special stories ranking CEOs by pay. Rather than suppressing the executive perks, the publicity had CEOs in America comparing their pay with that of everyone else. In response, executives’ salaries skyrocketed. […] Now the average CEO makes about 369 times as much as the average worker–about three times the salary before executive compensation went public.

Chapter 2

Or, as Mark Twain once noted about Tom Sawyer, “Tom had discovered a great law of human action, namely, that in order to make a man covet a thing, it is only necessary to make the thing difficult to attain.”

James Assael was once a supplier of waterproof watches to the US war-effort but as the war died down he couldn’t find a new market for his watches. The Japanese had a market, but they didn’t have the money, only pearls. Assael took the deal and decided to trade his watches for pearls, and soon became known as ’the Pearl king’.

A while later, he was approached by a Frenchman one day who had a massive supply of ‘black pearls’. There was no market for these black pearls, however. Assael tried to market them simply, but these efforts failed. If he couldn’t tap into old markets, Assael decided to create his own market, and this market would be willing to pay extortionist amounts for these–previously worthless–pearls.

He went to a prominent gemstone dealer friend of his and had him display the pearls in the window of his store for exorbitant prices, alongside his other gems. Parallel to that, he also ran an advertisement campaign marketing the black pearls alongside the most expensive of jewelry.

Soon, the overpriced black pearls were selling like hotcakes. Assael had taken something essentially unseen before–and therefore worthless–and made it a literal gem. How? He associated this item with gems–this initial comparison the consumers were led to was imprinted onto their minds, and informed their later assumptions of its price. They had never seen a black pearl or its price before, but if you were to ask them its price after they saw these adverts, it would be outrageously expensive.

Dan calls this ‘anchoring’ or ‘imprinting’; when we buy a product at a certain price, we become ‘anchored’ to that price. In an experiment, he had his students associate the last two digits of their social security number with an assortment of items, and then asked them to bid on these items; he discovered that the people with the largest last-two-digits paid, on average, a higher price for each item than the students with the smaller last-two-digits. These last-two-digits became an ‘anchor’.

This is ‘arbitrary coherence’; initial prices are arbitrary, but they shape our perception of later prices. Price-tags alone are not anchors, however. They are associated, ‘imprinted’, when we contemplate buying a product at that price-tag. Only then do we resort to these comparisons.

And anchors are not forever; we gradually change our anchors as we are exposed to change. If gasoline prices are hiked–changed from our anchor–we complain and maybe drive a little less for the first few months, but eventually we get used to the price and return to our pre-hike level of gasoline use. In so doing, our anchor changes to the new post-hike price.

This leads into herding; when you see many people doing a certain thing, you are more inclined to do that thing yourself. This is behavior herding. Self-herding, however, is when you do something for the first time, like going to Starbucks, and the next time you walk past a Starbucks you think “I went there once before, so going again is a good decision”; you are herding, but instead of herding behind other peoples’ decisions, you are herding behind your own past decisions, your anchors. This becomes a cycle, and soon, as they say, ‘old habits die hard’.

Another question is, why Starbucks? If the coffee was cheaper, for example, at your previous choice of coffee store, why did we change to Starbucks? Why did this ‘anchor’ at our previous coffee shop not influence our decision this time? The answer is that, by brooking comparisons to other coffee shops and making Starbucks as distinct from them as possible, Howard Shultz (Starbucks’ founder) prevented potential customers from using other coffee shops as anchors for Starbucks.

Chapter 3

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!

It’s time for another experiment. Dan sets up a table at a large public building with two offerings: Hershey’s Kisses (henceforth abbreviated HK) and a Lindt truffle. A Lindt truffle, for reference, costs about 30 cents. He offers the Lindt for 15 cents, and the HK for 1 cent. As customers see the table, they make a simple cost-benefit analysis and realize that the truffle is of superior quality and comparatively better than the HK, and 73% of them choose it!

