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Book Summary: "Predictably Irrational - The Hidden Forces that Shape Our Decisions" by Dan Ariely

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Dan Ariely’s book shares an updated and enhanced account of a series of experiments that demonstrate how we have little control over our irrational behaviours and how this impacts on our ability to make decisions. Ariely wrote Predictably Irrational: The Hidden Forces that Shape Our Decisions after recovering as a patient in the burn department. His original aim was to better understand our irrational quirks in the hopes of retraining ourselves to make better decisions.

Predictably irrational

Here, I will share my summary of each chapter as follows:

  1. The Truth of Relativity
  2. The Fallacy of Supply and Demand
  3. The Cost of Zero Cost
  4. The Cost of Social Norms
  5. The Influence of Arousal
  6. The Problem of Procrastination and Self-Control
  7. The High Price of Ownership
  8. Keeping Doors Open
  9. The Effect of Expectations
  10. The Power of Price
  11. The Context of Our Character, Pt. I
  12. The Context of Our Character, Pt. II
  13. Beer and Free Lunches

At the end, there are additional reflections and anecdotes about several chapters and interestingly, an account of recent events called The Subprime Mortgage Crisis and Its Consequences.


Chapter 1: The Truth About Relativity

Why everything is relative – even when it shouldn’t be.

Everyone recognises that we enjoy comparison. We compare jobs with jobs, holidays with holidays, boyfriends and girlfriends, etc. Using relativity is how most of us make decisions in life. Unfortunately, it’s also the thing that makes us miserable because of jealousy and envy.

To help with issues that arise from using relativity, Ariely suggests we control the circles in which we compare ourselves. He uses a class reunion as an example. We should consciously move away from the circle of people who boast of their big salaries and talk with someone else instead.When spending or researching a purchase, we should consciously only view houses or cars that are truly within our budget.

If we do move up the ranks, it’s clear that we’ll only stay satisfied with this higher standard of living for a short period of time before we restart looking to an even higher standard.

What can we learn from this? The more we have, the more we want. Ariely’s only cure for this is to break the cycle of relativity.


Chapter 2: The Fallacy of Supply and Demand

Why the price of pearls – and everything else – is up in the air.

Here, Ariely discusses the existence of arbitrary coherence. What is arbitrary coherence? Although initial prices are “arbitrary”, once those prices are established in our minds they will shape not only present prices but also future prices. Price tags become anchors when we contemplate buying a product or service at that particular price.

Usually, our first decisions will resonate over a long sequence of decisions. They remain with us as anchors for a long time after the initial encounter. Ariely finds this research useful as he goes on to explain the importance of understanding the process by which our first decisions translate into long-term habits.This, and the other studies I’ve not shared here, illustrate how anchoring plays a role in the many choices we make. The concern comes when we realise that we are no more than the sum of our first, naive and random behaviours.

Ariely advises that, first, we can start to become more aware of our vulnerabilities. With everything you do, you should train yourself to question your repeated behaviours. Second, since the first decision has such an impact on all decisions in a similar category in the future, we should all give it an appropriate amount of attention. Once we reconsider our old choices, we can open ourselves to new decisions – and the new opportunities of a new day.


Chapter 3: The Cost of Zero Cost

Why we often pay too much when we pay nothing.

It’s clear that getting something for free gives you a buzz. In this chapter, Ariely argues that zero is a source of irrational excitement. Zero or free can become a struggle when deciding between a free item and another item. We often give up a better deal and settle for something that was not what we originally wanted because we were lured by theFREE!The reason we go for free is because we suddenly forget the downside of this particular transaction. When choosing between two products we often overreact to the free one.

The concept of zero is not only applicable to price but also time. A lot of people spend time in a queue for something that is free but forget that the time spent waiting in that queue may be better used in another way. Similarly, a food product which is labelled as having zero calories is often picked up in favour of something we actually want to eat which may not also be healthier, but has more calories than zero.

What can we draw from this? FREE! can have a great deal of power when trying to entice others to pay attention to your product or idea.


Chapter 4: The Cost of Social Norms

Why we are happy to do things, but not when we are paid to do them.

**This chapter struck a chord with me because every idea resonated with me in some shape or form. Namely, the ideas of a norm that exists in the market and norm that exists in society.

When you do an act of kindness for someone such as opening a door, you do not expect reciprocity. Both parties enjoy the moment and nothing more is said about it. This describes the sphere where a social norm is at play.The sphere where market norms apply varies greatly. Here, you get what you pay for. This is where we see the involvement of wages, prices, rents, interest and cost-and-benefit decisions.

