January 16, 2010

Predictably Irrational, by Dan Ariely

Posted in Behaviour at 08:12 by graham

My short notes on Predictably Irrational, by Dan Ariely. An excellent book. Entertaining, and covers much fascinating ground from social psychology and behavioral economics. Some of the experiments Dan and his team designed are fiendish!


Value is relative

We only know what we want when we see it in context. The bike the Tour de France winner rides. A set of speakers compared to another.

We only know what something is worth, or how much we like it, when comparing to other similar things (purchases, partners, jobs, etc..

We tend to choose the middle option. A high price option on a restaurant menu increases average order price, because it makes the rest seem cheap in comparison.

If we have several difficult to compare items, but two are easily comparable and one of those two is clearly superior to the other, we will prefer that one to all the other options. We can introduce a ‘decoy’ version of one item, slightly less appealing, so that the target item is chosen. In A v B, introduce -A, and most people will choose B.

Video: The truth about relativity

Arbitrary coherence

When we seriously contemplate buying something at a given price, that price becomes our anchor. From then on we judge other similar items relative to that price. We are coherent with our first valuation of something, even if that price is now irrelevant, arbitrary.

Items on sale attempt to get you to anchor at the ‘pre-sale’ price, before introducing the sale price.

Video: Starbucks, Dunkin Donuts, and Anchors

Herding

Joining a queue because other people are in it. Preferring a busy restaurant. Assuming something is good (or bad) on the basis of other people’s behavior.

Self-herding is when you do what you did before, because, well, that’s what you do. (See also: commitment)

We are irrationally attracted to FREE(!) things. We often pay a high cost in time and opportunity cost for them. Discounting from cent to free has a much higher influence than 2 cents to 1 cent. Free is a whole different place than something that has a cost.

Social Norms vs Market Norms

Pay someone cheap, they don’t work much, because they use market norms and don’t feel it is worthwhile. Pay someone nothing, they work hard, because they use social norms.

Gifts stay within social norms, unless you mention the price of it, in which case people revert to market norms.

Thinking about money makes people more self-reliant, selfish, solitary, individualistic.

Counting money is a pain buffer, makes people feel more powerful.

If both are present, market norms displace social norms, and it is very difficult to get the social norm back.

With gifts, benefits, and a good atmosphere, companies try and create a social contract with their employees. The employees hence expect the other side, the company to be there for them when they needed. Social norms require a high level of commitment from the company. Google and lots of startups get this right.

Video: The Cost of Social Norms

Emotions

When not experiencing the emotion, we are bad at predicting our responses in a strong emotional state, such as sexual arousal, anger, hunger, excitement, jealousy, etc.

It is not easy to look from one emotional state to another.

Most people are aware that they procrastinate. Giving them tools to commit to a deadline helps them overcome it.

The best remedy for procrastination is an external force: Automatic payroll deductions for saving, teacher imposed assignment deadlines, exercising with a partner, etc.

Engineer the world to force you to achieve your goal.

Simpler schedules are easier to commit to and more likely to be followed.

Package actions up into something that feels important enough to avoid procrastination. The same way auto-dealers package up our servicing into large mileage increments, and do all of it at once.

Video: The Influence of Arousal

Endowment effect

We value what we own more than other people do. Sellers usually value their items more than buyers do.

The sellers focuses on the loss of the enjoyment of the item. The buyer focuses on alternate uses for the money. Seller and buyer expect the other to see things the same was as them.

The more work you put into something, the more ownership you feel. The Ikea Effect, because you assembled it yourself.

The endowment effect is why companies offer ‘trial’ rates and ‘money back guarantees’. Once we have something, own it, we value it more. A ‘virtual ownership’ applies to trying on clothes, and especially to online auctions.

The endowment effect applies to ideas too. We don’t want to let go of them, so they become a rigid ideology.

People dislike losing options, and will work quite hard to keep all their options open, eve if that means occasionally ignore their best option.

Often, we are presented with two or more very similar options. In this case the biggest cost is that of not choosing – the time spent deciding is time we are enjoying neither option.

Life usually conforms to our expectations, so you can influence results by setting expectations. Marketing sets expectations.

Video: Dating, doors, and loss aversion

Priming

Priming is putting thoughts into someones head.

Often, an experiment will ask people to unscramble a word, that word is chosen to make them think the priming thought.

Priming is a context effect: Being influenced by something irrelevant in our immediate environment.

Two parties in a conflict, having already strongly committed to one side, need a neutral third party to resolve their conflict.

Video: The Effect of Expectations

Placebos

Placebos are belief and conditioning. Many, maybe most, surgical procedures are not placebo tested.

Honesty

We internalize social virtues, so our conscience keeps us broadly honest.

Given the opportunity, most people will cheat a little bit. A greater potential and reward for cheating doesn’t increase the cheating. Being reminded of the Ten Commandments, or of honor systems, eliminates the cheating.

People are more likely to cheat for non-monetary items – steal a pen from work, but not the value of the pen from the petty cash box.

It seems that people will only cheat within the limits their conscience (super-ego) allows them. We cheat to the extent we can justify it to ourselves.

“It is difficult to get a man to understand something when his salary depends upon his not understanding it” – Upton Sinclair

Video: The Context of our Character


Dan Ariely maintains an excellent website with links to research papers from the book, and much more, here: http://www.predictablyirrational.com/.

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