Book SummaryPredictably Irrational, by Dan Ariely

1-Page Summary1-Page Book Summary of Predictably Irrational

Standard economic theory relies on the idea that humans use infallible logic when making decisions, and even when we make wrong decisions, we quickly realize and remedy them. On the other hand, behavioral economics argues that humans frequently act irrationally, and we often don’t realize our errors at all. Instead, we continue making the same mistakes—we’re not only irrational but predictably so.

The good news is, it doesn’t need to be this way—here, we’ll discuss common pitfalls of human logic, and explore the forces that really drive your actions. Armed with this knowledge and awareness, you can consciously avoid the triggers of irrationality and improve your decision-making skills.

Irrationality Trigger #1: Relativity

It’s human nature to make comparisons to find guidance toward the “right” choice. We don’t have an inherent sense of the value of things, so we resort to surmising the value of an item by considering its relative advantage or disadvantage over another. Because of our need for guidance, relativity has a powerful influence on how we make decisions.

Many advertisers play into this need using the decoy effect. That is, they present you with options, including a clearly unfavorable option—the “decoy”—to trigger a comparison that will guide you toward a specific choice.

• For example, an advertisement for magazine subscription bundles might include three options: internet only for $59/year; print only for $125/year; and an internet and print bundle for $125/year. You’ll likely conclude that the print-only option—the decoy—is a rip-off. It’s much more expensive than the internet option, even though both options include only one medium. Instead, you’ll choose the bundle, which appears to offer two media for the price of one. However, if the print-only option weren’t included, you’d likely choose the cheapest option, internet-only.

We compound the decoy effect by making irrational comparisons—we tend to focus on similar, easily comparable products and reject products that are different and thus less easily comparable.

• Salespeople know this and play into it. When you’re deciding between two options (A and B) and their accompanying attributes, you’ll likely be presented with a decoy third option (-A). This option is similar to—but worse than—one of the options. Because the two “A” options are more easily comparable than A and B, you’ll quickly reject option B. Then, because the -A option is clearly worse than the A option, A will be your final decision—just as the salesperson intended.

Relativity doesn’t just drive irrational decision-making—it makes us miserable. We measure our possessions against others’ due to our comparative nature, which leads us into a trap of comparative consumption. There are two ways to avoid this trap.

• First, you can diminish your comparison opportunities. By controlling what products you see, you can exercise control over how tempted you are to make comparisons. For example, if you’re car shopping, only look at options within your means instead of browsing expensive, unwise choices.
• Second, change your focus. Think about your choices in a larger context—you may realize that your money will be better spent on something more rewarding in the future.

Irrationality Trigger #2: Anchoring

Often, you’ll find that your idea of a fair price for a product doesn’t match another person’s idea of a fair price. This is because of arbitrary coherence—your “right” price for an item is completely arbitrary, usually just the first price you saw that product listed for. Once you have a price in mind, it becomes a benchmark for all other prices for that product (coherence).

• For example, if you grew up in Hawaii, your idea of a fair price for a gallon of milk would be around $7—but for a Wisconsinite, a fair price would be around $2.95. The product is the same, but the idea of what’s a reasonable price depends on wherever you happened to grow up.

This process of establishing a product’s price as “normal” and making it the benchmark by which you judge all other prices for that product is called anchoring. You’re constantly influenced by prices—advertisements, the manufacturer’s suggested retail price (MSRP), a car salesman explaining a car’s value. A price “sticks” as an anchor as soon as you consider buying a product at that price. Though you may rationally be aware that prices must change depending on environment and circumstances, your anchors will irrationally inform your choices.

An anchor can easily develop into a long-term habit, through a process called self-herding—that is, if you have a positive first impression (your anchor, in a sense) of a decision you’ve made, such as trying a new product or restaurant, you’ll later make the same decision based on your memory of your first impression. Over time, you start to think that this behavior is a preference when it’s simply a habit built on that first impression.

These “preferences” often cost time and money—ask yourself what pleasure you’re getting from the habit.

