Predictably Irrational — Book Review

This particular book is special because it’s very closely related to my research. Behavioural economics is an area of research that looks closely at gaps in standard economic models when it comes to explaining human behaviour, which is often erratic and unpredictable from an economic point of view. Dr. Dan Ariely is one of the foremost visionaries of the modern world view in Behavioural economics, and through this book he breaks down the motive and nitty grittes of the field without initimidating the reader. Of all the books I’ve read, this is the most complete introduction of the field I’ve come across. The narrative is not an academic one, it’s more of a personal story, arguably even autobiographical in tone, where Dan skips through multiple experiments like a kid in a candy store while explaining the rationale behind their setting and giving insights into human behaviour.

Relativity

Einstein said it. All of know and accept it. But probably not quite in the manner as we sub-consciously do. Our minds are wired to compare and we rigorously do so, anything and everything we can. These comparisons lead us to questionable decision making where economic theory assumptions of our rationality fall apart. For example, the same person who travels 15 mins to buy slightly cheaper groceries from a store farther away, will probably not hesitate in spending an additional few thousands on the purchase of a new car. Does the utility of money change with context? Of course not. We just judge the extra cost by putting it next to our base purchase. A ₹3 PayTM surcharge on a ₹100 spend is not a big deal, the same charge on a ₹10 purchase is. This can be expanded beyond money to other contexts with the same basic premise. It might sound intuitive, but it goes against economic theory’s assumptions of our rationality and sees human decision making in new light.

Price Anchoring

Demand and supply are forces that regulate market prices of commodities. That’s common knowledge. But in Predictably Irrational, Ariely argues that contrary to common perception, price anchoring is a much stronger and potent force than we give it credit for. How exactly do we determine that diamonds are expensive? That property prices in a certain section of a city, or of our favourite dish on a restaurant menu is what it is supposed to be? The answer is price anchors. Our brain gets conditioned to a price point for a particular commodity and accepts it. This is the reason why people who move from smaller cities to larger cities find prices of commodities exorbitant. Why I, as an Indian and used to paying Rs. 20 for a bottle of water, find it agonisingly painful to pay a pound for a bottle of water when I travel. Price anchors are the secret drivers of demand, and they get established in an un-intuitive manner, and once they are imprinted, it’s very hard to shake them.

Cost of Zero Cost

In this chapter, Dan explains how we treat ‘FREE’ offerings irrationally. This again plays towards our inherent bias of loss minimisation, where loss aversion is a greater motivator than the possibility of gains. The proposition of ‘FREE’ offerings makes us believe that there is no downside of a decision, i.e., no loss whatsoever, hence, we form an irrationally bias towards them. We do not realise any hidden downsides like the utility of our invested time, among others when dealing with ‘FREE’ or zero-cost offerings.

The Monetary Equivalence of a Friendly Favor

This particular point is very interesting as it isn’t quite as intuitive as others on this list. Unlike what we might be inclined to believe, monetary gratification is not always a primary driver or incentive for us to work. Dan explains this through the example of a household dinner, where compliments are socially acceptable and desirable, but monetary payments are not. Now this is common understanding, but research also shows that the same principles of ‘personal’ relationship hold strong when carefully cultivated by an employer for an employee. Implying, that personalised gifts might be a better reward to boost productivity than cash bonuses.

Emotions in Decisions

We are emotional beings, and although we might accept sheepishly to being swayed by our emotions from time to time when taking decisions, we do not quite understand the extent of this phenomenon. Dan tested young adult decision making and risk propensity in sexual decision in normative and aroused states and the difference was incredible. In an aroused state, teens were much more likely to partake in risky sexual behaviour, beyond societal, statistical and their own expectations.

Procrastination

We all suffer from this uncanny bane of our generation to varying degrees. Dan setup a beautiful class experiment where he gave his students choices of varying degrees of freedom in setting their own deadlines for the course’s requirements, assignments and reports. The options included strict professor set deadlines, lax time-bound deadlines and no deadlines whatsoever, with all submissions due before the end of the course. Upon analysing the behaviour of students, Dan arrived at the conclusion that we are not really great at setting deadlines for ourselves, and having external deadlines forced upon us might actually be a boost for the productivity of a majority of us. Details on the experiment and results can be found in the following paper.

Irrational Ownership

When it comes to assigning values to objects we behave irrationally for our own possessions. Dan proved this through a series of experiments on university football tickets at the Duke University. Students who were able to purchase the tickets valued them 10 times more than students who did not get them. 10 times. This is a practical demonstration of the Endowment Effect. Dan attributes this irrationally skewed valuation to the following points:

• We prioritise reducing losses over gains, hence assigning greater important to our own possessions makes for an attempt to maintain the status quo which may have evolutionary benefits.
• We initiate non-monetary connections to things we own, which makes their disposition complicated.
• We assume people will see transactions from our own point of view.

Great Expectations

Our expectations play a much more important role in shaping our experiences than we realise. We tend to form stereotypes around our expectations and these stereotypes weigh strongly on our actual experience. Dan tested this through his students’ perception of taste for two brands of beers — Budweiser and a Blasmic Vinegar brew that’s native to MIT. When made aware of the beer brands, most students preferred the Budweiser as the Vinegar brew has a bad name amongst the general student community, but when unaware of the brands, students reported similar tastes and likableness for both the beer brands. The expectation of a sour vinegar-like taste from MIT brew played a crucial role in playing down its likableness. This experiment can have far-reaching repercussions in our daily lives and the decisions we make.

Power of Price

Expensive phones are better than cheaper phones, and the same holds for watches, TVs, laptops and a lot of other stuff, right? Maybe, for a large number of cases, yes. But this has led to our brain conditioning us to believe that expensive commodities always have an edge over their cheaper alternative, so much so that we react differently to even medication that’s expensive. Placebo is an age-old concept but its application in medical prices was discovered by Dan in a series of innovative experimentation where people reported significantly greater relief from headache when they were provided an expensive headache pill compared to a cheaper alternative. There is only one catch — here, both the medicines were exactly the same. People’s expectation from the expensive medicine to be more effective was a strong enough placebo to help them with their headache. Similar concepts can be applicable in multiple spheres of our lives.

All in all, I found Predictably Irrational frankly brilliant. Dan doesn’t try to speak from an academic high-point the the book never feels preachy. Innovative new theories are presented in a very intuitive manner that readers will enjoy. As perfectly put by the New York Times, “Predictably Irrational is a far more revolutionary book than its unthreatening manner lets on. It’s a concise summary of why today’s social science increasingly treats the markets-know-best model as a fairy tale.”

Feel free to reach out to me for more material on any of the discussed concepts in the book, or directly search for them online.

Originally published at https://vivekkaushal.com on April 6, 2019.