Chapter summary
Ariely discusses many modes of thinking and situations that may skew the traditional rational choice theory. There are 15 chapters in total, and the following outline the main points.
The Truth About Relativity
In chapter 1, Ariely describes the ways in which people frequently regard their environment in terms of their relation to others; it is the way that the human brain is wired. People not only compare things, but also compare things that are easily comparable. [2] For example, if given the following options for a honeymoon—Paris (with free breakfast), Rome (with free breakfast), and Rome (no breakfast included), most people would probably choose Rome with the free breakfast. The rationale is that it is easier to compare the two options for Rome than it is to compare Paris and Rome. Ariely also explains the role of the decoy effect (or asymmetric dominance effect) in the decision process. The decoy effect is the phenomenon whereby consumers will tend to have a specific change in preference between two options when also presented with a third option that is asymmetrically dominated. This effect is the "secret agent" in many decisions. In the example with the honeymoon options, Rome without free breakfast is the decoy. (It makes Rome with breakfast look superior to Rome without breakfast. Comparing Rome and Paris is difficult, so the easy comparison of Rome makes it more likely to choose Rome over Paris.) It makes Paris look inferior when compared to Rome with the free breakfast. Relativity helps people make decisions but it can also make them miserable. People compare their lives to those of others, leading to jealousy and inferiority. Ariely finishes the chapter by saying "the more we have, the more we want" [3] and his suggested cure is to break the cycle of relativity. To break the cycle, people can control what goes on around them. The focus on smaller "circles" can boost relative happiness, as can changing this focus from narrow to broad. When considering upgrading a phone, the consumer could think about what else they could buy with the money they would spend on the upgrade.
The chapter also explores the independence of irrelevant alternatives and the idea of menu dependence.
The Fallacy of Supply and Demand
In chapter 2, consumers purchase items based on value, quality or availability—often on all three. The methods of appointing a value to an object with no previous value, like the Tahitian black pearl, is susceptible to irrational pricing. A value can be as easily (arbitrarily) assigned as by having a fancy ad with "equally" precious items and a high price tag in a window of a store on Fifth Avenue. When consumers buy a product at a certain price, they become "anchored" to that price, i.e. they associate the initial price with the same product over a period of time. An anchor price of a certain object, say a plasma television, will affect the way they perceive the value of all plasma televisions henceforth. Other prices will seem low or high in relation to the original anchor. In other words, decisions about future LCD television purchases become coherent after an initial price has been established in the consumer's mind. A person's self value for services rendered can also be affected by anchor prices; one can irrationally price his/her abilities or services based on an anchor price proposed. Using the concepts of anchor price and arbitrary coherence, Ariely challenges the theory of supply and demand. He states that demand, the determinant of market prices, can be easily manipulated. Furthermore, supply and demand are dependent on each other (manufacturer's suggested retail prices affect consumers' willingness to pay). Finally, the author claims that the relationships between supply and demand are based on memory rather than on preferences. [4]
The Cost of Zero Cost
In chapter 3, Ariely explains how humans react to the words "free" and "zero". Humans make decisions without rationalizing the outcomes of their choices. To illustrate this point, Ariely conducted multiple experiments. The outcome was consistent: when faced with multiple choices, the free option was commonly chosen. With the opportunity to receive something for free, the actual value of the product or service is no longer considered. Ariely claims, "Most transactions have an upside and a downside, but when something is FREE! we forget the downside. FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is." [5]
Ariely's concept of "FREE!" applies not only to monetary and quantitative costs, but also to time. We forgo some of our time when we wait in line for free popcorn or to enter a museum on a free-entrance day. We could have been doing something else at that time. Ultimately, he demonstrates how such a simple concept can be used to drive business and social policy. For example, to reduce health cost, companies could offer free regular checks. Employees would be more willing to get them at zero cost rather than paying some amount of money. Ariely recommends the consideration of the net benefits of the choices we make regarding both preference and money. Perhaps we would get the better deal and even save money if we did not react to free the way we do.
Being Paid vs. A Friendly Favor
In chapters 4 and 5, Ariely speaks in great detail of the differences between social norms—which include friendly requests with instant payback not being required—and market norms—which account for wages, prices, rents, cost benefits, and repayment being essential.