• Is it worth the money you’re spending on it, or is it just a habitual decision?
• Would it be possible to cut back or spend your money elsewhere?

Irrationality Trigger #3: “Free”

“Free” is a powerful marketing tool because we’re inherently attracted to things that are free. Every transaction has an upside and a downside—you gain something, but you may have spent money on a dissatisfying purchase. “Free” eliminates the possibility of this downside, and does away with rational cost-benefit analysis.

• If you were offered a Belgian chocolate for 15 cents or a dollar-store chocolate for 1 cent, you’d likely do a quick cost-benefit analysis (as the standard economic model predicts) and choose the Belgian chocolate. It’s a very low price for a far superior product.
• If the price of each chocolate was...

Predictably Irrational Summary Introduction to Behavioral Economics

The standard economic model that our world operates on is based on the idea that humans are rational creatures. This model assumes that when you’re presented with options or a decision to make, you’ll carefully weigh the benefits and drawbacks of each of your options, and choose the best possible outcome for yourself.

Furthermore, this model dictates that in the case you do act irrationally and make a poor decision, the flaw of your decision will be quickly revealed to you, you’ll realize your mistake, and you’ll avoid making the same mistake again in the future.

**Behavioral economics, on the other hand,...

Predictably Irrational Summary Chapter 1: How Relativity Makes Decisions For You

It’s human nature to make constant comparisons in an effort to find guidance toward the “right” choice. This is why, as a general rule, people can’t pinpoint what they want until they see someone else with it. For example, if you were asked to shop for headphones, it’s likely you wouldn’t know exactly what to look for because you don’t know what makes for “good” headphones. However, if you spotted someone wearing a really sleek pair of headphones, you’d likely want to buy similar ones. Because someone else has those headphones, we assume that they’re a good choice.

Because of our need for guidance, relativity has a powerful influence on how we make decisions. Humans don’t have an inherent sense of the value of things or what the right decision is. Instead, we resort to surmising the value of an item by considering its relative advantage or disadvantage over another. However, these value-determining comparisons are often set up for us in a way that leads us to irrational choices.

**An awareness of how we rely on relativity to make decisions is important because it influences all parts of your life—where and how you spend your money, how you choose who to date, and how...

Shortform Exercise: Think About How the Decoy Effect Has Influenced You

Stopping the decoy effect from influencing your decisions depends on being aware of what faulty or forced comparisons look like in your life.

Think of the last purchase you made where you had to choose from a set of options (for example, purchasing a new refrigerator or selecting from a menu at a restaurant). What decision did you make?

Shortform Exercise: Break the Cycle of Comparative Consumption

Practice diminishing your comparison opportunities and broadening your perspective to avoid the irrational purchases that relativity can encourage.

Think of a large purchase you’re considering. What is the purchase, and what prompted you to first consider making it?

Predictably Irrational Summary Chapter 2: How We Unreasonably Determine Reasonable Prices

Often, you’ll find that your idea of a fair price for a product doesn’t match another person’s idea of a fair price. This disparity can be explained by the concept of arbitrary coherence—the “right” price you assign to an item is completely arbitrary. Usually, it’s simply the first price you saw that product listed for. But, once you have that price in mind, it influences how you think of the present and future prices for that product (coherence).

• For example, if you happened to grow up in Hawaii, your idea of a fair price for a gallon of milk would be around $7. However, imagine if you lived in Wisconsin—where milk runs about $2.95 a gallon—before moving to Hawaii. You’d find Hawaii milk prices ludicrous. The product is the same, but your idea of what it should reasonably cost is based on the milk prices wherever you happened to grow up.

This process of establishing a product’s price as “normal” and making it the benchmark by which you judge all other prices for that product is called anchoring. In this chapter, we’ll discuss just how irrational these anchor prices can be, and then examine how anchors can compound into long-term irrational decisions.

...

Shortform Exercise: Question Your “Preferences”

One way to help ensure that you’re making rational choices is to reflect on the reasons you’re making those choices.

Think of one of your purchasing habits (for example, a latté every morning, or a new iPhone every time a new model comes out). Describe the habit.