When we keep social norms and market norms separate, life is good. Ariely uses sex as an example. Prostitutes take money for sex but expect nothing more. Similarly, a wife does not ask her husband for money each time they have sex because they’ve made an agreement in the social sphere unlike the prostitute who operates in the market sphere. If a guy takes a girl out on a date and tries to pay the girl at the end of the date, he will find himself in a tricky situation which demonstrates what happens when you combine the two norms.

Ariely goes on to discuss how companies use social norms in the market sphere to get their employees to spend more hours at the office. As a result, the partition between work and leisure has blurred. By offering a social reward you can strongly motivate behaviour. That’s why many companies have a benefit programme which has the lifestyle of the employee in mind. Think of medical care, annual leave and discounts or vouchers for childcare. As a result, they get harder working employees who’ve recognised the social rewards that they’ll receive in return.

From Ariely’s research, it’s clear that cash incentives (from the market norm) only take you so far. Social norms are the forces that can make a difference in the long run. Ariely explores this idea not only in corporations but in rethinking the school curriculum. He argues that linking education to social goals (elimination of poverty and crime, elevation of human rights), technological goals and medical goals that we care about as a society will have an impact on the motivation of pupils.

Interestingly, Ariely also argues that money is very often the most expensive way to motivate people. Social norms are not only cheaper, but often more effective as well.


Chapter 5: The Influence of Arousal

Why hot is much hotter than we realise.

Possibly the most controversial part of the book, this chapter makes for an entertaining yet fascinating read as Ariely explores decision-making under sexual arousal and extrapolates this research to other decisions we make when emotional.

Ariely finds that every one of us, regardless of how “good” we are, underestimates the effect of passion on our behaviour. He discusses the implications of not behaving in a way that we would predict for ourselves when emotional. He provides suggestions on how to encourage safe sex, safe driving and make better life decisions.

As a result, we need to recognise these two sides to ourself and how this benefits and hinders our lives and decision-making.


Chapter 6: The Problem of Procrastination and Self-Control

Why we can’t make ourselves do what we want to do.

Unsurprisingly, Ariely’s first piece of research, which looks at students and deadlines, finds that the best cure for procrastination is to impose deadlines from above. The problem is that, although most people recognise that they procrastinate, they may not understand their problem completely. However, those that do recognise their problem are in a better position to utilise available tools for pre-commitment and by doing so, help themselves to overcome it.

Looking at the wider population, we all struggle with resisting temptation and instilling self-control. We’re surrounded by the struggle for control. The only way to overcome this is to get an authority figure to give us the orders. So, if you’re unable to save from your pay packet, you can take advantage of your employer’s automatic deduction option.

Taking healthcare as another example, Ariely argues that we have self-imposed penalties to ensure we take physical examinations seriously like being fined for not going for your annual check-up.

To keep spending in check, Ariely discusses an idea he’d had in the past of creating a self-control credit card that helps people manage their credit wisely. He talks about how he failed to successfully pitch the idea to a credit company who, realising they will no longer make a profit, rejected the idea quietly by never following up.


Chapter 7: The High Price of Ownership

Why we overvalue what we have.

Our life stories can be told by the ebb and flow of particular possessions – what we get and what we give up. There are three quirks in the human nature that hold us back with selling possessions:

  1. We fall in love with what we already have
  2. We focus on what we may lose, rather than what we may gain
  3. We assume other people will see the transaction from the same perspective

Being aware of the ills of ownership can help. Recognising the temptation to improve the quality of our lives by buying a larger home or a new car is key to avoiding bad decisions. Try to view any transaction as if you were a non-owner to help create distance between yourself and item.


Chapter 8: Keeping Doors Open

Why options distract us from our main objective.

Every one of us tries to keep all our options open. We’re mostly aware of this but what we aren’t considering is that we give up something for those options. We may go for a computer that has far more functions than we need. Also, we can forget to spend enough time or money on what really is important.

Ariely explores the reasons for why we struggle to commit ourselves to one thing. Following an experiment, it’s clear that given a simple set-up and a clear goal, all of us can pursue the source of our satisfaction. The research also shows that keeping more than one door open is not only stressful but uneconomical.

At the same time, though, we can sometimes fail to realise that there are some options disappearing that need our attention. To help, we can consciously start closing some of our doors. Admittedly, this is easier with those doors that are smaller. For those that may lead to a new career it will be more difficult to close.

Being left with just two doors open can be equally challenging. Especially two doors or options that are very similar. We can end up so torn about which option to take that we don’t choose either. Meanwhile, we’ve wasted all this time “not deciding”, we’ve neglected our other responsibilities.


Chapter 9: The Effect of Expectations

Why the mind gets what it expects.