Dan now cuts off one-cent from the prices of both. The HK is offered for free, and the Lindt for 14 cents. The fundamental dynamics here haven’t changed, and the Lindt is still the better choice, right? You’re right, but the customers thought differently! 69% selected the HK this time, compared to 31% for the truffle!

Zero is not just another price; zero can lead us into trouble. There’s nothing wrong with grabbing free items; the problem is when two-for-one deals, offers between a free and non-free item, and other dilemmas come to. When deciding between a free and non-free item, we do not consider the free item as 0, but merely as free. We forego traditional cost-benefit analysis in so doing!

Time also figures in this issue. Free items often have an added time cost: you’re usually not the only one pumped to get in line for a free serving of ice cream!

Chapter 4

Dan organizes another experiment. This time: he requests three groups of students to accomplish the same task. They have to drag (digital) circles into squares, as many as they can, within a time limit of five minutes. One group gets paid $5 for participation, one group gets paid 50c, and the last group doesn’t get paid at all.

The group that got paid $5 dragged (on avg) 159 circles, and the ones who received 50c dragged 101 circles on avg. The ones who didn’t get paid? They dragged 168, more than either! Why is this?

According to Dan, we have two ‘norms’ we interact according to: social norms, and market norms. Social norms are friendly requests, and involve our communitarian and social nature. Market norms, on the other hand, are determined by sheer mathematics: cost-benefit analyses, and the like.

So the reason the $5 group outperformed the 50c group is, as per market norms, simply because they were being paid less and were thus less motivated to do work. The reason for the last group working harder than the $5 group is simply this: there are some things ‘money can’t buy’, and the motivation created by our social norms (shown in volunteer work, charity, etc.) is one of those things.

An interesting thing to note is when exactly we apply either norm. According to Dan, the moment money is even mentioned in work or requests, our social norms evaporate and our market norms take hold. Having these two parallel ethics within us is fine while they’re separated (the mythical ‘work-life balance’ among others), but sometimes they intersect with harmful consequences. Dan gives a good example:

A guy takes a girl out for dinner and a movie, and he pays the bills. They go out again, and he pays the bills once more. They go out a third time, and he’s still springing for the meal and the entertainment. At this point, he’s hoping for at least a passionate kiss at the front door. His wallet is getting perilously thin, but worse is what’s going on in his head: he’s having trouble reconciling the social norm (courtship) with the market norm (money for sex). On the fourth date, he casually mentions how much this romance is costing him. Now he’s crossed the line. Violation! She calls him a beast and storms off. He should have known that one can’t mix social and market norms–especially in this case–without implying that the lady is a tramp. He should also have remembered the immortal words of Woody Allen: “The most expensive sex is free sex.”

One way to circumvent the evaporation of social norms, but still compensate whomever you’re involving, is to offer them gifts instead. Gifts, as opposed to hard cash, still figure in our social norms. Hearing of gifts does not move us into market norm-mode. Repeating the experiment, but instead with (differently priced) chocolates instead of money, Dan found that pretty much all groups performed the same; as in, they all worked with social norms in mind.

There are advantages to market norms, however. As per Dan: ‘market norms are not just about effort–they relate to a broad range of behaviors, including self-reliance, helping, and individualism.’ For example, a group of researchers gave two groups of participants puzzles with themes: one theme involved money, while the other theme was ’neutral’. The participants attempting to solve the puzzles related to money worked far longer before asking for help than the ones with the neutral themes.

However, you have to be careful in breaking social norms in favor of market ones. Dan gives an example: a daycare in Israel considered imposing a fine on parents late to pick their children up. The problem? Originally, parents and daycare workers were operating on social norms, and thus parents would feel a good dose of guilt on being late, perhaps changing their behavior. After introducing the market norm (fee), the parents actually started being more tardy, because ’they could decide for themselves whether to be late or not’ and felt no guilt (after all, they were compensating them!).

That’s not all, though. The daycare center reversed the policy, but it resulted in a further increase of tardy pickups. After all, now there were no market or social norms in place. What does this tell us? It takes a long while for social norms to recover after being replaced.