Predictably Irrational Summary Chapter 3: The Power of “Free”

In this chapter, we’ll discuss the concept of “free,” how it’s used to trigger irrational choices, and its potential for driving positive social change.

“Free” is a powerful marketing tool because we are inherently attracted to things that are free. This is because almost every transaction has an upside and a downside. The upside is that you gain something from the transaction. The downside is that you’ve spent money and it’s possible you won’t be satisfied with your purchase.

“Free” eliminates the possibility of a downside in a transaction. There’s no risk that your money will be spent on a dissatisfying purchase. Furthermore, because the free item is upside-only, you perceive it as much more valuable than it really is. For these reasons, you’ll naturally choose a free item above all else, even when it’s not the most rational choice. The following experiment illustrates how the possibility of getting something for free can interrupt rational thought processes.

Experiment: The Chocolate Sale

In this experiment, a chocolate-selling stand was set up in one of MIT’s student centers.

• In the first part, customers had the choice between a Lindt truffle for...

Shortform Exercise: Think About How “Free” Triggers You

Knowing how you tend to behave when “free” is in the equation can give you valuable insight into your vulnerabilities, helping you stop its influence.

When was the last time you got an item—or a feature of an item—for free? Describe the transaction.

Predictably Irrational Summary Chapters 4-5: Navigating Social Norms and Market Norms

In this chapter, we’ll discuss the concepts of “social norms” and “market norms” and the unexpected choices we make when these two worlds collide.

We all operate within two norms simultaneously. The first set of norms are social norms—requests are made and obliged because of the human need for connection and community. These requests look like asking a friend to help you move, or cooking a big meal for your family. These social transactions have three key parts:

• They provide pleasure for both parties.
• There isn’t a need for immediate “compensation.”
• Compensation isn’t monetary—it’s a reciprocal act of connection or community, such as inviting your neighbor for dinner to thank her for mowing your lawn.

The second set of norms are market norms—requests are made and obliged because they are expected and enforced. These transactions look like a tenant paying their landlord rent, or an employer paying their employee’s wages. The key parts of market transactions are directly opposite those of social transactions:

• They’re not necessarily for pleasure.
• There’s a need for immediate compensation.
• Compensation is monetary—non-monetary...

Shortform Exercise: Maximize the Benefits of Social Norms in Your Community

Social norms inherently make us act in a more altruistic way and can be used to improve our communities.

Think of an aspect of your community that needs improvement. (Perhaps there’s a litter problem, or you notice that many of your neighbors don’t recycle.) Describe this aspect.

Predictably Irrational Summary Chapter 6-7: How Emotional Arousal Derails Decision-Making

We tend to think that we know ourselves well enough to accurately predict decisions that we’ll make—but we almost never take into account that there are two selves driving our decisions. The first self is who you are in a “cool state,” when you’re able to think through your decisions calmly and rationally. The second self is who you are in an “aroused state.” In an emotionally aroused state—such as when you’re hungry, angry, afraid, or sexually excited—you tend to make primal choices that are often neither rational nor in your best interest.

Experiment: Arousal’s Effect on Sex-Based Choices

Consider a 2-part experiment done at Berkeley that illustrates the discrepancy between how the cool-state mind and the aroused-state mind work. In the first part of the experiment, male students were asked several sets of questions about sex. Their responses were recorded on a scale from 0-100 (0 being definitely no, and 100 being definitely yes).

• The first set of questions focused on activities they might take part in, such as, “Would you be able to enjoy sex with someone you hate?” or, “Would you enjoy sex with a 60-year-old woman?”
• The second set of questions...

Shortform Exercise: Set Up Decisions for Your Aroused-State Self

Building guidelines toward the decisions you want to make can help you avoid falling victim to your aroused state self’s need for instant gratification.

Describe an area where you often see a large gap between your cool-state decisions and your aroused-state decisions. (For example, you decide to be social at parties, but you clam up with anxiety when you get there. Or, you want to study for tests, but abandon the library as soon as your friends invite you elsewhere.)