When we believe beforehand that something will be good, it generally will be good – and when we think it will be bad, it will be bad. Ariely tests this by getting students to try different beers, one of which has a couple of drops of balsamic vinegar. When told the quality of each beer (promoting the vinegar one as the best) almost all people enjoyed the vinegar beer more. Those who were told about the vinegar upfront enjoyed the beer less.

Expectations also shape stereotypes. A way to view this positively is to perhaps at least acknowledge that we are all biased.


Chapter 10: The Power of Price

Why a 50-cent aspirin can do what a penny aspirin can’t.

Ariely explores placebos and how they can prove effective. Beliefs and expectations affect how we perceive and interpret sights, tastes and other sensory phenomena. This research is nothing new but Ariely takes the perspective that it hasn’t been explored in terms of how price affects our experience. Can a pricey medicine make us feel better than a cheaper brand? He finds that prices drive the placebo effect with pharmaceuticals and argues that this is also applicable to consumer products.

Controversially, the research discusses whether we should accept placebos as an effective treatment.


Chapter 11: The Context of Our Character Pt. I

Why we are dishonest, and what we can do about it.

Ariely opens this chapter with a controversial fact that every year employees’ theft and fraud at the workplace are estimated at about $600 billion. This is compared with the cost of all robberies which cost $525 million in 2004. The latter crime is more heavily monitored by law enforcement than the former. This fact helps Ariely explore the idea that there might be two types of dishonesty.

The first is by those who go out with the intention of robbing money through force. The second is by those who generally consider themselves honest. These are the ones who will sneakily add an extra dinner to an expense report even when it wasn’t covering just their own meal but also that of their friend.

Ariely’s experiments find that when given the opportunity, many honest people will cheat. Most of them cheat just a little bit. Also, once tempted to cheat, participants didn’t seem to be as influenced by the risk of being caught as one might think. Ariely uses the rest of this chapter to look at how we can cure dishonesty. This is because honesty is key to any business and any nation. He argues that in order to get people to become honest again they need to be reminded of a set of values and ethics. We need to revive professional standards.


Chapter 12: The Context of Our Character Pt. II

Why dealing with cash makes us more honest.

After leaving six cans of coke in a fridge of a shared kitchen in halls of residence, Ariely discovers they’ve all gone within 72 hours. Leaving a plate of six dollar bills in the same fridge, the money remains untouched for the same duration. Why? Following on from the previous chapter, Ariely shows more evidence that people are more likely to be dishonest when that which they’re stealing is one step removed from cash.

Ariely concludes that when given a chance, people cheat but most of us don’t see it coming. Even though most who do cheat but consider themselves ethical, it’s clear that these ones will not let the dishonesty spiral out of control. They limit their dishonesty. This is also not just something we see in individuals but also in many companies.

When we deal with money, we are primed to think about our actions as if we had just signed an honour code. Ariely’s worry is expressed when he highlights that soon enough we won’t be dealing with cash but rather use methods of payment which are one step removed from money. What then for honesty?


Chapter 13: Beer and Free Lunches

What is behavioural economics, and where are the free lunches?

For his last chapter, Ariely demonstrates the sway that others may have on your choice of meal at a restaurant. His advice is to be sure you know what you want and stick with you first decision. Be especially conscious when your friends order out loud before you as this is when you’re most likely to change your mind.

Ariely seeks to show how economics would make more sense if it were based on how people actually behave, instead of how they should behave. As an example, it makes no sense why more Americans don’t save for retirement if they’re rational beings. If we are all making good, informed decisions in every aspect of our lives, then we are also saving the exact amount that we want to save. From the perspective of behavioural economics, it’s perfectly reasonable that people are not saving enough. In behavioural economics, we understand that people procrastinate.

Ariely concludes on a stark but strong point. Although we may feel completely in control of any decision we make, we really aren’t at all. Each of his chapters describes the other forces at play. Even though irrational behaviour is at play, it doesn’t mean that we all must resign ourselves to it. Recognition and acknowledgement of this phenomenon is key to helping us overcome those forces.

The beauty of this enhanced version is that at the end of the book Ariely goes over most of the chapters again with several anecdotes. He demonstrates a strong and insightful story for why the subprime mortgage crisis happened in behavioural economics terms.


Evaluation

Overall, there’s not one reader out there who won’t take away something of value from this book. About 60% of this book helped me learn something completely new and the rest of it enhanced my understanding of ideas I’d been aware of. It’s a fascinating read (whether you’re interested in psychology or not), because it provides an accurate portrayal of everyday situations that it’s impossible not to be able to relate to any of the research outcomes. I’d highly recommend reading this if you find yourself trying to regain control over your life or understand why you procrastinate.