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@adityadedhia
3 weeks, 5 days ago - vertiblocks · 2 min read

Predictably Irrational

This commentary was initially published on 6 June, 2022, at the age of 18.

Book: Predictably Irrational
Author: Dan Ariely
Year: 2008
Pages: 304

Abstract: Human behavior is complex, fascinating, and utterly irrational, and we know a thing or two about it.


“Think how hard physics would be if particles could think.”


Predictably Irrational by Dan Ariely is an introduction to the world of behavioural economics and why we should care about it. The book gives an in-depth insight into the irrationality in our everyday decisions and their implications for businesses and policymakers. Even if we want to act rational, which conventional economics relies upon and does a relatively good job of predicting the economy in the long run, in the short run, changes are grossly misrepresented. Traditional economics assumes humans as utility-maximizing agents; however, measuring utility is difficult because consumers have their own scale of measuring utility which is subject to subjective judgment (If you are interested in how economists try to predict utility, have a read of an introduction to game theory). Even if it could be quantified, we certainly aren't good at it. Ariely gives insight into how concepts such as decoy theory (to force comparisons between easily comparable items) and relative advantage are used to manipulate the consumer's idea of utility. Additionally, the concept of minimizing waste and inefficiency is quickly forgotten at the sight of 'FREE.' Ariely further identifies how society separates social and market norms. People tend to be motivated by social situations and often work harder and happier than if it is treated as a 'job,'' even if their work is the same.

In short, we are all irrational in our own ways: we like having options, we like comparing easy things, and we like socialising. Human behaviour and personality all tie into our irrationality, influencing our decisions. Still, fortunately, these are repetitive tendencies, and identifying them sooner can help us make more rational decisions.

Dan Ariely's 'Predictably Irrational' is an enjoyable read, and it's filled with interesting examples of irrational behaviour. If you're interested in learning more about behavioural economics, this is a great place to start. On the other hand, if you do have knowledge on the topic, there is little depth that Ariely provides, especially in terms of an academic lens. Additionally, I did note that there is often a repetition of ideas, which is not inherently wrong but often underwhelming. Despite these shortcomings, the vast depth of examples and studies he provides are thought-provoking and leave you thinking about your own irrational behaviour. However, if you're looking for a deeper understanding of behavioural economics, you may want to look elsewhere.

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@adityadedhia
3 weeks, 5 days ago - microblocks · 1 min read

Predictably Irrational: Relativity

Ariely begins by discussing the concepts of relativity. The notion that humans are not inherently good at rationalising their value, or in economic terms, utility, "we focus on relative advantage and estimate the value accordingly." This idea is quite controversial; some believe we are hardwired to be irrational, whereas others contend that rationality can be trained. The essence of Ariely's message is that, despite what stance you take, the irrational choices we do end up making have patterns and, thus, are predictable.

Interestingly, throughout the book, Ariely routinely conducts experiences with scholars from MIT, which seem to fall for all these tactics, which suggests it is probably impossible to eliminate irrationality completely. Nevertheless, Ariely argues that being aware of the ways in which we behave irrationally may help us behave less irrationally. l
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@adityadedhia
3 weeks, 5 days ago - microblocks · 1 min read

Predictably Irrational: Decoy Theory

"Sam knows that customers find it difficult to compute the value of different options. (Who really knows if the Panasonic at $690 is a better deal than the Philips at $1,480?) But Sam also knows that given three choices, most people will take the middle choice," (Ariely).

Ariely goes on to demonstrate the power of perspective. How seeing the same thing in two different situations may completely change our decisions. He shares a great anecdote in which a restaurant created an expensive dish for the sole purpose of alluring people to buy the second most expensive dish (which no longer seems like such a bad option) (Ariely). Since it is not the <em>most</em> expensive, you would surely not want to look too cheap now, would you? This is very well the same reason we seem to be so troubled by being in a state of relative poverty, even though we may very well be much better off than we perceive we are. Ariely proposes that the only way to mitigate this is to break this cycle of relativity.