Predictably Irrational Summary Chapter 8: How We Overrate Ownership

Ownership is an inherent, important part of your life—you own all sorts of things, from clothing to cars to trinkets. Unfortunately, our sense of ownership usually drives irrational selling and buying decisions. First, we’ll look at how poor selling decisions are rooted in four particularities of human nature:

1. You naturally start to love things as soon as you own them. Imagine your parents give you a dog for your birthday. You’re astounded by your parents’ spot-on intuition when picking him out—he’s a perfect match for you. However, it’s very likely that you would have felt the same about any dog your parents gave you. The “perfect match” happened not because of your parents’ intuition, but rather your natural, immediate attachment to something that’s yours.
2. You focus on potential losses more than potential gains. For example, if you were thinking of putting your bike up for sale, you’ll focus more on the loss of the transaction—losing use of the bike—than on the financial gain. This loss aversion might prevent you from putting the bike up for sale at all, or might prompt you to put a ridiculously high price on it.
3. **You assume that the other person...

Shortform Exercise: Resist Virtual Ownership

Many advertisers will use “virtual ownership” to make you feel that you’re the owner of a product before you’ve even bought it. Work on recognizing this practice and taking a step back from the allure of ownership.

Think of a time you were influenced by virtual ownership—either by advertisement or trial period. Describe the purchase you made.

Predictably Irrational Summary Chapter 9: Why Options Distract Us From Opportunity

One part of human nature that holds us back substantially is our need to keep as many options open as possible. However, maximizing options is irrational because keeping many options open distracts you from pursuing goals and causes you to miss out on disappearing opportunities. Perhaps you're not advancing in your career because committing to your path would close you off from pursuing other careers. Or, you’re renting an apartment instead of purchasing a house because a house would “trap” you in your current location.

Choosing Which Options Deserve Attention

Though you’re hardwired to favor keeping your options open above all else, there are three significant ways you can stop wasting time on insignificant options and commit to decisions: narrowing your options, considering your losses, and recognizing and investing in your disappearing options.

Narrow Your Options

Recognize those options that realistically have very little opportunity or potential behind them and eliminate them from your thinking. Some of these options are insignificant and easy to dismiss—such as quitting clubs that feel like a waste of time or eliminating several little-enjoyed...

Shortform Exercise: Narrow Down Your Options

While it feels good to have open options, real opportunity comes when you make choices and stick to them.

What is a current decision you’re avoiding by keeping your options open? (For example, putting off buying a home, or oscillating between two cars you’d like to buy.)

Shortform Exercise: Recognize and Invest in Disappearing Opportunities

Sometimes, the options that hold the most opportunity are right in front of you—but won’t be there forever.

Think about the options in your life that might be disappearing opportunities. Describe the opportunity and why you think it’s disappearing.

Predictably Irrational Summary Chapters 10-11: Why You Usually Get What You Expect

Rationally, when you and another person witness an event together, you should have roughly the same experience and account of what happened. Of course, this isn’t always the case. Imagine that you’re at the dog park and your dog and another start fighting. You’re outraged because the other dog clearly started the fight. To your surprise, the other dog’s owner is also outraged, convinced your dog was the instigator.

Your knowledge that your dog is always friendly makes you sure that he couldn’t have started the fight—but of course, the other owner feels the same way about her own dog. As it turns out, your perception of events is heavily colored by your expectations and knowledge going into an experience. This doesn’t just influence your belief of what happened—your expectations can physically modify your sensory perceptions.

Experiment: Beer and Vinegar

At MIT, students were offered a choice between two beers. Beer A was regular Budweiser, and Beer B was Budweiser with two drops of balsamic vinegar added to each ounce. Each student was asked to taste the two beers and then choose which they’d like a pint of.

• Students who weren’t given any...

Shortform Exercise: Become a More Conscious Consumer

Consumers who think rationally about the non-importance of pricing when it comes to products are those who experience the placebo effect less strongly.

Describe a product that you could be buying at a lower price, but might feel that it doesn’t work as well.

