Book review: Predictably Irrational, by Dan Ariely

Continuing with my aim of reading and learning more about psychology, the most recent book I read on this topic was Predictably Irrational. It is a book on behavioural economics and talks about some of the irrational behaviours of the human mind which can actually be predicted correctly. Its a very light and interesting read, a definite recommend.

The book is split into 13 chapters, each focussing on a particular irrational human behaviour which can be explained. And this is based on simple experiments carried out by the author which support his hypothesis. I am listing below the summary of some of the observations shared in the book:

• People make a lot of decisions in their lives based on relativity, for example when shopping and deciding how much to pay for something. We cannot value things standalone but only in relation to others. And that may lead to some not-so-rational behaviours. One of the (good) side-effects of this is that people can use this to their advantage - they can hang around with people they are ok to compare themselves with, and feel happier about themselves than they otherwise would have felt!

• Pure market driven demand and supply, as defined in economics is a fallacy. People buy stuff based on (price) anchors. And the first price they ever see generally becomes the anchor for their future purchases. For example, if we see black pearls being sold at $1000, we will always be ready to buy them for $900, even if we don't know their real value! And this way, artificial demand can be created...

• Selling something for FREE has a power not known otherwise. It can make people buy stuff they don't want. And make them take irrational decisions. When something is available for FREE, it does not reman relative anymore but becomes an absolute. For example, in an experiment, most of the people were willing to buy a $10 Amazon gift card for free, rather than a $20 gift card for $7!

• There are two very different worlds which exist side by side in our society - the social norms world and the market norms world. In the social norms world, people are willing to do something for free (or a gift) to help their neighbour or fellow human being, something like mowing their lawn when away or helping them move around some stuff in the house, etc. The market norms world is linked to money, based on a clear give and take. And people become selfish and self-reliant in this world. In fact even a mention of money makes people shift to the market norms world.

• If a social norms situation come under the influence of market norms and changes into a give and take relationship, it is very tough to go back to the pre-existing social norms world.

• Companies which build a social relationship with their customers cannot change to a market norms driven company, as that destroys the customer relationship forever. For example, a company which advertises as being there to take care of their customers, has to always flex its rules and not be very rigid. As that may lead to them losing their customers. This of course won't happen to a market norms driven company, which is always very clear on what it will give and what it will take.

• In fact, some companies also try to build social norms with their employees, as being an organisation which cares about its employees rather than just driven by pure give and take. This leads to employees putting in more than the 9-5 hours towards their employers as they see it more driven by social norms than market norms. And this works because social norms work better in motivating people in the long term, rather than money (I think that is how my firm also works😊 ).

• When people are in an heightened emotional state, they make decisions completely opposite of what they think they would otherwise have made. Its beyond their control and they are in fact even unaware of this side of themselves.

• Procrastination and self-control is a real problem, e.g., delivering assignments on time, forcing people to save for their future and so on. And the only way to control this natural human behaviour is either to have an authoritarian environment where rules will have to be followed. Or allow everyone to self-set their deadlines and goals. This is the only way to avoid procastination, and it certainly works.

• Ownership of assets works in funny ways. We always value more what we have, than others would value them. This comes out when a seller is trying to sell his goods. The price is so much higher than what anyone would be willing to pay for it! Why this happens is because we end up focussing more on what we may lose when we sell rather than what we may gain and we assume others would see the transaction in the same way as us. 

• Linked to this, once we own something, even if temporarily, it affects our behavior and minds significantly. For example, once we get something, even if for a free trial, we cannot move back to not having it, as we originally thought we would. And so we will keep it (e.g., for a free trial of additional sports channels, we are more likely to keep the subscription rather than return it). It also effects people's behaviour when they bid for something and are the winning bid for long. They start feeling they own it and then end up bidding higher for the object than initially planned.

• Humans are wired to keep doors and options open. Even if the options are worthless, they spend a lot of time and money keeping those options open. To lead an easier life, it makes sense to close doors and move on.

• Already having expectations from something affects people's experience and they may feel things are better than they actually are!  For example, in an experiment, knowing already whether they are tasting Coke or Pepsi affected people's likeness for it. And blindfolded, the same experiment yielded different results!! Sometimes being blind to any stereotypes helps understand our feelings more correctly, than already going in with expectations.

• Placebos work. They have been tested enough. And they also depend on the price 😊. The higher the medicine price, more is the pain relief.

• People are generally honest because of their social norms upbringing and the superego. But given a chance, even normal honest people cheat (but just a little). However, a reminder of an oath of honesty makes them not cheat at all! (Is that why they ask you to sign those statements on forms you submit, this is true to the best of my knowledge... etc?)

• Also people cheat more when one step removed from cash. And less when its directly linked to cash. How can we then control dishonesty in a world which is very fast turning cashless?

• People are affected by orders placed earlier on their table. They order dishes different from others, to be unique and then enjoy their food less! I found this very suprising but well, thats the human mind! So apparently, its better to order first or anonymously, to enjoy the food you have in restaurants...