“Predictably Irrational” by Dan Ariely

This book surprised me because I thought it was going to be something different than it was. Originally I thought this book was going to be based more on theory (See “Thinking Fast, and Slow”) vice social situations (See “Incognito” by David Eagleman). Mr. Ariely’s approach took what many of us in everyday life to the experimental level. When I see something interesting happening around me I often ask “Why did he do that?” or “What is the evolutionary reason for that?” In this book, Dan Ariely answers some of those questions with clever experiments while building on the theories of Khaneman and Tversky. I especially like #12. You could say that it demonstrates why I even copy these excerpts to think about.

  1. I mention the rational economic model, I refer to the basic assumption that most economists and many of us hold about human nature—the simple and compelling idea that we are capable of making the right decisions for ourselves.
  2. I believe that recognizing where we depart from the ideal is an important part of the quest to truly understand ourselves, and one that promises many practical benefits.
  3. In conventional economics, the assumption that we are all rational implies that, in everyday life, we compute the value of all the options we face and then follow the best possible path of action. What if we make a mistake and do something irrational? Here, too, traditional economics has an answer: “market forces” will sweep down on us and swiftly set us back on the path of righteousness and rationality.
  4. The irrational behaviors of ours are neither random nor senseless. They are systematic, and since we repeat them again and again, predictable.
  5. We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly.
  6. High-priced entrees on the menu boost revenue for the restaurant—even if no one buys them. Why? Because even though people generally won’t buy the most expensive dish on the menu, they will order the second most expensive dish. Thus, by creating an expensive dish, a restauranteur can lure customers into ordering the second most expensive choice.
  7. This is the problem of relativity—we look at our decisions in a relative way and compare them locally to the available alternatives.
  8. “I don’t want to live the life of a Boxster [Porsche]” he [James Hong] told the New York Times, “because when you get a Boxster you wish you had a 911, and you know what people who have 911s wish they had? They wish they had a Ferrari.” That’s a lesson we can all learn: the more we have, the more we want. And the only cure is to break the cycle of relativity.
  9. Assael had taken something of dubious worth and made it fabulously fine. Or, as Mark Twain once noted about Tom Sawyer, “Tom had discovered a great law of human action, namely, that in order to make a man covet a thing, it is only necessary to make the thing difficult to attain.”
  10. Arbitrary Coherence: The basic rule of arbitrary coherence is this: although initial prices (such as the price of Assael’s pearls) are “arbitrary,” once those prices are established in our minds they will shape not only present prices but also future prices (this makes them “coherent”).
    1. This, then, is what we call arbitrary coherence. Initial prices are largely “arbitrary” and can be influenced by responses to random questions; but once those prices are established in our minds, they shape not only what we are willing to pay for an item, but also how much we are willing to pay for related products (this makes them coherent).
  11. Behavior Herding: It happens when we assume that something is good (or bad) on the basis of other people’s previous behavior, and our own actions follow suit.
  12. Socrates said that the unexamined life is not worth living. Perhaps it’s time to inventory the imprints and anchors in our own life. Even if they once were completely reasonable, are they still reasonable? Once the old choices are reconsidered, we can open ourselves to new decisions—and the new opportunities of a new day. That seems to make sense.
  13. We live simultaneously in two different worlds—once where social norms prevail, and the other where market norms make the rules.
  14. No one is offended by a small gift, because even small gifts keep us in the social exchange world and away from market norms.
  15. [On why fining parents that are late picking their kids up from day care doesn’t work]: The fine didn’t work well, and in fact it had long-term negative effects. Why? Before the fine was introduced, the teachers and parents had a social contract, with social norms about being late. Thus, if parents were late—as they occasionally were—they felt guilty about it—and their guilt compelled them to be more prompt in picking up their kids in the future. But once the fine was imposed, the day care center had inadvertently replaced the social norms with market norms.
  16. When a social norm collides with a market norm, the social norm goes away for a long time. In other words, social relationships are not easy to reestablish. Once the bloom is off the rose—once a social norm is trumped by a market norm—it will rarely return.