Chapter 5

Dan continues on the topic of market norms. His experiment this time involves Starburst Fruit Chews. His hypothesis is this: if he displays a limited number of fruit chews for the price of 1c, more Starbursts will be sold (per person) than if he sold the Starbursts for free.

As you’ve probably figured out by now, his hypothesis rang true. ‘When the Starbursts cost a cent apiece, the average number of candies per customer was 3.5, but when the price went down to zero, the average went down to 1.1 per customer.’. This contradicts two laws of demand:

1. When the price of a product goes down, its market increases because more people can afford it
2. This market may also buy more than one of said product, further increasing its demand

The first law rings true: in real numbers, more Starbursts were given away than bought. But the second law is disproven. This is, of course, because our social norms take over when we see the ‘gift’ Starbursts, and we think ‘I shouldn’t take too many because other people will also want some’.

Dan gives us another interesting example: he recently went to a sushi restaurant with his friends. At the end of their meal, there was one tuna left, but neither he nor his friends had the courage to take it for themselves. When the waitress came to take it away, he asked her if this was common:

“Oh,” she said, “I find one extra piece left almost every time. I think it is even more common than people finishing all their sushi.”

Dan explores further. What about effort? If you were asked to work for a limited amount of Starbursts, maybe solve a number of puzzles, how many would you attempt and how many Starbursts would you take? Dan tried out the experiment with Lindt truffles this time. He had an assistant offer people the truffles for:

• 1 cent each
• Free-of-cost
• for however many e’s (literally, the letter) in a stack of pages they found, they could take a truffle (if they wanted)

The first group took an average of 30 truffles each, the second took 1.5, and the final group took 8.6; in-between, but closer to the second group.

Chapter 6

Dan veers into controversial territory in his next experiment. He decides to experiment on how much peoples’ attitudes change when in ‘emotionally heightened’ states, as compared to their attitudes in normal, impassioned situations.

His emotion of choice was sexual arousal. How would sexual arousal affect peoples’ decision-making skills? The experiment was open only to men. Dan sent out ads and soon had–quite a few–willing participants.

The experiment was of two parts: on the first day, the participant would be interviewed and then would have to answer a set of questions. These would be his normal, impassioned attitudes. The same participant would come back a few days later and be set up in a darkened room.

He would be provided ‘material’ and, at the same time as he ‘utilized’ this material, he would have to answer the same set of questions. These would be his attitudes in his emotionally heightened state.

The results were about as one would expect:

Across the 19 questions about sexual preferences, when Roy and all the other participants were aroused they predicted that their desire to engage in a variety of somewhat odd sexual activities would be nearly twice as high as (72 percent higher than) they had predicted when they were cold. […] In the five questions about their propensity to engage in immoral activities, when they were aroused they predicted their propensity to be more than twice as high as (136 percent higher than) they had predicted in the cold state. Similarly, in the set of questions about using condoms, and despite the warnings that had been hammered into them over the years about the importance of condoms, they were 25 percent more likely in the aroused state than in the cold state to predict that they would forego condoms.

This idea of a janus faced man–publicly respectable, privately passionate–has captivated many a human and is the basis of much literature. Our participants were perfectly rational and intelligent people, but all this evaporated in their passion.

What lessons can we learn from this? For starters, never assume that your passionate brain, your animalistic side, will do anything rational. While sane, take all precautions you would need.

Chapter 7

Giving up on our long-term goals for immediate gratification, my friends, is procrastination.

Dan turns his sights to procrastination, everybody’s biggest problem. The lack of self-control can be harmful both on an individual level and a larger scale. Dan notes that, before 2008, America had a negative savings rate, meaning that people were spending more money than they had. There are two reasons for this: easy access to credit and rampant consumerism. Ultimately, this consumptive contributed to the 2008 recession (Dan doesn’t mention it in the book).

Procrastination is similar to the phenomenon we observed in the last chapter, both stemming from the same underlying issue of humans as animals lacking self-control in certain moments. People often make ambitious promises to themselves but, in the moment, they tend to forget those commitments and postpone tasks. As a result, when they do complete their work, for example, it is often rushed and of lower quality.

