Predictably Irrational – Dan Ariely

Predictably Irrational, is a series of experiments and stories that help highlight how irrational we are as human beings. My favourite takeaways were:

  • Never mix social norms with market norms
  • We are crazy for “FREE!”
  • Restating our moral duty actually makes us act more moral
  • We are more afraid of loosing what we have, than interested in gaining what we don’t
  • Trust and honesty are key to long-surviving businesses

Great thought experiment on Market Norms vs Social Norms –

“If a colleague came by your desk asking you if you want to buy cookies for a nickel a piece. Now how many would you take, and what would dictate your decision? Most likely, you would again take into account your level of hunger, your waistline, and your love of chocolate-chip-oatmeal cookies. But unlike the previous case, this time you will have no compunction about buying a bunch to eat and take home (knowing how much your kids would love them), and you would not even think about the fact that by getting so many of Susan’s cookies you are depriving your coworkers from that same joy. Why would your decision change so much once Susan asks for a nickel apiece? Because, very simply, by asking for money, she has introduced market norms into the equation, and these have chased away the social norms that governed the case of the free cookies. More interesting, it’s clear in both cases that if you take multiple cookies, there will be fewer for the other people in your office. But if Susan offers her cookies for free, I am willing to bet that you will think about social justice, the consequences of appearing greedy, and the welfare of your coworkers. Once money is introduced into the exchange, you stop thinking about what’s socially right and wrong, and you simply want to maximize your cookie intake.”

Reading Notes:

  • Relativity is our way to navigate the ocean of unknown. We may not know the worth of a 6-cylinder car but we can know immediately it is going to be worth more than a 4-ylinder car.
  • Relativity allows us to  use a small piece of information to illuminate a larger unknown piece.
  • “Free” is irrationally irresistible.
  • “Free” causes us to ignore the rational disadvantages of a choice as we feel we have stake nothing to get it – but free is rarely free, we always stake something.
  • Money (or the market) takes away the social connection we receive from an interaction. Typically a transaction was an exchange of good-will, a concession between two people that was rewarding and brought a sense of connection. When money is replaced, we feel obliged , we feel we have the “right” to the servicer and hence view it self-centeredly, egotistically and demandingly, destroying the human connection.
  • Delayed gratification with an immediately negative response is almost impossible to beat. The best way is to associate another positive (immediate) reward to compensate.
  • We are more afraid of loosing things than we are interested in gaining them. – This influences our actions heavily. Is this a form of reactance?
  • Going “backwards” in possessions is a “loss” that causes real psychological suffering.
  • We are biased towards things that we view as “ours”
  • We love open options (reactance)
  • “Open door syndrome” is the need to keep all options open and sample all possible before deciding. This is costly (emotionally and financially)
  • Cost of indecision (COD) – the opportunity cost wasted when spending too much time making a decision.
  • If COD becomes larger than the benefit of the decision, then you are going backwards!
  • Power of association can affect our own behaviour and actions. So much so that young people primed ideas like “slow, elderly, ancient” walked slower.
  • Trust is a public resource. – Trust erodes quickly and takes a long time to be rebuilt.
  • Honest is key to society.
  • Just having a social reminder of honest leads to more honest behaviour.
  • We cheat less with money than with possessions, goods, symbols of money – anything that is a step away from money.
  • Creating a strong correlation between an object and the money it cost could reduce dishonest behaviour.
  • Keep social norms separate from market norms!

Quotes:

  • Relativity – “For instance, we don’t know how much a six-cylinder car is worth, but we can assume it’s more expensive than the four-cylinder model.”
  • “Most people don’t know what they want unless they see it in context”
  • “Sometimes we want our decisions to have a rational veneer when, in fact, they stem from a gut feeling—what we crave deep down. I suspect that in our attempts to make sure that we end up with decisions that seem well-reasoned and thoughtful, we commonly undergo a lot of unnecessary mental gymnastics and justifications, particularly when the choices are large and significant.”
  • Zero Price Affect – “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. Why? 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.”
  • “The difference between two cents and one cent is small. But the difference between one cent and zero is huge!”
  • “We live simultaneously in two different worlds—one where social norms prevail, and the other where market norms make the rules.”
  • “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.”
  • “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 reestablish”
  • “The basic lesson, then, is that when we offer people a financial payment in a situation that is governed by social norms, the added payment could actually reduce their motivation to engage and help out.”
  • “When price is not a part of the exchange, we become less selfish maximizers and start caring more about the welfare of others.”
  • “As it turns out, we are caring social animals, but when the rules of the game involve money, this tendency is muted.”
  • “Americans have succumbed to rampant consumerism.”
  • “Procrastination (from the Latin pro, meaning for; and cras, meaning tomorrow)”
  • “We fall in love with what we already have.”
  • “We focus on what we may lose, rather than what we may gain”
  • “In other words, when we are removed from any benchmarks of ethical thought, we tend to stray into dishonesty. But if we are reminded of morality at the moment we are tempted, then we are much more likely to be honest”
  • “Cheating is a lot easier when it’s a step removed from money”
  • “It is psychologically easier to sacrifice consumption in the future, and even easier to give up a percentage of a salary increase that one does not yet have.”

sebastiankade

Sebastian Kade, Founder of Sumry and Author of Living Happiness, is a software designer and full-stack engineer. He writes thought-provoking articles every now and then on sebastiankade.com

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