Predictably Irrational

Predictably Irrational by Dan Ariely is an exploration of human behavior which diverts from the logic. Consistently. For example, imagine yourself shopping for a brand new suit and, for whatever reason, a new pen, maybe to accompany your suit. You see the $15 pen, but then remember that you saw the same pen in a different store for $7. The store is not that far (15 minute drive) and you decide that it’s totally worth it to postpone the purchase of the pen and drive by another store to save $8. Then you take a look at the suit. It’s $1,000, but then somehow you recall that a similar one. Same story – the store is 15 minutes away, and it’s $992 there, $8 cheaper.

Most people when faced with these two options will definitely purchase the pen at another store, but will forego a 15-minute drive to purchase the $992 suit. Relatively the savings are different: it’s more than a 50% on the pen, and a tiny sub-percentage point discount on the suit. Nevertheless, in a nutshell in both cases you stand to save $8 by driving 15 minutes. As a rational human, once you decide that a 15-minute drive is worth $8 in savings, you should accept that as an absolute rule. Nevertheless humans behave consistently irrational when faced with such choice in psychological studies conducted by Dan Arieli.

So what are other examples of inconsistent behavior from Predictably Irrational?

  1. When faced with the following choices for magazine subscription: $59 for digital edition, $125 for print edition, and $125 for digital+print edition, 84% opted in for the third option. Well, why not, you get digital+print for the same price as print, practically a steal. However, when the middle option is removed, people overwhelmingly (68%) chose the digital subscription. Comparing a $59 digital subscription with $125 print+digital made people wonder whether they reallyneed print subscription at all. Just having a middle option that will never be selected for obvious reasons boosted magazine’s top-of-the-line product. The magazine in question is Economist.
    • Relativity also leads to unexpected results. SEC told public companies that by 1993 they were obliged to disclose the top executives’ pay. Ideally, this would make companies more responsible to shareholders and even out the outrageous executive paychecks. In 1976 a CEO was paid 36 times the average worker pay. Net result? By 1993 the CEO pay was at 131 times average worker pay. Exposing the fat cats did not cause expected shareholder outrage, it encouraged other CEOs to demand higher pay, since now they had hard data telling them they were underpaid.
  2. Having two somewhat similar options together with dissimilar one will make people choose a better deal among similar options. Assuming that you’ve never been to Africa and have no emotional attachment to geographical locations there (choose something neutral to you if you do), what would you rather choose if I gave you a choice of (a) a free trip to Zanzibar that includes a free breakfast, (b) free trip to Zimbabwe without a free breakfast, (c) free trip to Zimbabwe with free breakfast. Most people in psychological studies consistently chose option C. Our brain is wired to compare equals, and comparing A and C without specific knowledge of locations seems like a lost cause. Comparing B and C, however, is a no-brainer – you get a free breakfast or you don’t. C is such an obvious choice, the brain shortcuts, and before long option A is out of the picture.
    • Marketing technique that utilizes this knowledge is called a decoy. Williams-Sonoma accidentally discovered it by adding another, more expensive, product to its breadmaker line. Prior to this breadmakers did not sell very well, being completely new product. When a more expensive machine was added, the original version seemed like a bargain, and also customers felt that since this was a line, not a one-off product, it must be something worth researching. Sales of the original breadmaker nearly doubled.
  3. In one study participants were asked to write down the last 2 digits of their social security number, and then write an estimated price they would pay for a bunch of unrelated items. Box of Belgian chocolates, bottle of wine, a wireless keyboard – the items were intentionally random so that most people would have a vague idea of what they cost in real world. By asking participants to write down their social security digits, researchers were hoping to prime the mind. The technique worked – people whose social security #s ended with 00-20 overall bid significantly less for the items than those with 80-99 as the first number on the list. The point is not that people with high social security numbers pay more, but the fact that making a person think about the number impacts the decision-making process, if this process involves choosing random numbers.
  4. Offering the item for free has a huge impact, even when the alternative is not that expensive. Arieli set up a stand offering two kinds of treats – Lindt truffles for 15c and Hershey kisses for 1c. The price difference was huge, but most people nevertheless seemed to appreciate Swiss chocolates over Pennsylvanian sugar-and-cocoa-butter concoction – 73% chose Lindt truffles. So another test the book author ran was selling Lindt truffles for 14c and giving Hershey’s kisses away at 0c. The relative difference was still 14c, but this time 69% of the customers chose the kiss. It’s not that 1c previously broke their budget, and all of a sudden a 0c kiss offered huge savings to hungry students. Faced with two paid choices, participants were forced to make a judgement, and in this case went for a more expensive, but higher-quality item. Faced with FREE, participants forgot all about the relative taste differences between Lindt and Hershey product, and overwhelmingly acted on instinct.
    • When Amazon was testing free shipping promotion in different countries, Amazon France did not expect any real change. After all, the French site has been charging customers 1 franc if their shopping cart when over a certain amount. It’s a modern-day equivalent of 20c, what difference could it make, if your shopping cart had to be over $25, where Amazon currently allows you to ship for free? However, going from 1 franc to 0 francs was dramatic.
  5. Setting deadlines works, and having external deadlines seems to work better. The author experimented with 3 of the classes he taught. Class A had specific deadlines on when the papers should be submitted – week 4, week 8 and week 12. Class B was free to choose its own deadlines, but it had to be done in writing – each student was asked to commit to submitting a paper by a certain week, even if the commitment involved writing ‘week 12′ for each one of the three papers. The third class had no deadlines at all, except for the fact that by the end of the course the instructor wanted to have a set of all 12 papers. Which of the classes got better final grades? It was just in the order they were listed – A did best on the exam, followed by B, followed by C.
  6. Accessories matter. The researcher has set up a coffee tasting station by giving away free coffee, which could be complemented with a variety of condiments – sugar, cream, nutmeg, cinnamon, etc. The additives were placed in Styrofoam cups with hand-written notes indicating what they were. The students were then asked the rate the quality of the coffee, supposedly for a new coffee shop that was planning to open its doors to MIT students. Second test involved brewing precisely the same coffee, except this time the condiments were placed in glass-and-steel containers on a nice looking tray with pre-printed labels. Students consistently gave the second coffee much better rating, even though the contents of the pot or the variety of condiments did not change.
  7. People have different expectations for products with various prices. Researchers conducted the experiments where a group of participants was exposed to a new pharmaceutical in a very professional environment – lab coats, brochures, and all. The experimental drug, they were told, was a pain reliever, so to conduct practical tests, they would produce an electrical shock of increasing voltage until the participant pressed the button indicating they’ve reached their maximum pain tolerance level. Price for the new drug? $2.50 a pop. To test the efficiency, the researchers first asked the participants to experience pain with no drug intake, and then undergo the same test. 100% of respondents claimed the pain was relieved and hence medication worked. The same drug was then tested on a different group of people, who accidentally (via a brochure on the table) found out the drug was 10c a pop. In this test, only half of those people claimed the pain reliever worked. The drug? In both cases Vitamin C.
  8. People order differently in public and in private. When groups of people were offered a list of beers to choose from, there was inevitably more variety in the orders than when everybody was handed a menu to write on. Hearing choices of others makes people want to express their individuality, and sometimes they tend to order their 2nd or 3rd choices after hearing what people before them have ordered. Whenever asked in private, the individuals were lacking the information on others’ choices and always went for their first choice.