To gain a deeper understanding of self-control, Dan conducts an experiment on his students. He divides them into three groups:

1. Group 1 has the freedom to choose their own deadlines for submitting three papers throughout the semester, but they will lose one percent of their grade for each day of delay.
2. Group 2 has no specific deadlines and only has to submit the papers by the end of the semester.
3. Group 3 has deadlines set by Dan himself.

Group 1 faced a dilemma in setting their deadlines. They realized that, if they set lenient deadlines, they would be more prone to procrastination. Therefore, most of them wisely utilized their freedom to set reasonable deadlines, with the penalty serving as a restraint of sorts. Group 3 had no choice in setting deadlines, and Group 2 could set individual deadlines without penalties or the need to inform the teacher.

When the results came in, on average, Group 3 students achieved the highest grades per paper, followed by Group 1, and Group 2 performed the worst. The lesson proved two-fold:

1. Penalties, rather than incentives, may prove more efficient in regards to curbing procrastination
2. In some cases, it may be more effective for a third party to dictate deadlines rather than individuals deciding for themselves

Although a simple solution to combat procrastination would be to have a third party enforce deadlines, Dan acknowledges that this approach is somewhat Orwellian. Instead, he decides to apply the idea of a penalty in synthesis with the idea of a third-party in a couple examples.

We could save a significant amount of money and potentially even our lives by regularly attending checkups. Alatts, our lack of self-control usually leads to us foregoing these checkups. But what if we had $200 riding on attendance? And, even worse, $200 of our own money? By holding an advance payment until you attend your scheduled checkup, your doctor can cleverly force you to attend! This synthesizes the idea of a penalty ($200 of our own money), and a third-party (the doctor). Another idea is for a user to set governors on their spending & borrowing on a credit card. If they exceed these limits, the smart card of sorts sends a notification to their family informing them of their fiscal irresponsibility, or taxes them a certain amount (which goes to charity). Here, the penalty is the tax or the shame, and the third-party is the smart-card itself.

Chapter 8

Ownership is not limited to material things. It can also apply to points of view. Once we take ownership of an idea–whether it’s about politics or sports–what do we do? We love it perhaps more than we should. We prize it more than it is worth. And most frequently, we have trouble letting go of it because we can’t stand the idea of its loss. What are we left with then? An ideology–rigid and unyielding.

We tend to value our possessions, especially the ones that figure most often in our lives, far more than a foreign objective observer would. This is why we often believe our possessions will sell for far more than potential buyers are willing to pay, and fail to sell them as a result.

As Dan states:

Ownership prevades our lives and, in a strange way, shapes many of the things we do. Adam Smith wrote, “Every man [and woman]… lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.”

That’s why it’s good to keep an inherent sense for what things are worth, both for selling and purchasing. If you were buying a home, wouldn’t it be great if your brain automatically calculated a quality:price ratio, where the quality also accounted for your personal preferences? We could manually figure something similar out, but unfortunately our biases prevent us. This is for three of our brain’s quirks:

1. We fall in love with what we already have, and in so doing let our emotions cloud objective evaluation. The entire concept of an ‘heirloom’ explains this well. The heirloom may be a worthless item, but our emotional attachment gives it its own value.
2. We also tend to focus on what we may lose rather than what we may gain. If you’re selling a car, you’re more likely to worry about how you will lose the use of the car rather than the utility of the money gained by selling it.
3. Finally, we expect the other participant in the transaction to view the matter as we do–emotionally. But, say a buyer, is more likely to measure the utility of the aforementioned heirloom objectively rather than based on emotional appeal.

Dan claims that all these quirks and biases are the result of ‘ownership’. As in, we feel for what own. The more you work for an item, the more ‘ownership’ you feel for it. Sometimes, we feel ownership before we even own something. This feeling is most visible in auctions, where it encourages us to bet more and more.