Predictably Irrational Summary Chapter 12: How Marketing Makes Us Distrust One Another

In this chapter, we’ll discuss how marketing tricks have eroded our trust in one another and how distrust of others leads us to make untrustworthy, irrational choices ourselves.

To understand how mistrust of companies can translate into further-reaching implications in society, it’s important to first understand the concept of the tragedy of the commons. This concept originates from the 1800s when farmers often shared a “commons” at the center of town to graze their livestock. To ensure that the resource was shared fairly—and to prevent overgrazing of the commons—farmers had a set limit on the number of animals they could graze there. The tragedy of the commons was the unfortunate fact that self-interested farmers would realize they could make more money if they added more animals. They would exceed the set limits and, while this made them more money in the short term, eventually rendered the commons unusable for everyone.

In present day, “the tragedy of the commons” is used to discuss the exploitation of public goods and resources. If everyone commits to ensuring that resources aren’t depleted, everyone enjoys the benefits—this is the rational way to consume...

Shortform Exercise: Reinforce Interpersonal Trust

One of the steps you can take toward dismantling the cycle of distrust is reinforcing others’ trust in you.

Describe a way you might be damaging interpersonal trust. (For example, you get upset about things you claimed you were okay with, or you exaggerate your accomplishments when talking to people.)

Shortform Exercise: Engage With Trustworthy Brands

Because general distrust trickles down from distrust of organizations and companies, it’s important that you engage with brands you trust.

Choose a brand you’d like to examine. How does this brand engage with complaints and try to improve themselves?

Predictably Irrational Summary Chapters 13-14: Why Honest People Act Dishonestly

There are two types of dishonesty. The first type is starkly criminal, premeditated, and at times violent—such as a bank robbery. The second type of dishonesty is non-violent and encompasses transgressions both criminal—such as embezzlement or insurance fraud—and relatively innocuous—such as swiping your coworker’s yogurt from the communal fridge.

Everyone is guilty of this second type of dishonesty—who hasn’t refilled their soda at a fast-food restaurant, or taken pens from work? What’s irrational is that though we recognize we’re guilty of dishonest actions, we irrefutably think of ourselves as good and honest people. In this chapter, we’ll explore the reasoning for this discrepancy.

First, we’ll look at an experiment from MIT that aims to demonstrate how anyone—even those normally considered honest, upstanding people—can be easily tempted into dishonesty. Furthermore, this experiment explores how far people will go into their dishonesty when given the chance.

Experiment: How Much Do Honest People Cheat?

Participants were asked to take a test consisting of 50 multiple-choice questions, writing their responses directly on the test paper. After 15 minutes, they...

Shortform Exercise: Think About How You Rationalize Dishonesty

When you consider yourself an overall honest person, it becomes easy to excuse or rationalize your instances of dishonesty. Work on recognizing how you may be falling into this trap.

Think of a recent time you acted dishonestly. Describe the situation.

Predictably Irrational Summary Chapter 15: Why Making Choices Aloud Is Dissatisfying

When we make decisions aloud in front of others, we tend to make very different choices than we would privately. Furthermore, when groups of people make decisions aloud, their choices are much more varied than they would be if they were choosing privately.

This is because people feel a natural, but irrational, need to protect their individuality by making choices that are different from those already “taken” by others. Subsequently, those who make decisions in private are more likely to be satisfied with their choice, because they’ve made a choice based on preference and not a need to prove something. We make choices based on our need to project a certain image of ourselves, even if those choices are not necessarily the best or most rational choices for us.

Experiment: The Beer Tasting Menu

At a brewery, experimenters offered free beer samples to 100 tables. There were four different beers on the menu. At the first 50 tables, clients were asked to make their orders out loud. The beers were delivered with a short survey that asked respondents how much they liked the beer they chose, and if they regretted their choice. At the second set of 50 tables, the process was...

Shortform Exercise: Practice Making Satisfying Choices

Make better decisions by understanding how your choices may be based on others’ perceptions, rather than on what’s best for you.

What is a recent unsatisfying choice you’ve made that was based on others’ perceptions of you? (For example, buying a car you didn’t love because your friend just bought the one you had your eye on.)