He also explains how combining the two can create troubling situations. The author comments that people are happy to do things occasionally when they are not paid for them. In fact there are some situations in which work output is negatively affected by payment of small amounts of money. Tests showed that work done as a "favor" sometimes produced much better results than work paid for.
For example, some lawyers were asked by AARP to provide needy retirees with services at a cost of about $30. The lawyers did not accept the offer. However, when asked to offer services at no cost, they agreed. Experiments also showed that offering a small gift would not offend anybody (the gift falls into social norms), but mentioning the monetary value of the gifts invokes market norms.
Ariely talks about how social norms are making their way into the market norms. To illustrate, State Farm's slogan, "Like a good neighbor, State Farm is there," provides an example where companies are trying to connect with people on a social level in order to gain trust and allow the customer to overlook minor infractions. The author concludes that "money, as it turns out, is the most expensive way to motivate people. Social norms are not only cheaper, but often more effective as well." [6]
Emotion in Decision Making
In chapter 6, Ariely collaborated with close friend George Loewenstein, a professor of economics and psychology at Carnegie Mellon University, to test the influence of arousal on decision making in high-emotion situations. Ariely and Loewenstein chose to test the effects of sexual arousal on decision-making in college-aged men at University of California, Berkeley. By using computers to stimulate sexual arousal, they determined that in a stimulated state, the young men were more likely to undergo an action that they would not normally consider. Using the data, Ariely argues that other high-emotion situations such as anger, frustration, and hunger have the potential to trigger similar effects on decision-making. In such situations our behavior is fully controlled by emotions. We are not the people we thought we were. No matter how much experience we have we make irrational decisions every time we are under the influence of arousal. Furthermore, he presents ideas to improve our decision-making abilities in other emotion-provoking situations such as safe sex, safe driving, and making other life decisions. For example, Ariely proposes an OnStar system that could potentially lower the number of car accidents in teenagers by performing tasks such as changing the car's temperature or dialing the teenager's mother when the car exceeds a set speed.
The Problem of Procrastination and Self-control
In chapter 7, over the last decade Americans have shown surprisingly little self-control. Ariely blames this lack of self-control on people's two states in which they make their judgments—cool state and hot state. In our cool state we make rational long-term decisions, whereas in our hot state we give in to immediate gratification and put off our decisions made in the cool state.
Ariely describes putting off these goals for immediate gratification as procrastination. [7] With proper motivators such as deadlines and penalties, people are more willing to meet deadlines or long-term goals. The author states that based on his experience with his students, deadlines set by authority figures such as teachers and supervisors make us start working on a specific task earlier. If we set the deadlines ourselves, we might not perform well. Moreover, we will not start making any progress towards the completion of the task until the deadline approaches.
Ariely also applies his theories to other aspects in life such as health care and savings. Having to pay a deposit at the doctor's office would make people more likely not to procrastinate and show up for their appointments. He goes on to say that if more consequences were put into effect, people would be more likely to meet their goals, appointments, deadlines, etc. made in a cool state. Ariely also elaborates on his idea of self-control credit cards. When applying for such a card, users can decide how much they can spend in each category and what would happen when they exceed their limit.
The High Price of Ownership
In chapter 8, Ariely discusses how we overvalue what we have, and why we make irrational decisions about ownership. The idea of ownership makes us perceive the value of an object to be much higher if we own the object. This illustrates the phenomenon of the endowment effect—placing a higher value on property once possession has been assigned. The author begins the chapter by using an example of how a lottery for highly sought-after Duke University basketball tickets inflates students' sense of value for the tickets. Students who actually received the tickets valued them ten times more than the students who did not receive them.
Ariely gives three reasons why we do not always think rationally when it comes to our possessions:
- Ownership is such a big part of our society that we tend to focus on what we may lose rather than on what we may gain.
- The connection we feel to the things we own makes it difficult for us to dispose of them.
- We assume that people will see the transaction through our eyes.
Ariely also lists the "peculiarities" of ownership as he calls them. One of them is that the harder we work on something, the more we start feeling about them as our own. Take assembling a piece of furniture as an example. Another peculiarity is that sometimes, the sense of ownership comes before the actual ownership, e.g. online auctions. To avoid the endowment effect, Ariely suggests that we create a barrier between ourselves and the material things we are tempted by daily.