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@adityadedhia
3 weeks, 5 days ago - microblocks · 1 min read

Predictably Irrational: Anchors and Arbitrary Coherence

"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," (Ariely).

Ariely goes into how the presence of an arbitrary selling price influences the consumer's idea of transactional value. A product that does not have an already established consumer perception of its true value can easily be used to manipulate the market forces. Is this not the same tactic many 'elite' hype or luxury brands use to artificially inflate demand for their product because of their initially high arbitrary anchor price? The saying 'you get what you pay for' is tossed out the window when it comes to these assets, as you are really just buying into the idea that this asset has a high perceived market value rather than its actual value. If I put it another way, we have no problems purchasing a $500 designer shoe&sup3; but would think twice about investing the same $500 into a promising startup. What is the difference here? Nothing but a matter of pure irrationality. The tables would turn if the startup could market itself to inflate its value, but things of monetary value cannot have their values be inflated in the same way products and services can, and thus, we continue to make irrational decisions.




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@adityadedhia
3 weeks, 5 days ago - microblocks · 1 min read

Predictably Irrational: Our Obsession with 'FREE!'

 "The real allure of FREE! is tied to this fear. There's no visible possibility of loss when we choose a FREE!" (Ariely). 

There is no doubt that free, or zero anything, really, is an attractive proposition. What Ariely underscores is that this can be attributed to anything. We don't just like free things to the extent to which we will sacrifice our time and energy to obtain them, but we also like working for free too. Ariely conducted studies where MIT volunteers who were asked to do a problem were much more independent and willing to help than paid students. Ariely explains this through social and market norms, indicating that when money is involved, rationality kicks in, and it is merely a matter of input and output.



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@adityadedhia
3 weeks, 5 days ago - microblocks · 1 min read

Predictably Irrational: The Power of a Single Experience

Ariely drives the point home that a feeling that a product or service is high-quality or not is directly attributed to the environment in which it is consumed. There is a well-known tool known as the extended marketing mix in business, which consists of 7Ps (product, price, place, promotion, people, process, and physical evidence)⁵. Ariely rationalizes that the anchors aforementioned are not just limited to prices but also experiences. For example, if an Apple showroom succeeds in its streamlined purchasing process, effective product locations, and a vibrant ambience of helpful staff, it is likely to improve sales despite its high price tag; Apple is able to market a premium product to the mass market effectively. Furthermore, we are more likely to view our initial positive experience, which served as the anchor, indicating that our future experiences will also be positive.



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@adityadedhia
3 weeks, 5 days ago - microblocks · 1 min read

Predictably Irrational: Irrational Attachment with Inanimate Objects

"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," (Ariely).

Conventional economic theory does not account for the fact that the perceived utility for the buy and seller are at two extremities, likely leading to no sale deadlock unless the buyer feels as if he is 'settling' for a lower price. Ariely explains that the things we own are of higher perceived value compared to the buyer, "Suppose you decide to sell your old VW bus. What do you start doing? Even before you've put a FOR SALE sign in the window, you begin to recall trips you took...Unfortunately, the buyer of the VW is more likely to notice the puff of smoke that is emitted as you shift from first into second; and the buyer of your house is more likely to notice the strip of black mould in the corner," (Ariely).


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@adityadedhia
3 weeks, 5 days ago - microblocks · 1 min read

Predictably Irrational: Doors Without Keys

"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," (Ariely).

We often fall into the trap of going further than we actually need. We fail to account for the cost of the misallocation of resources this creates. Nowadays, a common example can be seen in the software-as-a-service (SaaS) industry⁶ These businesses often bundle multiple apps together to make it a more appealing deal compared to single app purchases. Consider a writer who is compelled into buying an office suite. Now, he would have been perfectly fine going with just a word processor, but could he really swallow missing out on all the other apps that the bundle offered? He rationalizes, 'This option is cheaper if I use all the apps. Maybe I won't need a spreadsheet software today, but in the event that I ever need to work with some data, I would be able to do so.' The irony is that we probably know this, yet we will continue to do it anyways.
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@adityadedhia
3 weeks, 5 days ago - microblocks · 1 min read

