Predictably Irrational by Dan Ariely

Don’t read this book please! If you do you’ll make it much harder for me and others to sell you something.

In all seriousness though, this book has completely evolved the way I look at pricing, marketing, positioning, and more. One major take away is this:

People have a hard time comparing things that are different from one another. Give people the opportunity to recognize your goal in that context, as a comparison between similar things. Of those similar things, make it obvious that your goal is the best option.

In the context of pricing, try to place the juicy orange you want to sell next to a dying one, and place both oranges next to an apple of any kind. You will sell more oranges.

In the context of mating, be sure you hang out with someone that looks similar to you but less attractive. You will end up being more attractive than anyone in the room.

Wash. Rinse. Repeat.

There are other gold nuggets in the book, such as how providing a sense of ownership to a buyer (before they buy) can garner an items maximum value. And, how a strong grasp of “market norms” and “social norms” can provide you with harder working employees.

But, the book is more than a few tips and facts, Dan takes you through the experiments and their results so you can understand the genesis of his conclusions.

Since reading Predictably Irrational by Dan Ariely I have been able to benefit from many of its conclusions in my everyday life. It is very much worth the read. If you are thinking about selling a product, service or good read this book first!

I’ve copied some of my notes from the book below. Let me know if you have any comments, discussion points or ideas around them – I’d love to hear about them!

The discipline that allows me to play with this subject matter is called behavioral economics, or judgment and decision making (JDM).

humans rarely choose things in absolute terms.

We don’t have an internal value meter that tells us how much things are worth.

most people don’t know what they want unless they see it in context.

I found the recurring theme in the book to be: pricing (or in a larger scope, decision making) is more about a person following a path of least resistance than a true evaluation of values and rationale. The context you give helps to guide that path.

The decision between the Internet-only and print-only options would take a bit of thinking.

The path of least resistance equates to the path with the least requirement to think. The way you balance your offering helps decrease the need for thought.

Sam also knows that given three choices, most people will take the middle choice (as in landing your plane between the runway lights). So guess which television Sam prices as the middle option? That’s right—the one he wants to sell!

I’ve heard this concept before, but just creating a “middle” is over simplifying what is really going on here. It is more about the previous point of context. Provide things a person can compare most easily and but that beside something too different to compare without a deeper level of thought. For example, if you want someone to buy an orange, put it next to a similar orange – then put those oranges next to an apple. Well, I’ll let him explain it ….

It was the mere presence of the decoy that sent 84 of them to the print-and-Internet option (and 16 to the Internet-only option). And the absence of the decoy had them choosing differently, with 32 for print-and-Internet and 68 for Internet-only.

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. That may be a confusing thought,

Studies even find that countries with the “happiest” people are not among those with the highest personal income.

pinstripe suit for $455 and decide to buy it, but then another customer whispers in your ear that the exact same suit is on sale for only $448 at another store, just 15 minutes away. Do you make this second 15-minute trip? In this case, most people say that they would not. But

The only question you should ask yourself in these cases is whether the trip across town, and the 15 extra minutes it would take, is worth the extra $7 you would save.

We compare the relative advantage of the cheap pen with the expensive one, and this contrast makes it obvious to us that we should spend the extra time to save the $7. At the same time, the relative advantage of the cheaper suit is very small, so we spend the extra $7.

We made this mistake  A LOT on our trip. When prices adjust we found ourselves worrying about 50 cents on a $1 charge BECAUSE we couldn’t help think “hey, this is off by 50%!”

This is also why it is so easy for a person to add $200 to a $5,000 catering bill for a soup entrée, when the same person will clip coupons to save 25 cents on a one-dollar can of condensed soup.

we find it easy to spend $3,000 to upgrade to leather seats when we buy a new $25,000 car, but difficult to spend the same amount on a new leather sofa (even though we know we will spend more time at home on the sofa than in the car). Yet

we could better assess what we could do with the $3,000 that we are considering spending on upgrading the car seats. Would we perhaps be better off spending it on books, clothes, or a vacation?

“I don’t want to live the life of a Boxster,” he 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.”