Marketers try to exploit this fact. Trials, for example, lead to us feeling ownership over the particular item being trialled. Eventually, we lose the strength to end the trial! Similar is the ‘30-day money back guarantee’; sure, you can always return the item if it’s not worth the money. But are we really capable of objectively evaluating and comparing the worth and utility of the items after we have ‘claimed ownership’ over it? Dan would say no.

Chapter 9

In 210 BC, a Chinese commander named Xiang Yu led his troops across the Yangtze River to attack the army of the Qin (Ch’in) dynasty. Pausing on the banks of the river for the night, his troops awakened in the morning to find, to their horror, that their ships were burning. They hurried to their feet to fight off their attackers, but soon discovered that it was Xiang Yu himself who had set their ships on fire, and that he had also ordered all the cooking pots crushed. Xiang Yu explained to his troops that without the pots and the ships, they had no other choice but to fight their way to victory or perish. That did not earn Xiang Yu a place on the Chinese army’s list of favorite commanders, but it did have a tremendous focusing efefct on his troops: grabbing their lances and bows, they charged ferociously against the enemy and won nine consecutive battles, completely obliterating the main-force units of the Qin dynasty.

Xiang Yu acts opposite to common-sense in this story; a normal human strives to keep as many doors open as possible. Not only would we preserve our food and ships, we would make sure of some sort of backup for both–live to fight another day. We can not stand the idea of closing doors.

We often do this to the detriment of our productivity. After all, keeping doors open costs a lot of effort. And when we take decisions intending to keep doors open, we often give up something in exchange. To illustrate this, Dan holds an experiment. He has different volunteers play two different versions of a video game:

1. In the normal version, students have three doors they can ‘click’ into. Once inside a room, they can click the screen and they obtain a random amount of money, added to a counter. They have a 100 clicks, going into and out of a room costs one click, and there is a room which earns them the most money per click. The goal is, obviously, to find that room as quickly as possible and click away the rest of your clicks.
2. In a slightly changed version, the same rules apply. But, if you haven’t visited a room in the last twelve clicks, it disappears permanently.

The students who played the first version played rationally. They went into a random room, sampled its money offerings, went into the next room, and so on. Once they had sampled all the rooms, they quickly determined which had earned them the most on average, went into it, and clicked the rest of their clicks in that room.

Our rationale for the second game should be the exact same. Nothing has fundamentally changed, after all. Even the limit of twelve clicks before an unvisited room disappears can be accounted for: we just have to spend less time sampling each room. But, when they played that version, most students obsessed themselves with keeping all the doors open instead of finding the most efficient room. They earned around 15% less money on average.

As Dan summarizes:

In 1941 the philosopher Erich Fromm wrote a book called Escape from Freedom. 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?

Our desire to keep doors open is harmful, but keeping doors that are worthless or even harmful open simply compunds the problem. And there are in fact disappearing doors in our life, but we are often too obsessed with keeping other doors open to realize. Dan gives the example of a father too obsessed with studying to realize his children’s childhood is slipping away. If we want to live a healthy life, we must close down as many of these worthless doors as possible.

But the struggle goes on. Picking between two similar options is often as tough as closing down doors. In these sort of choices, we often grind the issue down into small details that we bicker over endlessly. In so doing, we tend to ignore the consequences of not choosing at all!

Review

Starts off decent, but as the writer uses the exact same format for each chapter it gets old quick. The format itself is:

1. Bring up example
2. Talk about how it’s related to your hypothesis
3. Talk about how you experimented on your hypothesis
4. What we can learn from it all

Certainly, a solid application of the scientific method (mostly), but it gets dry for the layman reader. I can’t personally confirm whether most–or even any–of the lessons outlined are valid, but they seem reasonable to me.

But what I do know is that, as the chapters go on, Dan tries to explain the same problems of the human condition that many other materialists have tried to. No offense, but this is certainly taking on a task that is somewhat above him, or at least above the topic of behavioral economics. At the same time, he draws increasingly sketchy conclusions from his experiments. They leave me with that instinctual feeling that ’there’s something wrong here’. I’ve stopped my notes past Chapter 9 for this reason.