Predictably Irrational: The Power of Placebo

Ariely believes that the placebo effect has a stronger hold on us than we would like to admit. For example, he finds that the feeling of taking medicine, regardless of its actual content, can be enough to trick our brain into thinking it is working.This irrational attachment to placebos can have profound implications. For example, people might forego an effective treatment in favour of a placebo simply because they think it will work better. Ariely argues that placebos pose a dilemma for businesses since overvaluing a product's value by merely relying on the placebo effect can be considered quite unethical, "If people actually get more satisfaction out of a product that has been hyped, has the marketer done anything worse than sell the sizzle along with the steak?" (Ariely).
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@adityadedhia
3 weeks, 5 days ago - microblocks · 1 min read

Predictably Irrational: Virtuous Cheating


In the last part of the book, Ariely uncovers that even the most honest of us cheat given the ideal circumstances, but by just a bit. What Ariely observed after conducting various experiments with MIT students is that when given the opportunity to cheat on a test, their average scores were slightly inflated, "When the students were given the opportunity to cheat without being able to shred their papers, they increased their correct answers from 32.6 to 36.2. But when they were offered the chance to shred their papers&mdash;hiding their little crime completely&mdash;they didn't push their dishonesty farther," (Ariely).


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@adityadedhia
3 weeks, 5 days ago - macroblocks · 2 min read

Predictably Irrational: Food for Thought




It was refreshing to see Ariely cover a broad range of aspects in his arguments, especially his philosophical reasoning. As observed, irrationality often leads people to make poor decisions. The following is an excerpt I found interesting, "Even the most brilliant and rational person, in the heat of passion, seems to be absolutely and completely divorced from the person he thought he was...Perhaps there is no such thing as a fully integrated human being. We may, in fact, be an agglomeration of multiple selves."
      
Is the amalgamation of all our irrational decisions actually formulaic and intentional? It is interesting to question whether we should even attempt to be rational? Philosophers have attempted to unravel rationality in life yet to no avail. If life does not have an inherent meaning, or at least we are not supposed to know it, then why bother being rational? After all, irrational decisions have also been successful ones; in fact, more decisions are based on gut feelings and intuition rather than precise rationality. Consider the fact that Facebook purchased WhatsApp for $19 billion in 2014, a time when its sales were a mere $20 million. This comes to a payback period (PBP) in excess of hundreds of years. Despite this, certainly, Facebook made the right decision, but was it necessarily rational⁷?
      
If we cannot be perfectly rational, and being rational does not always lead to optimal outcomes, could an attempt at being more rational end us in making worse decisions? This idea springs out of the idea of relative positioning. Everything is relative to time, space, and place, and who knows if attempting to alter your brain's instinctive decision-making could lead you to miss out on something with a greater utility? 
      
As eye-opening as Ariely's claims are, I would go as far as to argue that we should not be advocating for <em>rationality</em> but rather <em>mindful irrationality</em>. If you have gotten the gist, his solutions often interfere with his theory of the market and social norms. Whether we like it or not, we are chained by the laws of social norms, and any attempt to interfere by trying to act rational may result in coming across as arrogant, condescending, and even rude, potentially harming business relations. There is such a concept called 'analysis paralysis', sometimes a state in which comparing like decisions can be challenging and, in fact, meaningless to over-analyze. So should we really be worried about trying to force ourselves to act more rational or stick to a our predefined paths and continue to make progress as nature originally intended? I leave that decision to you.
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@adityadedhia
3 weeks, 5 days ago - microblocks · 1 min read

Predictably Irrational: Takeaways

1. Humans are conditioned to view things as fair; as Frederick Taylor's scientific management theory suggests, workers want outputs deemed 'fair' for their inputs. It is vital to identify the opportunity cost of a decision from an objective market-based standpoint; by examining personal utility stripped from human equity. In other words, being more conscientious of your sentiments and attempting to solely trade in terms of market norms rather than trying to factor in the seller's vision.      