Another very relevant point to my recent experiences. I took a trip to eject from the cycle of not-enoughism.

Harry Winston, the legendary gemstone dealer. Winston agreed to put them in the window of his store on Fifth Avenue, with an outrageously high price tag attached. Assael, meanwhile, commissioned a full-page advertisement that ran in the glossiest of magazines. There, a string of Tahitian black pearls glowed, set among a …

Above was a great example of context. The marketer simply positioned a non-precious item along with extremely precious things.

not only that goslings make initial decisions based on what’s available in their environment, but that they stick with a decision once it has been made. Lorenz called this natural phenomenon imprinting…

… once we buy a new product at a particular price, we become anchored to that price.

The basic idea 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”).

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.

This was a very impressive experiment. Just using high numbers in your context, *even if they have ZERO relevance to a price or your product*, effect the value a person places on your good. Just – wow.

But price tags by themselves are not necessarily anchors. They become anchors when we contemplate buying a product or service at that particular price. That’s when the imprint is set. From then on, we are willing to accept a range of prices—but as with the pull of a bungee cord, we always refer back to the original anchor. Thus the first anchor influences not only the immediate buying decision but many others that follow.

high-definition television on sale for $3,000, for instance. The price tag is not the anchor. But if we decide to buy it (or seriously contemplate buying it) at that price, then the decision becomes our anchor henceforth in terms of LCD television sets. That’s

The only way out of this box, in fact, is to rent a home in the new location for a year or so. That way, we adjust to the new environment—and, after a while, we are able to make a purchase that aligns with the local market.

“Well, I listened previously to that annoying sound for a high amount. This sound is not much different. So since I said a high amount for the previous one, I guess I could bear this sound for about the same price.”

you think to yourself. “People are standing in line.” So you stand behind these people. Another person walks by. He sees three people standing in line and thinks, “This must be a fantastic restaurant,” and joins the line. Others join. We call this type of 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.

you think to yourself. “People are standing in line.” So you stand behind these people. Another person walks by. He sees three people standing in line and thinks, “This must be a fantastic restaurant,” and joins the line. Others join. We call this type of 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.

self-herding. This happens when we believe something is good (or bad) on the basis of our own previous behavior. Essentially,

Herding is a fairly obvious occurrence, but self-herding was more of an eye-opener.

the prices at the two places; and, of course, the cost (or value) of walking a few more blocks to get to Dunkin’ Donuts. This is a complex computation—so instead, you resort to the simple approach: “I went to Starbucks before, and I enjoyed myself and the coffee, so this must be a good decision for me.” So you walk in and get another small cup of coffee.

Buying coffee at Starbucks has become a habit with you.

Starbucks did everything in its power, in other words, to make the experience feel different—so different that we would not use the prices at Dunkin’ Donuts as an anchor, but instead would be open to the new anchor that Starbucks was preparing for us.

Could it be that the lives we have so carefully crafted are largely just a product of arbitrary coherence?

Could it be that we made arbitrary decisions at some point in the past (like the goslings that adopted Lorenz as their parent) and have built our lives on them ever since, assuming that the original decisions were wise? Is

it might seem to us that this is just one decision, without large consequences; but in fact the power of the first decision can have such a long-lasting effect that it will percolate into our future decisions for years to come.

with the price and quality of the truffle, and then made their choice. About 73 percent of them chose the truffle and 27 percent chose a Kiss. Now we decided to see how FREE! might change the situation. So

But what a difference FREE! made. The humble Hershey’s Kiss became a big favorite. Some 69 percent of our customers (up from 27 percent before) chose the FREE!

The critical issue arises when FREE! becomes a struggle between a free item and another item

Why? I think it’s because humans are intrinsically afraid of loss. The real allure of FREE! is tied to this fear. There’s no visible possibility of loss when we choose a FREE! item (it’s free). But suppose we choose the item that’s not free. Uh-oh, now there’s a risk of having made a poor decision—the possibility of a loss. And

Suppose I offered you a choice between a free $10 Amazon gift certificate and a $20 gift certificate for seven dollars. Think quickly. Which would you take?

a $20 gift certificate for seven dollars delivers a $13 profit. That’s clearly better than getting a $10 certificate free (earning $10). Can you see the irrational behavior in action?*

immortal words of Woody Allen: “The most expensive sex is free sex.”

