By Dan Ariely (2009)
Pages: 280, Final verdict: Should-read
Do human beings make rational decisions? Being the most evolved species on this planet, we would certainly assume so. Dan Ariely, professor at Duke and behavioral economics guru has made a career of proving us wrong. From the placebo effect to how marketeers take advantage of our financial decision making bias, this week we will explore the forces that shape our irrational (and yet predictable) behavior.
The world of behavioral economics
Ariely’s trade - and our book - is on behavioral economics, the study of what people do when they buy, sell, marry and make other real-life decisions.
The applicabilities from the study of the subject range from marketing to finance or even medicine. Particularly in consumer business, understanding human bias has a profound effect on the way choices are presented to us, and how we make decisions.
We tend do treat market norms and human rationale as a dogma. Perhaps we shouldn't. As we will see next, fooling our mind into deciding what we buy, eat, take as medicine, or who we get in love with can be simpler than taking candy from a baby (adults normally don't bite).
"We usually think of ourselves as sitting the driver's seat, with ultimate control over the decisions we made and the direction our life takes; but, alas, this perception has more to do with our desires-with how we want to view ourselves-than with reality" - Dan Ariely, in Predictably Irrational
Our irrationality is everywhere
Our brain and decision making process seems incredibly complex. And yet, as we move along the sea of examples, we start to grasp patterns on the way we think and act. The book reads itself as a series of experiments and experiences on how our decisions are impacted by the options we have, our social context, or our state of mind.
Not wanting to leave too much uncovered, here's a triplet of studies which you might relate to:
We make decisions based on relative comparison: A few experiments are focused on how the options presented to us affect what we buy. To exemplify, this is why, when we go to the movies, we always have a couple of less attractive popcorn menu offers. These merely serve as anchors (the mid sized popcorn menu) to lead us into getting the large one (which is bad, specially with summer just around the corner).
Irrational decisions and sex: One particular study put MIT undergrads in an awkward situation to test the effect that arousal has on sexual decisions. Young men were asked to answer a questionnaire - once in a regular setting and another while indulging in Internet pornography. The results (which I'll not reveal here) shed light into how policy making in matters such as STDs or drunk driving should take into consideration how otherwise smart people can be lead into irrational decisions.
The placebo effect: On one chapter, a set of studies depicts the conditions in which we succumb to the placebo effect. One study put two groups of subjects through increasing levels of pain with electric shocks (not a study I would love to be part of). In the end, even though both groups received the same painkiller, they were told the medicine had different market prices (2.50$ vs 0.10$). Who reported greater pain relief, and why? Yup, you got it.
It does not stop here though. Perhaps the most impressive characteristic of Predictably Irrational is the wide range of examples the reader gets to explore, and the simplicity with which they are presented. Ever wondered why Uber offers you a free ride when you sign in? Or why Starbucks has such a hip ambience on their shops? What about how can leaders drive honesty on the workplace? Well I have, and now I don't wonder anymore.
And as much as you learn from our irrationality itself, those examples go hand and hand with a way for us to fight it (and embrace it). The most important way of doing it is by having a deep acknowledgment of our cognitive bias, as the ones mentioned above. By mastering them, we prevent ourselves from making undesirable decisions, and can even use them in our advantage.
Predictably Irrational is a great book. The combination of a simple introduction to the study of behavioral economics coupled with an array of interesting (and even odd) experiments is sure to entertain you - while making you think - for a few hours.
Like other books which focus heavily on research papers and social experiments to expose paradigm shifting ideas, Dan Ariely's book also has its shortcomings. In particular, the conclusions of a few of the studies seem over-simplistic, particularly when they aim at portraying flaws on the basic economics principles we take for granted.
I can promise you this though. If you read this book, you will start to think twice before getting that large popcorn menu on the movies, and stop buying discount cat food at the supermarket (I know you don't even own a cat).
- Buy the book online.
- Read Thinking, Fast and Slow, the "bible" of behavioral economics, a book by Daniel Kahneman
- A reading list on behaviour economics