2. Humans are plagued by short-termism. In the productivity space, this is term is often coined as instant-gratification, which suggests that we prefer doing things that give us instant pleasure, such as watching a movie, as opposed to reading or studying in which we cannot conceptualise the full extent of utility gained since the benefits take time to accrue&sup1;.This same concept spills over into decision-making as well. It can be perilous if combined with clever marketing tactics such as 'FREE' products or services or pressing urgency to convey a 'fear of missing out.' It is observed that different emotions heavily influence us, but if we make ourselves conscious of them, we can be in a better position to make better decisions.

3. Humans are willing to work for free if they feel it will contribute to something bigger than themselves in the pursuit of reaching a state of self-actualisation as described in Maslow's hierarchy of needs;. Although no one will do a job for free, employee retainment and acquisition should have a greater focus on non-financial rewards and stray away from strict market norms, including when dealing with customers.


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@adityadedhia
3 weeks, 5 days ago - macroblocks · 4 min read

Predictably Irrational: Key Quotes

"We are really far less rational than standard economic theory assumes. Moreover, these irrational behaviors of ours are neither random nor senseless. They are systematic, and since we repeat them again and again, predictable."

"We not only tend to compare things with one another but also tend to focus on comparing things that are easily comparable—and avoid comparing things that cannot be compared easily."

"Whether the trip across town, and the 15 extra minutes it would take, is worth the extra $7 you would save. Whether the amount from which this $7 will be saved is $10 or $10,000 should be irrelevant."

"Did the digits from the social security numbers serve as anchors? Remarkably, they did: the students with the highest-ending social security digits (from 80 to 99) bid highest, while those with the lowest-ending numbers (1 to 20) bid lowest. The top 20 percent, for instance, bid an average of $56 for the cordless keyboard; the bottom 20 percent bid an average of $16."

"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."

"Zero is an emotional hot button—a source of irrational excitement. Would you buy something if it were discounted from 50 cents to 20 cents? Maybe. Would you buy it if it were discounted from 50 cents to two cents? Maybe. Would you grab it if it were discounted from 50 cents to zero? You bet!"

"We live simultaneously in two different worlds—one where social norms prevail, and the other where market norms make the rules."

"Who do you suppose is likely to work harder, show more loyalty, and truly love his work more—someone who is getting $1,000 in cash or someone who is getting a personal gift?"

"We understand, for instance, that a salary alone will not motivate people to risk their lives. Police officers, firefighters, soldiers—they don&rsquo;t die for their weekly pay. It&rsquo;s the social norms—pride in their profession and a sense of duty—that will motivate them to give up their lives and health."

"We work just as feverishly to keep all our options open. We buy the expandable computer system, just in case we need all those high-tech bells and whistles. We buy the insurance policies that are offered with the plasma high-definition television, just in case the big screen goes blank...And we buy a luxury SUV, not because we really expect to drive off the highway, but because just in case we do, we want to have some clearance beneath our axles."

"Don’t underestimate the power of presentation. There’s a reason that learning to present food artfully on the plate is as important in culinary school as learning to grill and fry. Even when you buy take-out, try removing the Styrofoam packaging and placing the food on some nice dishes and garnishing it (especially if you have company); this can make all the difference."      

"EXPECTATIONS ALSO SHAPE 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...This is why we have the expectation that an elderly person will need help using a computer or that a student at Harvard will be intelligent."      

"Placebos run on the power of suggestion. They are effective because people believe in them. You see your doctor and you feel better. You pop a pill and you feel better. And if your doctor is a highly acclaimed specialist, or your prescription is for a new wonder drug of some kind, you feel even better."

"When given the opportunity, many honest people will cheat. In fact, rather than finding that a few bad apples weighted the averages, we discovered that the majority of people cheated, and that they cheated just a little bit."

"IF I WERE to distill one main lesson from the research described in this book, it is that we are pawns in a game whose forces we largely fail to comprehend."

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