Predictably Irrational | Dan Ariely

Summary of: Predictably Irrational: The Hidden Forces That Shape Our Decisions
By: Dan Ariely

Introduction

Welcome to ‘Predictably Irrational’, an engaging and thought-provoking book by Dan Ariely that uncovers the hidden forces influencing our decisions. As you delve into this summary, prepare to be amazed by the irrational ways people respond to different situations. Discover the incredible power ‘free’ holds over us, how arbitrary ‘anchors’ set our expectations regarding prices, and how ownership alters our perception of value. Unearth the intriguing ways in which our expectations and previous experiences shape our perceptions, and learn how social and market norms dictate our behavior in various situations. Get ready to challenge your assumptions and strive to make better, more rational choices in your own life.

The Power of “Free”

The word “free” can create irrational behavior in people. When comparing the price of Lindt truffles and Hershey’s Kisses, most people chose the Lindt truffles at 15 cents each. However, when the price of Lindt truffles was lowered to 14 cents and Hershey’s Kisses became free, people chose the Hershey’s Kisses. This is the power of “free” and the zero price effect. Humans fear losing money and perceive free items as more valuable than they really are. Companies like Amazon take advantage of this by offering free shipping for orders above a certain threshold. Policy makers should also understand and leverage the power of “free” to create change, such as providing free cholesterol level checks to encourage regular check-ups.

The Irrationality Of How We Pay For Products

Our purchasing decisions often rely on arbitrary coherence, a phenomenon that is far from rational. The first price we hear for a product acts as an anchor that we then use to determine a reasonable price for future purchases, ignoring the rational analysis of supply and demand. Whether it is the price of a bottle of wine or a box of Swiss chocolates, the mere act of writing down the last two digits of our social security number before answering how much we are willing to pay can have an effect on our estimates. The anchoring effect is particularly evident when new products hit the market, leading us to rely on the first quoted price as a reference point. This inclination leads us to perceive prices that are coherent with this anchor as reasonable and anything higher or lower than that as a ripoff or unattractive.

The Psychology of Ownership

At Duke University, students camp out for days before basketball games to participate in a ticket lottery. After the lottery, those who won tickets valued them at $2,400, while those who did not value them at $170. This is because people fall in love with what they own and disproportionately focus on what they are losing. Additionally, people expect others to appreciate the same things they do. This effect applies to opinions too, causing people to become stubborn when they feel they “own” an opinion.

Perception is Reality

Our expectations and previous experiences drastically affect how we perceive things, from the taste of cola to the effects of medicine and energy drinks. Even our stereotypes can influence our behavior. In a blind taste test, people preferred Pepsi to Coca-Cola, but in a visible one, Coca-Cola was the favorite. This is because brands influence our perceptions, being a purely mental image, and expectations play a significant role in our perception of things. Even the potency of medicine is impacted by expectations, and the placebo effect proves that patients who believe in a drug’s effectiveness feel better after taking it. More astonishingly, expensive medicine has more powerful effects, and the same is true for energy drinks, where the price of the product affects its energizing effect. Even subtle stereotypes can influence our behavior, reflecting our perception of the elderly in the way we walk.

The Power of Social Norms

In their book, the authors explore how we have two different sets of norms in our society, social and market norms. Social norms are built around friendly requests and favors, while market norms are more focused on tit-for-tat exchanges. When we apply the wrong set of norms in a situation, it can lead to disaster. Market norms can make people act more selfishly, which is why lawyers refused to provide cheaper services to needy retirees when it fell under market norms. But when asked to do it for free, the social norms applied, and it was acceptable. The study emphasized that once market norms are invoked, it is difficult to revert back to warm and unselfish social norms. Therefore, people should be careful when making requests and consider which norms they could invoke, as even mentioning money may trigger cold market norms.

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