Book Review-Predictably Irrational: The Hidden Forces That Shape Our Decisions

It’s not unusual to perceive others as irrational. We can’t make sense of what other people do while assuming that we ourselves are completely rational. However, Dan Ariely points out in Predictably Irrational: The Hidden Forces That Shape Our Decisions that, not only are we, too, irrational, we’re predictably irrational. We make the same mistakes repeatedly. We don’t practice rational decision-making, we practice irrational decision-making.

Rational Decision Making

Gary Klein shares his studies of fire captains in Sources of Power and Seeing What Others Don’t, and how we internalize how things work and how they fit together. More important, he explains that we can’t articulate what we know about how we make our decisions, because they just seem to come to us. (This fits with knowledge management and the concept of tacit rather than explicit knowledge. See Lost Knowledge and The New Edge in Knowledge for more on tacit knowledge.)

However, Klein’s work is on how our “gut” and how our intuition works – not how it gets in the way of rational decision-making. He only acknowledges that intuition works before rational decision-making can be engaged. Rational decision-making is an expensive process and one that we try to avoid if we can. In fact, we try to avoid any difficult comparison. We prefer easy, relative comparisons because, well, they’re easy.

Discover the Truth

Everything is Relative

The actual size of your home or your actual salary is irrelevant – mostly. What matters for your happiness is how your home stacks up to your friend group. If your salary is larger than your sister-in-law’s husband, you’ll probably feel relatively good about your salary – that is, unless your sister-in-law’s husband is a bum and there’s no comparison. Our salary is good when it exceeds others’. Our marriage is good when it seems to show more love.

It turns out that every evaluation is a relative evaluation. We don’t truly evaluate things in absolute terms. Ariely mirrors what Kahneman says in Thinking, Fast and Slow that we get more value from our first dollar of gain than the second – and so on. On the loss side, which we feel more acutely, the first dollar lost is more painful than the second dollar lost. Losing a dollar – or a million – should be the same whether it’s the first or the fifth, but that’s not what happens with humans. We find familiarity less rewarding and less depressing than newness.

From the perspective of trying to be a “choice architect” (in the words of Nudge), this is important because it means that we can encourage people to purchase the product or services that we want them to purchase by offering them a slightly less attractive option that’s easy to compare to the option we want them to buy.

There’s an example about The Economist, where the Internet-only option was priced at $69 per year, the print was priced at $125 per year – and both were priced at the same $125 per year. This made the “both” option an easy sell. However, was it really a better deal than the Internet-only option if the subscriber would never open a single printed issue? No, not from a logical point of view. However, from a choice point of view it was a brilliant way of keeping print alive for a while longer.

Arbitrary Coherence

But who set the price for the subscription in the first place? Somewhere, somehow, all printed magazine subscriptions ended up being the same price. All the subscriptions that you buy tended to be in a range of prices. Most books that you buy tend to be in a relatively small range of prices. We don’t expect to pay more than about $35 for a book. Some mass-market books can be $10 or less but, excepting trade books and textbooks for class, that’s what we expect to pay for a book.

Given that the cost to print a book is somewhere between $1 and $10 depending upon size, quantity, etc., is there a formula to get to the sales price of the book? The answer is no. Pricing is set based on its anticipated demand and the price which will make the publisher and, secondarily, the author the most money.

The price of books is an example of arbitrary coherence. Once we’ve set our expectations with the price of a book, we tend to expect that the pricing will stay relatively the same over time. In the case of books, professional and textbooks are the exception. They’re seen differently and have a different “set point” of expectations.

We might expect to pay $100 or more for a professional book or a technical book. Are the production costs different? Not really. Are the development costs different? Not in most cases. Interestingly, the real difference is in the perceived marketability and longevity. Professional books have a smaller market. Textbooks have a much shorter longevity because of the expectations that they be updated frequently.

We may all grumble at having to pay $100 for a textbook or a professional book – but we still do it, because we’ve been conditioned to expect that this is what we do.

Breaking Coherence

The big implication of coherence is how to break it. The big game is how do you charge $5 for a cup of coffee instead of $1? The answer lies in our ability to distinguish the experiences sufficiently, such that the experience of a $5 coffee doesn’t feel like the same experience as a $1 coffee. By changing how the experience feels and our frame of reference, we break coherence and create a new standard that we’re willing to pay and an experience we desire.

Starbucks is famous for its ability to create an experience that we’re willing to pay $5 for. Is the coffee that much better? That’s certainly debatable. But few would argue that there’s an experience to a coffee house – whether it’s Starbucks or not. We’ll pay once for that experience. And then our neural shortcuts kick in and we’ll do it again.

Because we’re constantly seeking a shortcut, we’re always looking to simplify the problem. When we’re faced with the need for a shot of caffeine in a hot suspension fluid like coffee, we’ll ask ourselves what will work rather than what is most cost-effective. We ask the question where can we get it. We’ll evaluate what we’ve done in the past, and since we’ve tried Starbucks before, it’s an acceptable option.

So luring people in the door for their first cup works because, whether you make money on the first cup or not, a large majority are likely to come back.