In line with the ethos of market norms, those who received five dollars dragged on average 159 circles, and those who received 50 cents dragged on average 101 circles. As expected, more money caused our participants to be more motivated and work harder

He doesn’t mention it, but this chapter dances between the cost/benefits of capitalism, socialism as well as charities. Where does hard work truly stem from, and what motivates truly great work?

The results showed that on average they dragged 168 circles, much more than those who were paid 50 cents, and just slightly more than those who were paid five dollars.

people will work more for a cause than for cash.

This is yet another good reason to always look for the societal benefits in what you bring to market. Tangentially or directly.

AARP asked some lawyers if they would offer less expensive services to needy retirees, at something like $30 an hour. The lawyers said no. Then the program manager from AARP had a brilliant idea: he asked the lawyers if they would offer free services to needy retirees. Overwhelmingly, the lawyers said yes. … What was going on here? …

When money was mentioned, the lawyers used market norms and found the offer lacking, relative to their market salary. When no money was mentioned they used social norms and were willing to volunteer their time.

Why didn’t they just accept the $30, thinking of themselves as volunteers who received $30? Because once market norms enter our considerations, the social norms depart.

The structure he defines between market norms and social norms is very compelling. Definitely good food for thought in your everyday life.

IN THE PREVIOUS experiment, then, those who got paid 50 cents didn’t say to themselves, “Good for me; I get to do this favor for these researchers, and I am getting some money out of this,” and continue to work harder than those who were paid nothing. Instead they switched themselves over to the market norms, decided that 50 cents wasn’t much, and worked halfheartedly.

no one is offended by a small gift, because even small gifts keep us in the social exchange world and away from market norms.

They reacted to the explicitly priced gift in exactly the way they reacted to cash, and the gift no longer invoked social norms—by the mention of its cost, the gift had passed into the realm of market norms.

As it turned out, the students who had first worked on the “salary” task struggled with the puzzle for about five and a half minutes before asking for help, whereas those who had first worked on the neutral task asked for help after about three minutes. Thinking about money, then, made the participants in the “salary” group more self-reliant

In fact, after thinking about money these participants were less willing to help an experimenter enter data, less likely to assist another participant who seemed confused, and less likely to help a “stranger” (an experimenter in disguise) who “accidentally” spilled a box of pencils.

The inherent philanthropic traits we hold are pretty inspiring.  Even if subliminal.

the participants in the “salary” group showed many of the characteristics of the market: they were more selfish and self-reliant; they wanted to spend more time alone; they were more likely to select tasks that required individual input rather than teamwork; and when they were deciding where they wanted to sit, they chose seats farther away from whomever they were told to work with. Indeed, just thinking about money makes us behave as most economists believe we behave—and less like the social animals we are in our daily lives.

How do you balance this fact with setting up the most effective work environment?

For example, what happens when a customer’s check bounces? If the relationship is based on market norms, the bank charges a fee, and the customer shakes it off. Business is business. While the fee is annoying, it’s nonetheless acceptable. In a social relationship, however, a hefty late fee—rather than a friendly call from the manager or an automatic fee waiver—is not only a relationship-killer; it’s a stab in the back.

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.

There is much more of a responsibility a company has when they use the sense of “family” with customers or employees. There are a greater consequences between benefits and failures.

In this 24/7 work environment social norms have a great advantage: they tend to make employees passionate, hardworking, flexible, and concerned. In a market where employees’ loyalty to their employers is often wilting, social norms are one of the best ways to make workers loyal, as well as motivated.

If corporations started thinking in terms of social norms, they would realize that these norms build loyalty and—more important—make people want to extend themselves to the degree that corporations need today: to be flexible, concerned, and willing to pitch in. That’s what a social relationship delivers.

we could elevate the social norm, making the officer feel that his mission is worth more than his base pay

MONEY, AS IT turns out, is very often the most expensive way to motivate people.

