Sunday, January 11, 2015

Predictably Irrational, by Dan Ariely

Dan Ariely is a professor of behavioral economics, the field that is trying to analyse economics via human behavior studies. In his book, Predictable Irrational - The Hidden Forces that Shape our Decisions, he is arguing that the simple model of market forces constraining people to behave rationally to maximize gain is false, as people are not rational and will never be rational. He then goes to explain various mental fallacies that we are subject to, complete with experiments testing and proving them.

The book is rather short and easy to read, split into 15 chapters and some annexes. Here is a summary:
  • Chapter 1: The Truth About Relativity - People assess the value of something relative to something else that is known. Thus people can be "primed" by being exposed to items that are priced in a certain way, influencing the value they give to something else. Think supermarkets and the three category of items: cheap stuff, expensive stuff and one item that is insanely expensive. Relativity will make people to buy the expensive stuff.
  • Chapter 2: The Fallacy of Supply and Demand - Again, value is not really an objective thing, coming from supply and demand, but by comparing to other things. The example given is that of black pearls, at first no one would buy them, but the importer chose the most beautiful and best, created a line of insanely expensive jewels and advertised them everywhere. Soon black pearls were in demand and at a much higher price than normal pearls.
  • Chapter 3: The Cost of Zero Cost - Ariely argues that zero is a price in a category of its own. He makes an experiment where people have to choose between average and good candy and they are asked to pay 2 cents and 14 cents, respectively. People overwhelmingly choose the good candy, since the price is not that high. However, when the price of the average candy drops to nothing and that of the good candy to 12 cents (so the financial gain is the same for the same quantity) people switch sides and take the average candies.
  • Chapter 4: The Cost of Social Norms - One of the most interesting for me, this chapter discusses how people function on social norms until someone introduces the market norms (tit for tat), in which case the social norms go out the window and the situation may even become really embarrassing socially. Imagine Thanksgiving dinner at the house of mother in law, nice roasted turkey, good wine, the wife's recipe was used for the delicious desert, everybody is happy. What happens if the man thanks the hosts and attempts to give them money to cover the expense? A lot of interesting experiments expand on the concept.
  • Chapter 5: The Power of a Free Cookie - A reverse of Chapter 4, it considers what happens when you get something for free as opposed to having to pay for it. When a colleague comes to the office and brings cookies, people take one or two, taking into consideration that other people in the office need to get a cookie. However, if people are asked to pay a cent on the cookies, they usually take more, again market rules trumping social norms when money is involved.
  • Chapter 6: The Influence of Arousal - Rather funny chapter, but really interesting. It shows that people, when sexually aroused, change their behavior significantly. That is not a surprise, but that change is so large that those people themselves cannot predict what they will actually do. Consider this when you rationally "plan" on how you are going to behave when exposed to temptation or strong emotions.
  • Chapter 7: The Problem of Procrastination and Self Control - People tend to value the present much more than the future. People plan to save money or lose weight, but are deflected by present moment temptations. Can something be done about it?
  • Chapter 8: The High Price of Ownership - People tend to overvalue the things they already possess. In an experiment, Ariely proves that people would not buy the things that they are trying to sell at the price that they would themselves ask. This is used in economics when people are offered the option of "trying out" something and only when they actually "have" the item, decide if they want to give it back.
  • Chapter 9: Keeping Doors Open - One AI researcher came with the idea that intelligent behavior arises spontaneously when trying to maximize the available options. Ariely argues that this kind of behavior is not intelligent at all. He does clever experiments with doors that disappear if not opened in an interval of time and observes people periodically open them just in order to keep them there, even if they gain less by not visiting more lucrative rooms.
  • Chapter 10: The Effect of Expectations - This chapter seems to be incomplete. It is argued that if expecting to enjoy or not enjoy something, the enjoyment will be proportional to the expectations. Personally I feel that this only happens in cases where people can't really tell the difference between good and bad. I often face the opposite effect when watching a movie that I expect to be good and hate it when it is merely average.
  • Chapter 11: The Power of Price - Similar to Chapter 10, this shows how we feel we get more from something that is priced higher. The placebo effect is also discussed here. Interesting, indeed.
  • Chapter 12: The Cycle of Distrust - Economics says that there can be no hundred dollar bills on the ground because someone would have picked them up already. Making fun of this view on things, Ariely discusses dishonest offers that look like great deals, but instead are taking advantage of your gullibility. He argues that originally trustful people quickly lose that trust when cheated and it is hard to get it back. He gives an interesting example where they installed a stall offering free money. Only about one in five people even approached it.
  • Chapter 13: The Context of Our Character part 1 - Both chapters discuss the level of human dishonesty, but show that circumstances change the amount considerably. In an experiment he gives people the chance to cheat after doing some word memory tests, but people almost don't cheat at all if the words were related to honesty or moral codes.
  • Chapter 14: The Context of Our Character part 2 - In this it is shown that people are more likely to cheat if they can rationalize the value of the thing they steal. A concrete example is that they are less likely to steal money than something one step apart from money, like a worthless token. The difference is quite significant.
  • Chapter 15: Beer and Free Lunches - A kind of good bye chapter, this shows how people are influenced in their choices by what other people in their group chose. He makes a clever experiment where people order from several types of beer, either publicly or on a piece of paper. Depending on the culture, they choose differently or similarly to what people before them chose.

Overall I found the book informative. If one can integrate the teachings of the book, the benefit for one's life would be great. Unfortunately, Ariely shows that this kind of rational illusions are predictable, and that people need to make great efforts to dispel them. I leave you with a video presentation from Dan Ariely on TED, just to give you a taste of what he is like and what he does.