The Effect of Expectations
In chapter 9, Ariely and other colleagues conducted a series of experiments to determine whether previous knowledge can change an actual sensory experience. One of the experiments was conducted in the Muddy Charles, one of the MIT's pubs. Students visiting the pub tasted two types of beer—Budweiser and the MIT Brew (which contains balsamic vinegar).
In the "blind test" the majority preferred the altered brew, but when they were told in advance that it was vinegar-laced, they chose the original Budweiser. Another group of students was made aware of the vinegar content immediately after tasting both kinds of drinks. However, they still reported that they preferred it, proving that knowledge after the experience does not affect our sensory perceptions.
Ariely also states that expectations shape stereotypes. Stereotypes provide us with knowledge before the actual experience and thus influence our perceptions. The author describes an experiment in which an objective math exam was administered to two groups of Asian-American women. Before taking the test, the women from the first group were asked questions regarding gender-related issues, whereas the second group had to answer questions about race-related issues. The second group did better than the first one and met the expectation that Asians are good at math.
Ariely concludes, "Expectations can influence nearly every aspect in one's life." [7] He presents an argument that expectations can override our senses, partially blinding us from the truth.
The Power of Placebo
In chapter 10, Ariely started out with a medical procedure called internal mammary artery ligation for chest pain. The interesting twist is when a cardiologist decided to test the efficacy of this procedure by performing a placebo procedure. The result showed that the placebo is equally effective, thereby disputing the effectiveness of the original surgery. This example is one of many that illustrate the power of placebo in medical science.
While the effect of placebo has been knowingly and unknowingly practiced for millennia, the interesting observation Ariely and his collaborators made was that prices of the prescribed medicine can be used as a placebo as well. This chapter ended with a complex and moral question as to whether or not the placebo effect in medicine should be studied more closely or even eliminated systematically.
A cognitive bias is a systematic pattern of deviation from norm or rationality in judgment. Individuals create their own "subjective reality" from their perception of the input. An individual's construction of reality, not the objective input, may dictate their behavior in the world. Thus, cognitive biases may sometimes lead to perceptual distortion, inaccurate judgment, illogical interpretation, and irrationality.
Rationality is the quality of being guided by or based on reason. In this regard, a person acts rationally if they have a good reason for what they do or a belief is rational if it is based on strong evidence. This quality can apply to an ability, as in a rational animal, to a psychological process, like reasoning, to mental states, such as beliefs and intentions, or to persons who possess these other forms of rationality. A thing that lacks rationality is either arational, if it is outside the domain of rational evaluation, or irrational, if it belongs to this domain but does not fulfill its standards.
Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors in the decisions of individuals or institutions, and how these decisions deviate from those implied by classical economic theory.
Appeal to emotion or argumentum ad passiones is an informal fallacy characterized by the manipulation of the recipient's emotions in order to win an argument, especially in the absence of factual evidence. This kind of appeal to emotion is irrelevant to or distracting from the facts of the argument and encompasses several logical fallacies, including appeal to consequences, appeal to fear, appeal to flattery, appeal to pity, appeal to ridicule, appeal to spite, and wishful thinking.
The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption, by maximizing utility subject to a consumer budget constraint. Factors influencing consumers' evaluation of the utility of goods include: income level, cultural factors, product information and physio-psychological factors.
In the case of uncertainty, expectation is what is considered the most likely to happen. An expectation, which is a belief that is centered on the future, may or may not be realistic. A less advantageous result gives rise to the emotion of disappointment. If something happens that is not at all expected, it is a surprise. An expectation about the behavior or performance of another person, expressed to that person, may have the nature of a strong request, or an order; this kind of expectation is called a social norm. The degree to which something is expected to be true can be expressed using fuzzy logic. Anticipation is the emotion corresponding to expectation.
The term social order can be used in two senses: In the first sense, it refers to a particular system of social structures and institutions. Examples are the ancient, the feudal, and the capitalist social order. In the second sense, social order is contrasted to social chaos or disorder and refers to a stable state of society in which the existing social structure is accepted and maintained by its members. The problem of order or Hobbesian problem, which is central to much of sociology, political science and political philosophy, is the question of how and why it is that social orders exist at all.
In the psychology of affective forecasting, the impact bias, a form of which is the durability bias, is the tendency for people to overestimate the length or the intensity of future emotional states.