You move mountains with gospel, not cash. Create a vision and sell it.

to make informed decisions we need to somehow experience and understand the emotional state we will be in at the other side of the experience.

Go back to a home built before we had to have everything, for instance, and check out the size of the closets. Our house in Cambridge, Massachusetts, for example, was built in 1890. It has no closets whatsoever. Houses in the 1940s had closets barely big enough to stand in. The closet of the 1970s was a bit larger, perhaps deep enough for a fondue pot, a box of eight-track tapes, and a few disco dresses. But the closet of today is a different breed. “Walk-in closet” means that you can literally walk in for quite a distance. And no matter how deep these closets are, Americans have found ways to fill them right up to the closet door.

The average American family now has six credit cards (in 2005 alone, Americans received 6 billion direct-mail solicitations for credit cards). Frighteningly, the average family debt on these cards is about $9,000; and seven in 10 households borrow on credit cards to cover such basic living expenses as food, utilities, and clothing.

like the self-imposed deadlines I gave to Gaurav and his classmates (the deadlines that offered personal choice, but also had penalties attached for the procrastinators)? This might be the perfect compromise between authoritarianism, on the one hand, and what we have too often in preventive health today—complete freedom to fail.

Would you be willing to commit to a $200 deposit, refundable only if you arrived at the appointment on time? If so, you will have replicated the condition that I offered Gaurav’s class, a condition that certainly motivated the students to be responsible for their own decisions.

The reminds me of two thoughts, a Ulysses Contract and/or libertarianism vs. dictatorship.

HOW ELSE COULD we defeat procrastination in health care?

the “endowment effect,” we predicted that when we own something … we begin to value it more than other people do.

A powerful concept. In short, give a person the sense of ownership before the sale is made to maximize value.

Those who owned a ticket, on the other hand, demanded about $2,400 for it. Like Joseph, they justified their price in terms of the importance of the experience and the lifelong memories it would create.

The first quirk, as we saw in the case of the basketball tickets, is that we fall in love with what we already have. … The second quirk is that we focus on what we may lose, rather than what we may gain…The third quirk is that we assume other people will see the transaction from the same perspective as we do.

OWNERSHIP ALSO HAS what I’d call “peculiarities.” For one, the more work you put into something, the more ownership you begin to feel for it. Think about the last time you assembled some furniture. Figuring out which piece goes where and which screw fits into which hole boosts the feeling of ownership.

There’s another way that we can get drawn into ownership. Often, companies will have “trial” promotions. If we have a basic cable television package, for instance, we are lured into a “digital gold package” by a special “trial” rate (only $59 a month instead of the usual $89). After all, we tell ourselves, we can always go back to basic cable or downgrade to the “silver package.” But once we try the gold package, of course, we claim ownership of it. Will we really have the strength to downgrade back to basic or even to “digital silver”? Doubtful. At the onset, we may think that we can easily return to the basic service, but once we are comfortable with the digital picture, we begin to incorporate our ownership of it into our view of the world and ourselves, and quickly rationalize away the additional price.

More than that, our aversion to loss—the loss of that nice crisp “gold package” picture and the extra channels—is too much for us to bear. In other words, before we make the switch we may not be certain that the cost of the digital gold package is worth the full price; but once we have it, the emotions of ownership come welling up, to tell us that the loss of “digital gold” is more painful than spending a few more dollars a month.

But, once we change our possessions we have a very hard time going back down.

Would this keep our participants from clicking on it anyhow? No. To our surprise, they continued to waste their clicks on the “reincarnating” door, even though its disappearance had no real consequences and could always be easily reversed. They just couldn’t tolerate the idea of the loss, and so they did whatever was necessary to prevent their doors from closing.

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 this 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 to see before dying, we have not stopped at number 999. But then comes a problem—are we spreading ourselves too thin? The temptation Fromm was describing, I believe, is what we saw as we watched our participants racing from one door to another.

THE OTHER SIDE of this tragedy develops when we fail to realize that some things really are disappearing doors, and need our immediate attention. We may work more hours at our jobs, for instance, without realizing that the childhood of our

What we need is to consciously start closing some of our doors. Small doors, of course, are rather easy to close.

