Traditional economics assume that human beings are rational and will make the best choice available to them after carefully considering all of their options. Theoretically, stopping to do a cost-benefit analysis with each decision we make is the smart thing to do. Unfortunately, as behavioral economist Dan Ariely points out in his book “Predictably Irrational: The Hidden Forces That Shape Our Decisions,” human beings cannot be counted on to act rationally. In fact, our irrational behavior is so ingrained, it’s possible to predict individuals’ illogical reactions in almost any dilemma.
For example, how many times have you purchased a second book or item from Amazon that you didn’t particularly want, just to take advantage of the free shipping offered when you spend over a certain amount? Rationally, it makes more sense to spend an extra few dollars on shipping for the only book you need. However, the word “free” seems to have a hypnotic effect on our brains. Just ask Amazon, which saw a major increase in sales once it started the free shipping promotion.
The field of behavioral economics – that is, the study of how psychology intersects with economics – is a relatively new field. However, though the insights about why we behave the way we do may be new, advertisers, retailers, and marketers have been taking advantage of our irrationality for years. Reading Ariely’s entertaining explanation of these behaviors can help you pause to think about your choices before you are swayed by advertising.
Insights and Experiments
Throughout 13 chapters, Ariely outlines the experiments he conducted in order to test our irrational impulses. These experiments range from the sublime to the ridiculous, and include experiments where Ariely leaves plates of cash in communal refrigerators, as well as six-packs of soda, to show that individuals are honest about cash but not soft drinks; experiments where he physically shocks participants and then offers them either $0.10 or $2.50 painkillers to prove that price affects our expectations of efficacy; and experiments wherein he gives his students an opportunity to cheat, but asks them to recall the Ten Commandments beforehand, to show that a reminder of a moral rule decreases cheating.
However, no matter how humorous these experiments may sound, each one was conducted with rigorous attention to the scientific method, and Ariely’s conclusions can certainly be trusted as sound.
The insights gathered from these experiments fall into three general categories:
This tenet of behavioral economics has to do with the fact that human beings need a precedent when deciding how much to spend on something. Without this precedent or anchor, human beings will latch onto anything that will give them an idea of what to expect.
For example, suppose you are looking to hire a personal trainer. You don’t have any idea how much they charge, so you call a couple of gyms. The first tells you that each half-hour session costs $75. The second gym tells you that half-hour sessions are $50 each. Clearly, the second trainer is a better price – but is it the best possible price? Since you don’t already have an anchor to know how much to expect to pay for personal training, you can only use the information available to you. This is problematic because your brain then makes $50 per training session the anchor, meaning that it will be difficult for you recognize whether this is truly a good price, or just a good one in comparison to your first call.
This particular human need for an anchor price for comparison is the reason why you’ll often see a $200 bottle of wine on a restaurant menu – compared to $200, the $50 wine you’re thinking of getting seems like a bargain.
Ariely points out that anchoring is an insidious problem, since you are at the mercy of the individual setting the price. Starbucks took advantage of this psychological quirk when it first became ubiquitous. Prior to Starbucks, no one would have dreamed of spending $5 for a cup of coffee. But Starbucks created an ambiance that was very different from the general coffee shop experience. Patrons didn’t know how to anchor a cup of coffee in the upscale environment that Starbucks offered, so $5 didn’t necessarily seem unreasonable. And once you pay $5 for coffee once, it becomes your new anchor for the price of coffee.
Fighting the influence of anchoring is difficult to do, but it helps to think about prices in the broader scheme of what you can afford. If you compare a non-anchored price (a price you’re unsure is reasonable) to something you regularly buy – like your favorite frozen dinner, for example – it will give you a better idea of whether you can afford it.
If you do not know if a price is reasonable, take it out of the context of the particular sales environment. For example, I had a friend in college who looked at everything in terms of ramen noodles, rather than dollars. Since she could buy a package of ramen for $0.25, she would convert something she wanted into the number of meals that same money would buy. Was a new $14 CD worth 56 ramen dinners? In that context, it was very easy for her to say no to the impulse purchase, even though $14 didn’t seem expensive.
In the case of the temptation of a $50 bottle of wine, think about what the $50 price tag could also buy you. Would you be willing to give up a new pair of shoes, or a night out at a less expensive restaurant, or a mani-pedi at your salon in order to buy that $50 wine? Would the $15 bottle of wine make you just as happy? These are the questions you must ask yourself in order to combat the influence of anchoring.
Generally, humans have the experience that they expect to have. For example, if you have a headache, Ariely shows that you expect an expensive painkiller to do a better job than a cheap one, and because of those expectations, you do feel better after downing the costly pill. Unfortunately, that’s true even if both pills are identical, other than price.
A similar phenomenon happens at restaurants. Long and flowery descriptions of entrées will be much more enticing to a diner than a flat statement of ingredients. Otherwise, you’d never see the words “succulent” or “drizzled” on a menu.
No matter where you are, your expectations help to form your experiences. So it helps to recognize in yourself when your expectations are unreasonable or irrational. For example, the “availability heuristic” is the force that makes something seem more likely because we’ve seen recent examples of it. This is why many people are afraid of flying, even though driving a car is much more dangerous: Every plane crash makes the news, but we never hear about the dozens of fatal car crashes that occur each day.
When you find yourself making decisions about your life based on fear or anxiety, take a moment to think about just how likely your expectations are. If you let your child walk by himself to a friend’s house, is it really likely that something terrible will happen, or is that simply the irrational expectation you have?
Despite a popular belief otherwise, human morality can be very much contingent on outside forces. For example, in the cheating experiment, Ariely discovered that any reminder of a moral code – from the Ten Commandments to the college honor code – would affect a student’s willingness to cheat, even when there was no way he could be caught.
Similarly, people are more honest when it comes to cash than they are with goods because, as Ariely points out, “Cheating is a lot easier when it’s a step removed from money.” We have an irrational reverence for cash which we do not have for many things that are non-monetary. This is part of the reason why our society harshly prosecutes purse-snatchers, but allows CEOs of companies that bilked their customers to live under house arrest.
Another disturbing aspect of our morality is how our commitment decreases when we are in a state of arousal. In a rather racy experiment (which I will not detail here), Ariely proved that while we may believe in fairness, gender equality, and even safe sex while in a normal state, we are much more likely to ignore those beliefs when aroused. (Parents of teenagers will probably want to pay close attention to this chapter.) Since morality can be so flexible depending on circumstances, Ariely has made it clear that we all need to decide how we will behave before temptation strikes.
“Predictably Irrational” is an engaging and humorous read. Dan Ariely provides the reader with a thorough introduction to behavioral economics, and offers a few insights for how to combat the irrationality that we all fall victim to. After reading this book, you will want to spend some time protecting your money and your future from your irrational self, and you’ll certainly be glad you did.
What are your thoughts on Dan Ariely’s book, “Predictably Irrational“?
HarperCollins Publishers, 382 pages, paperback