Readers' Digest Irrationality

Each of the chapters in this book describes a force (emotions, relativity, social norms, etc.) that influences our behavior. And while these influences exert a lot of power over our behavior, our natural tendency is to vastly underestimate or completely ignore this power. These influences have an effect on us not because we lack knowledge, lack practice, or are weak-minded. On the contrary, they repeatedly affect experts as well as novices in systematic and predictable ways. The resulting mistakes are simply how we go about our lives, how we “do business.” They are a part of us.

I’m an INTJ. According to The Compleat Idiot's Guide to the INTJ: We don’t do feelings. We use critical thinking, reason, and logic. We have a tough time with people who make decisions based on emotions, and we can often come across as blunt and cold because we ignore the feelings of others. But on the plus side, we take criticism well since we have no feelings to hurt. Other INTJ description are less blunt, but it’s pretty much an accurate description of my type and I represent the type pretty well. For instance, I took the GRE when it still had the Analytical Ability section and scored 800; I also keep my emotions buried so deep I usually have trouble figuring out what I’m feeling even when I want to.

Knowing all of this, you might conclude I aspire to be a purely logical Vulcan like Spock, but in fact the opposite is true. I decided a long time ago that humans are mostly emotional, instinctive, conditioned, and reactionary, and logic has only a minor impact on things. I don’t say this misanthropically, because I include myself in this description. It’s just the way we are and I do my best to embrace it and work with it.

So does Dan Ariely in the book Predictably Irrational. There’s really not much here that hasn’t been figured out by salespeople and observers of human nature throughout history, it’s just that Ariely articulates it and uses scientific methods to validate it. He’s a behavioral economist, so he comes at this from the angle of economic decision making. He doesn’t just make the point that we are stupidly irrational, but that we are predictably so—we are irrational in the same ways over and over again, so then we actually can use logic and reasoning in creating structures, contexts, and limits in response to these irrational behaviors.

Each chapter considers an aspect of the issue. Ariely uses real-world anecdotes and circumstances to illustrate his main point (and how that point contradicts traditional rational economic assumptions), shares numerous experiments he and his colleagues have conducted to prove the point, and considers implications and strategies for dealing with that reality. The chapter subtitles are pretty descriptive, but I’ll elaborate, share good quotes, or ponder a bit for most of them.

The Truth about Relativity: Why Everything Is Relative—Even When It Shouldn’t Be
We never decide in a vacuum of clear logic, but always in comparison. So how the context is shaped and the options for comparison will determine what we decide. I originally discovered the book through this video of Ariely presenting this idea.

The Fallacy of Supply and Demand: Why the Price of Pearls—and Everything Else—Is Up in the Air
Much like goslings are imprinted by their first encounter with another creature, our expectations about base prices for everything are determined by our first encounters with them. The same item/experience can be completely undesirable or nearly unattainable depending on how it’s presented.

As our experiments demonstrate, what consumers are willing to pay can easily be manipulated, and this means that consumers don’t in fact have a good handle on their own preferences and the prices they are willing to pay for different goods and experiences. . . .

So where does this leave us? If we can’t rely on the market forces of supply and demand to set optimal market prices, and we can’t count on free-market mechanisms to help us maximize our utility, then we may need to look elsewhere. This is especially the case with society’s essentials, such as health care, medicine, water, electricity, education, and other critical resources. If you accept the premise that market forces and free markets will not always regulate the market for the best, then you may find yourself among those who believe that the government (we hope a reasonable and thoughtful government) must play a larger role in regulating some market activities, even if this limits free enterprise. Yes, a free market based on supply, demand, and no friction would be the ideal if we were truly rational. Yet when we are not rational but irrational, policies should take this important factor into account.

The Cost of Zero Cost: Why We Often Pay Too Much When We Pay Nothing
People would rather pay $.15 for a high quality chocolate than $.01 for a poor quality one, but will almost always take a free poor quality one over a $.14 high quality one. Same price difference, just insert the word “free” to get an entirely different decision. I’ve often joked that we should market the library with signs that say something like, “Huge Sale! Two FREE checkouts with each regular one!” Turns out it’s not a joke.

The Cost of Social Norms: Why We Are Happy to Do Things, but Not When We Are Paid to Do Them
I introduced this chapter here. He also considers the implications of business and employer practices. 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.