I have based a lot of my life on a similar theory.

But the bigger doors (or those that seem bigger) are harder to close. Doors that just might lead to a new career or to a better job might be hard to close. Doors that are tied to our dreams are also hard to close.

We need to drop out of committees that are a waste of our time and stop sending holiday cards to people who have moved on to other lives and friends. We need to determine whether we really have time to watch basketball and play both golf and squash and keep our family together; perhaps we should put some of these sports behind us. We ought to shut them because they draw energy and commitment away from the doors that should be left open—and because they drive us crazy.

WHEN WE BELIEVE beforehand that something will be good, therefore, it generally will be good—and when we think it will be bad, it will bad. But how deep are these influences?

Reminds me of Stumbling On Happiness a bit.

But the advantage of Coke over Pepsi was due to Cokes’s brand—which activated the higher-order brain mechanisms.

But because a stereotype provides us with specific expectations about members of a group, it can also unfavorably influence both our perceptions and our behavior.

Research on stereotypes shows not only that we react differently when we have a stereotype of a certain group of people, but also that stereotyped people themselves react differently when they are aware of the label that they are forced to wear (in psychological parlance, they are “primed” with this label).

placebos work. One is belief—our confidence or faith in the drug, the procedure, or the caregiver. Sometimes just the fact that a doctor or nurse is paying attention to us and reassuring us not only makes us feel better but also triggers our internal healing processes.

The second mechanism is conditioning. Like Pavlov’s famous dogs (that learned to salivate at the ring of a bell), the body builds up expectancy after repeated experiences and releases various chemicals to prepare us for the future.

it is easy to imagine that a $4,000 couch will be more comfortable than a $400 couch;

When it comes to medicines, then, we learned that you get what you pay for. Price can change the experience.

In 2004, the total cost of all robberies in the United States was $525 million, and the average loss from a single robbery was about $1,300.18

In general, a compelling stat.

In the control condition, in which cheating was not possible, participants solved on average three problems (out of 20). In the second condition, in which the participants could pocket their answers, they claimed to have solved on average 5.5 problems. What was remarkable was the third situation—in which the participants pocketed their answer sheets, but had also signed the honor code statement. In this case they claimed to have solved, on average, three problems—exactly the same number as the control group.

The effect of signing a statement about an honor code is particularly amazing

Just an honor code can do so much. It reminds me of a study of how much more giving people were if they watched superman or info on a charity before the test.

occasional swearing of oaths and occasional statements of adherence to rules are not enough. From our experiments, it is clear that oaths and rules must be recalled at, or just before, the moment of temptation. Also,

we are able to “bend” reality, see the world in terms compatible with our selfish interest, and become dishonest. What

We are very irrational with our ethics. In short, ask yourself which is worst : stealing a $1 pen or stealing $1 in cash. Why?

Do you see what we were doing? Would the insertion of a token into the transaction—a piece of valueless, nonmonetary currency—affect the students’ honesty? Would the token make the students less honest in tallying their answers than the students who received cash immediately? If so, by how much?

He related this compulsion to our use of “tokens” as a way to separate our minds from the cash value we place upon an expense.

the tendency to order alcoholic beverages that were different from what other people at the table had chosen and a personality trait called “need for uniqueness.” In essence, individuals more concerned with portraying their own uniqueness were more likely to select an alcoholic beverage not yet ordered at their table in an effort to demonstrate that they were in fact one of a kind. What these

people, particularly those with a high need for uniqueness, may sacrifice personal utility in order to gain reputational utility.

Did he just describe a hipster? 😉

In Hong Kong, individuals also selected food that they did not like as much when they selected it in public rather than in private, but these participants were more likely to select the same item as the people ordering before them—again making a regrettable mistake, though a different type of mistake, when ordering food.

Perhaps restaurant owners should ask their customers to write out orders privately (or quietly give their orders to the waiters), so that no customer will be influenced by the orders of his or her companions.

but maybe we can realize that we have such biases and listen more carefully to the advice and feedback we get from others.

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