Mental accounting is a model of consumer behaviour developed by Richard Thaler that attempts to describe the process whereby people code, categorize and evaluate economic outcomes. Mental accounting incorporates the economic concepts of prospect theory and transactional utility theory to evaluate how people create distinctions between their financial resources in the form of mental accounts, which in turn impacts the buyer decision process and reaction to economic outcomes. People are presumed to make mental accounts as a self control strategy to manage and keep track of their spending and resources. People budget money into mental accounts for savings or expense categories. People also are assumed to make mental accounts to facilitate savings for larger purposes. Mental accounting can result in people demonstrating greater loss aversion for certain mental accounts, resulting in cognitive bias that incentivizes systematic departures from consumer rationality. Through increased understanding of mental accounting differences in decision making based on different resources, and different reactions based on similar outcomes can be greater understood.
Escalation of commitment is a human behavior pattern in which an individual or group facing increasingly negative outcomes from a decision, action, or investment nevertheless continue the behavior instead of altering course. The actor maintains behaviors that are irrational, but align with previous decisions and actions.
In marketing, the decoy effect is the phenomenon whereby consumers will tend to have a specific change in preference between two options when also presented with a third option that is asymmetrically dominated. An option is asymmetrically dominated when it is inferior in all respects to one option; but, in comparison to the other option, it is inferior in some respects and superior in others. In other words, in terms of specific attributes determining preferences, it is completely dominated by one option and only partially dominated by the other. When the asymmetrically dominated option is present, a higher percentage of consumers will prefer the dominating option than when the asymmetrically dominated option is absent. The asymmetrically dominated option is therefore a decoy serving to increase preference for the dominating option. The decoy effect is also an example of the violation of the independence of irrelevant alternatives axiom of decision theory. More simply, when deciding between two options, an unattractive third option can change the perceived preference between the other two.
Renbrook School is an independent, private day school in West Hartford, Connecticut. Founded in 1935, Renbrook is an independent day school for students in three divisions; Beginning School for students in preschool through kindergarten, Lower School for grades 1-4, and Upper School for grades 5-8. With over 300 students, class sizes of 10–15 are typical. Located on over 75-acres atop Avon Mountain, the main building was originally the home of Frederick Rentschler.
Dan Ariely is an Israeli-American professor and author. He serves as a James B. Duke Professor of psychology and behavioral economics at Duke University. Ariely is the co-founder of several companies implementing insights from behavioral science. Ariely wrote an advice column called Ask Ariely in the WSJ from June 2012 until September 2022. Ariely is the author of the three New York Times best selling books Predictably Irrational, The Upside of Irrationality and The Honest Truth about Dishonesty. He co-produced the 2015 documentary (Dis)Honesty: The Truth About Lies.
Menu engineering or Menu psychology, is the design of a menu to maximize restaurant profits.
Cognitive Surplus: How Technology Makes Consumers into Collaborators is a 2010 non-fiction book by Clay Shirky, originally published in with the subtitle "Creativity and Generosity in a Connected Age". The book is an indirect sequel to Shirky's Here Comes Everybody, which covered the impact of social media. Cognitive Surplus focuses on describing the free time that individuals have to engage with collaborative activities within new media. Shirky's text searches to prove that global transformation can come from individuals committing their time to active engagement with technology. Overall response has been mixed with some critics praising Shirky's insights but also decrying some of the shortcomings of his theory.
More Than Good Intentions: How a New Economics is Helping to Solve Global Poverty is a non-fiction book by Yale economist Dean Karlan and field researcher Jacob Appel published in 2011. It combines insights from behavioral economics with field research from developing countries to discuss and evaluate international development and poverty-alleviation programs. The authors describe the book as “...a new way to understand what really works to reduce poverty...”
The IKEA effect is a cognitive bias in which consumers place a disproportionately high value on products they partially created. The name refers to Swedish manufacturer and furniture retailer IKEA, which sells many items of furniture that require assembly.
The Honest Truth About Dishonesty: How We Lie to Everyone---Especially Ourselves is a 2012 book by the Duke University cognitive science professor Dan Ariely. It investigates why and when cheating occurs, debates its usefulness and questions how it can be discouraged.
The Irrational is an American crime drama television series created by Arika Mittman. It stars Jesse L. Martin, and premiered September 25, 2023, on NBC. The Irrational is based on the 2008 non-fiction book Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely.