The Influence of Arousal: Why Hot Is Much Hotter Than We Realize
It’s Jekyll and Hyde. Not only do we consistently decide and behave decidedly differently when under the grips of powerful emotions, we also, regardless of repeated experience, fail to predict we will do so. We become someone else but don’t even realize it.

The Problem of Procrastination and Self-Control: Why We Can’t Make Ourselves Do What We Want To Do
This chapter basically makes the case for laws and regulations, forced preventative health care and savings and such. We always put things off. If we have self-imposed deadlines we put them off less. If we have externally imposed deadlines we put them off least.

The High Price of Ownership: Why We Overvalue What We Have
Ownership includes emotional and sentimental value that no one else feels. Things like eBay auctions work because of “virtual ownership.”

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? An ideology—rigid and unyielding.

Keeping Doors Open: Why Options Distract Us from Our Main Objective
Over-busy lives . . .

The Effect of Expectations: Why the Mind Gets What It Expects
We see the world through “me” colored lenses. Self-fulfilling prophecy. The prism analogy above. You shape your experience of the world based on what you expect it to be. There is a kernel of truth to all those sappy “choose your attitude” mantras. Subconscious stereotypes are constantly affecting us. Neutral mediators are important. And, strangely enough, beer tastes better with a few drops of balsamic vinegar (2 drops per ounce in their experiments).

The Power of Price: Why a 50-Cent Aspirin Can Do What a Penny Aspirin Can’t
See the expectations chapter above and apply it to placebos. The effects are not just psychological, though; it truly does make a difference in the body’s physical reactions.

When people think about a placebo such as the royal touch, they usually dismiss it as “just psychology.” But there is nothing “just” about the power of a placebo, and in reality it represents the amazing way our mind controls our body. How the mind achieves these amazing outcomes is not always very clear. Some of the effect, to be sure, has to do with reducing the level of stress, changing hormonal secretions, changing the immune system, etc. The more we understand the connection between brain and body, the more things that once seemed clear-cut become ambiguous. Nowhere is this as apparent as with the placebo.

The Context of Our Character, Part I: Why We Are Dishonest, and What We Can Do about It
I introduced this chapter here. Everyone lies, cheats, and steals in little ways. But we’re less likely to do so when reminded of the existence of things like the Ten Commandments or the MIT honor system. 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. It has nothing to do with the likelihood of being caught, either; all that seems to matter is the reminder that it’s wrong.

The Context of Our Character, Part II: Why Dealing with Cash Makes Us More Honest
When we look at the world around us, much of the dishonesty we see involves cheating that is one step removed from cash. Companies cheat with their accounting practices; executives cheat by using backdated stock options; lobbyists cheat by underwriting parties for politicians; drug companies cheat by sending doctors and their wives off on posh vacations. To be sure, these people don’t cheat with cold cash (except occasionally). And that’s my point: cheating is a lot easier when it’s a step removed from money.

Do you think that the architects of Enron’s collapse—Kenneth Lay, Jeffrey Skilling, and Andrew Fastow—would have stolen money from the purses of old women? Certainly, they took millions of dollars in pension monies from a lot of old women. But do you think they would have hit a woman with a blackjack and pulled the cash from her fingers? You may disagree, but my inclination is to say no.

One example: He went into the MIT dorms and put things in student fridges: 6-packs of Coke and plates with 6 one-dollar bills. After 72 hours all the Cokes were gone and none of the money had been touched.

In the larger context, we need to wake up to the connection between nonmonetary currency and our tendency to cheat. We need to recognize that once cash is a step away, we will cheat by a factor bigger than we could ever imagine. We need to wake up to this—individually and as a nation, and do it soon. . . . the days of cash are coming to a close.

Beer and Free Lunches: What Is Behavioral Economics, and Where Are the Free Lunches
Wouldn’t economics make a lot more sense if it were based on how people actually behave, instead of how they should behave? As I said in the Introduction, that simple idea is the basis of behavioral economics . . .

Although irrationality is commonplace, it does not necessarily mean that we are helpless. Once we understand when and where we may make erroneous decisions, we can try to be more vigilant, force ourselves to think differently about these decisions, or use technology to overcome our inherent shortcomings. This is also where business and policy makers could revise their thinking and consider how to design their policies and products so as to provide free lunches.