  17. If you’re a company, my advice is to remember that you can’t have it both ways. You can’t treat your customers like family one moment and then treat them impersonally—or, even worse, as a nuisance or a competitor—a moment later when this becomes more convenient or profitable.
  18. Money, as it turns out, is very often the most expensive way to motivate people. Social norms are not only cheaper, but often more effective as well.
  19. Such feelings benefit both the workplace and the employee. Employers who can foster these feelings gain dedicated, motivated employees who think about solving job-related problems even after the workday is over. And employees who take pride in their work feel a sense happiness and purpose. But in the same way that market norms may undermine social norms, it may be that market norms also erode the pride and meaning people get from the workplace.
  20. What these results mean is that when price is not part of the exchange, we become less selfish maximizers and start caring more about the welfare of others.
  21. Giving up on our long-term goals for immediate gratification, my friends, is procrastination.
  22. Sometimes we strongly support regulations that restrain our self-destructive behaviors, and at other times we have equally strong feelings about our personal freedom. Either way, it’s always a trade-off.
  23. In many transactions why does the owner believe that his possession is worth more money than the potential owner is willing to pay? There’s an old saying, “One man’s ceiling is another man’s floor.” Well, when you’re the owner, you’re at the ceiling; and when you’re the buyer you’re at the floor.
  24. The second quirk is that we focus on what we may lose, rather than what we may gain.
  25. Ownership is not limited to material things. It can also apply to points of view. Once we take ownership of an idea—whether it’s about politics or sports—what do we do? We love it perhaps more than we should. We prize it more than it is worth. And most frequently, we have trouble letting go of it because we can’t stand the idea of its loss. What are we left with then? An ideology—rigid and unyielding.
  26. Our propensity to overvalue what we own is a basic human bias, and it reflects a more general tendency to fall in love with, and be overly optimistic about, anything that has to do with ourselves.
  27. In running back and forth among the things that might be important, we forget to spend enough time on what really is important.
  28. In 1941 the philosopher Erich Fromm wrote a book called “Escape from Freedom.” In a modern democracy, he said, people are beset not by a lack of opportunity, but by a dizzying abundance of it. In our modern society that is emphatically so. We are continually reminded that we can do anything and be anything we want to be. The problem is in living up to this dream. We must develop ourselves in every way possible; must taste every aspect of life; must make sure that of the 1,000 things we see before dying, we have not stopped at number 999. But then comes a problem—are we spreading ourselves too thing?
  29. Can previous knowledge actually modify the neural activity underlying the taste itself, so that when we expect something to taste good (or bad), it will actually taste that way?
  30. Stereotypes: A stereotype, after all, is a way of categorizing information, in the hope of predicting experiences. The brain cannot start from scratch at every new situation. It must build on what it has seen before.
  31. Time heals all wounds, and one of the ways time works in our favor is to help us either forget or misremember the past in a way that makes us feel better about ourselves.
  32. Psychologists, economists, and environmentalists use the phrase “the tragedy of the commons” to describe the same basic principle: when we use a common resource at a rate that is slower than the rate at which it replenishes, all is well. However, if a few individuals get greedy and use more than their share, the system of consumption becomes unsustainable, and in the long term, everybody loses.
  33. The word profession comes from the Latin professus, meaning “affirmed publicly.” Professions started somewhere deep in the past in religion and then spread to medicine and law. Individuals who had mastered esoteric knowledge, it was said, not only had a monopoly on the practice of that knowledge, but had an obligation to use their power wisely and honestly.
  34. When we are removed from any benchmarks of ethical thought, we tend to stray into dishonesty. But if we are reminded of morality at the moment we are tempted, then we are much more likely to be honest.
  35. In many ways, the standard economic and Shakespearean views are more optimistic about human nature, since they assume that our capacity for reasoning is limitless. By the same token the behavioral economics view, which acknowledges human deficiencies, is more depressing, because it demonstrates the many ways in which we fall short of our ideals.
  36. Behavioral economists believe that people are susceptible to irrelevant influences from their immediate environment (which we call context effects), irrelevant emotions, shortsightedness, and other forms of irrationality.

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions

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