Believe it or not, Predictably Irrational is available at Amazon.

  • Tommy Lobotomy

    Why is this only about shopping and other commodities? It seems all Facebook can think about is what’s for sale and how to sell it. It’s turning me off. Sorry.

  • Tom

    @Tommy Lobotomy where do you think all the funding for studies comes from :P

  • Fchaubard

    I write about a similar phenomenon that certainly overlaps with this one. The example I use is this. Imagine you are standing amongst a hill top and you see a mountain peak (A) in the distance and then you see another peak (B) even further in the distance. Your judgement of the distance between peaks A and B you could imagine would be a function of your distance from the two peaks. Correct? If you are veryyy far away from the two peaks your estimation between A and B would be poor. As you get closer to A your estimation gets better. And lets go a step further. If you were in between the two peaks, your estimation would be much better. I call this Relative Understanding.. How does this relate? In principle people rationalize.. and they rationalize EVERYTHING. So to bring it back to the suit and pen example, if I am already spending $992 then the person will say oh well whats another $8. Lets bring in another example from this book, the Social Security example. Since everything in our minds is relative, the benchmark that is established with the 2 numbers of our ssn makes our decision relative to that benchmark. There are other applications of this too that arent mentioned. When a person finds out we spend 3 billion dollars per boat in our navy yard, the average (non-engineer) says OMG that is ridiculously overpriced! My tax dollars shouldn’t go to some AEGIS combat system that is overpriced by such an amount! But an engineer specifically one that works for Lockheed would probably say its underpriced. Everything is relative in our minds, especially opinion.

  • Sali

    salut cava bien tu est la

  • http://isomorphismes.tumblr.com/ isomorphisms

    Even a Sharpie only costs $1. Who is buying these $7 and $14 pens?

  • http://isomorphismes.tumblr.com/ isomorphisms

    The suits are more likely to be different between stores than the pen — and the differences more important.

  • http://isomorphismes.tumblr.com/ isomorphisms

    Another possible explanation for the beer result is that people can’t think of a large variety of beers ab initio and the menu helps them recall what varieties there are.

  • Zach

    I personally think that it’s a good way for their business. After all, it does work!

  • Bangcok

    the pen and suit example , is not irrational. the customers prefer to punish the first pen seller.

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  • http://harsh-singh.com Harsh Singh

    Dan Ariely has a fantastic coursera course https://www.coursera.org/course/behavioralecon
    Check it out =]