Coherence, and breaking it, doesn’t just work in the low-cost world of coffee; it works in the price of priceless jewels. Literally, black pearls had no value before leveraged by an exclusive jeweler and advertising in the swankiest magazines. After that, a relatively valueless black pearl became an expensive option for those who thought that the pearls were the classiest way to distinguish themselves.

Environments, Knowledge, and Subjective Experiences

Starbucks broke our coherence by changing the environment. Instead of drinking from a cheap paper cup, they gave us a cup with texture. The condiments are displayed in nice jars. An atmosphere with wood tables rather than Formica countertops. It was enough to break our coherence on price. However, that’s not the only factor capable of knocking us out of our subconscious patterns. Sometimes what we know – or don’t know – can make all the difference in what we experience.

What if you don’t know anything about the dish that you’re about to taste? You’re in a foreign country and you don’t speak the language. Your guide shares with you that this is a local delicacy and it’s a privilege that your host is willing to honor you by sharing it. You taste it and decide that it is indeed very good. Later your guide shares that what you ate was eel, or monkey brains, cockroaches, bull testicles, or something else that you might squirm a bit to know that you’ve just eaten.

What if you reverse the situation, and your guide tells you what is in the dish before you taste it? It shouldn’t matter to how much you like it – but it does. It shouldn’t change your opinion of the taste – but it does. Our knowledge of the situation – and our preconceived notions of it – can and does change the experience. An astute guide will tell you only that it’s rare and that it’s an honor and neglect the ingredients – until after, when it won’t matter much.

It seems that we’re easily swayed by the environments that we’re in. We’re willing to break our coherence based on the presence of fancy jars and wood counter tops. We’re unable to stop our perceptions from being changed based on our preconceived notions about things – unless we don’t know until after we experience it.

Love the Stuff You’ve Got

Have you ever wondered why parent’s children are – to them – the most precious creatures known to man, while others wonder which would be worse, their children or a kraken? Perhaps that’s a bit of hyperbole, but the truth is that parents believe their children are the cutest, smartest creatures to ever walk the face of the earth. That is, at least until they become teenagers, when they believe that and the parents try to correct them.

There’s an affinity to the things that we have. While this affinity doesn’t prevent us from coveting the things that others have, especially if they have status attached to them, it does tend to allow most of us to be happy with what we’ve got. (See Who Am I? for more about status as a motivator.) Of course, if there’s something available for free, we’re going to want that.

Free is Different

I go to a lot of conferences and that means I get the chance to walk a lot of exhibit halls. The booths are interesting; but perhaps more interesting to me are the people. There are those folks that will walk from booth to booth collecting whatever they have available for free. If it’s pens, they’ll scoop up a handful. They’ll do this even if they know they won’t survive the ride home in their bags. Why? Well, it’s not because the conference is in a far-off place, it’s because free is a different place.

While we may not like to make rational decisions, we still do some form of cost-benefit analysis in the back of our heads (way away from our frontal lobes) to decide whether to do something or not. For most of us, however, there’s a short in the system. When someone says the word “free”, we don’t consider any costs – not just the monetary cost.

Most things in life have a non-monetary cost. There’s the cost to have all that space, and the cost to transport whatever we’re getting, and a thousand other ways that “free” may not really be completely free. However, when someone says that it’s free, we fail to consider any of the other costs. So, all we see are the benefits – and then of course we want it. That means things that are free are “purchased” at a substantially higher rate than those that have even a trivial cost.

Social vs. Market Norms

Free isn’t the only way to change the way we view things in a predictable way. Sometimes it’s changing a transaction from market norms to social norms. Consider, for instance, volunteerism. People volunteer their time, energies, and talents with no expectation of compensation every day. I’ll be running audio for services at church on a weekend with no expectation of compensation. An audio engineer might make $80,000 per year and be busy half the time so the services might be worth $80/hr.

If I was offered $80/hr to do audio engineering, I’d turn it down – it’s not a good use of my time. However, I’m happy to serve the church by providing these services. I’d also be happy to take out the trash, cook a meal or anything else. The difference is that I’m operating on a different set of norms. When I’m volunteering, I’m operating on social – not market norms.

Similarly, I’ve said that one of the greatest tests of love is when you’ll do something for someone else that you won’t do for yourself. I don’t like to strip wallpaper, but when my sister-in-law needed help as she moved into a new house, that’s exactly what we went to do.

The lesson here is that if you want to get folks to help for less than what they’re worth, or to do things they won’t do for themselves, engage their desire for social interaction and social agency.

Closing Doors

Our social worlds are filled with opportunities and possibilities. The rest of our lives can seem as if there’s a bit of scarcity. That is, there is a limit to what is available to us. As a result, we resist closing doors. In fact, we’ll waste quite a bit of our energy and resources protecting things that we’ll never use again.

We’ve filled all our closets and storage spaces with clothes and things that we’ll never use again. We are holding on to some of these things for sentimental reasons, but many will have no practical purpose for us ever again. (You might look at your high school year book – but do you ever really expect to do anything with it than wax nostalgic about your youth?)

If you, like the rest of us, aren’t ready to close a door to make your life more simple and less cluttered, perhaps you can open a door by picking up Predictably Irrational.