Dan Ariely
Professor of psychology and behavioural economics at Duke University, Dan Ariely is Israeli-American. The Center for Enhanced Hindsight, an organisation dedicated to study, was founded by him as well. Dan’s research focuses on people’s irrational behaviour, particularly when it comes to economics. Three of his books became New York Times bestsellers. He co-founded five prosperous businesses, and his TED lectures have received over 15 million views.
Freebies Lead to Emotionally Irrational Behavior
The term “free” elicits an emotional response in each of us. Buy two get one free encourages us to overbuy rather than logically purchase one item, even if we only need one of it. Also, it’s not unusual for attendees to bring back useless conference giveaways like pens, notepads, and post-it notes.
Free, according to Dan, is a strong emotional trigger as well as a price. This emotional catalyst has the power to sway our judgement. For instance, research has been done on how individuals decide between purchasing Hershey’s Kisses for one cent or delectable Lindt truffles for fifteen cents apiece.
The overwhelming majority (73%) would be content to spend more money on the Lindt truffles. Yet when you give the Lindt truffles for 14 cents and the Hershey kisses for free (the same price differential as in the first experiment), 69% of individuals chose the Hershey kisses. In both experiments, the price difference is the same. But, the existence of anything “free” distorts people’s sense of reason. This is what Dan refers to as the “power of free.”
The Zero Price Effect
In each situation when there is a chance of losing goods, humans battle. But, there are no potential drawbacks when something is free. Because there is no risk, we therefore overestimate the value of these products. Dan advises individuals to use this impact to their advantage rather than allowing themselves to be drawn into it. You will start attracting customers if you provide something for free as part of your service or product. Also, you should offer a portion of the purchase free if you want to start selling more of a specific product.
The first price we are given influences our upcoming negotiations.
Dan argues that we are much more illogical than we think when determining the price we are willing to pay for goods. The most sensible way to pricing would be to consider supply and demand and the utility of the item. Dan says that we actually use arbitrary coherence. In essence, we will accept the first price we are given as coherent, regardless of how arbitrary it may be. As a result, this first price serves as a benchmark for deciding on a fair price for our subsequent purchases.
Dan argues that our decision-making process is much more illogical than we are aware of when determining the price we are willing to pay for goods. The most logical method to pricing would be to take supply and demand as well as the item’s utility into account. But Dan says we utilise arbitrary coherence instead. In essence, we will accept the first price that we are given as coherent, regardless of how arbitrary it may be. In light of this, the first price acts as a benchmark for establishing a fair price for subsequent purchases.
It’s interesting to note that even numbers unrelated to products can have an effect on this anchoring effect. People were instructed to write down their social security number’s final two digits for a study. They were then required to place bids on goods at an auction. High numbers, like 96, resulted in substantially greater prices being paid for goods. But, if the person’s final two digits were a small number, like 21, they would not bid on products unless they were deeply discounted.
Price tags are not always anchors by themselves, but they do become anchors when we consider purchasing a good or service at that specific price.
Our own value is too high.
Dan says that we have a stronger attachment to the things we possess. When we acquire something, we begin to consider all the good things we have done with it or can do with it. We therefore place a higher value on these things than on those of others. In addition, people tend to focus more on what they are losing than what they are getting. As a result, we find it difficult to part with our assets, which causes us to greatly overestimate their value. Thirdly, we overvalue our possessions while being completely unconscious of it. Thus, we anticipate that other people would hold our possessions in the same regard. Dan gives the example of someone selling a house to illustrate this.
They will overvalue the visual attractiveness of these designs, and their home will be filled with their favorite unusual designs. As a result, they will use these ideas as a justification for asking a higher price for the home. Yet, due of the glitzy interiors, purchasers will probably demand a discount on the home.
Basketball games are highly popular at Duke University. Students will spend days camped out in front of the stadium in order to enter a lottery for tickets. But, when students win tickets and then attempt to resell them, the fun part starts. Even if each student has an equal chance of winning and probably initially priced the tickets equally, the pricing is distorted the moment possession is involved. Individuals who win the tickets prize them so highly that they attempt to sell them for $2,400. Those who did not receive the winning tickets, however, are only willing to pay $170. The sole difference between these students at the outset was their ownership of the tickets.
Dan gives a complex illustration of how each of these biases might influence our choices. We tend to fall in love with what we already have, which is the first oddity. Let’s say you decide to trade in your used VW vehicle. You start to remember the journeys you took it on even before you put a “for sale” sign in the window. The warm glow of nostalgia sweeps over you, reminding you that you were much younger. This affects how much you charge.
Second, he notes that we tend to focus on potential losses rather than potential gains. As we set the price for that cherished VW, we consider what we will lose (the ability to use the bus) more so than what we will receive (money to buy something else). We start grieving the loss as soon as we consider parting with our beloved possessions. His third peculiarity is that we presume that other people will view the transaction from the same angle. We in some way anticipate that the purchaser of our VW will identify with our thoughts, feelings, and memories. Sadly, the puff of smoke that is released as you move from first to second is more likely to be noticed by the VW buyer.
Expectations Influence What We Experience
Our expectations, which are shaped by our prior experiences, have a profound impact on how we perceive things. Dan gives an illustration of how Pepsi and Coke both claim that consumers prefer the flavour of their cola. They base their case on consumer feedback that indicates they prefer Coke’s flavour when the logo is obvious. Nonetheless, Pepsi triumphs in a blind taste test. As a result, how consumers perceive the Coke brand in their minds affects how they perceive the cola.
Movies with excellent reviews are another illustration. If a film has garnered favourable reviews and numerous accolades, we are more inclined to like it. Even with medicinal procedures, we can observe this effect. I’m talking about the placebo effect. Medical outcomes are better for those who are more accepting of the notion that medication works. Similar findings have been made about more expensive medications, which show that they can nevertheless affect patients more than cheaper alternatives. Eventually, individuals who spent more money on an energy drink outperformed those who had spent less money on the identical energy drink on a puzzle.
In essence, both our behavior and our true experiences are substantially impacted by our expectations. Depending on the circumstances, we should use these standards. The expectations that we use will be impacted by the norms.
Depending on social or market norms, responses
Market norms and social norms are the two main categories of norms in the world, according to Dan. Social norms apply to cordial requests and favours, whereas market rules apply to the trade of resources. In some situations, applying the incorrect norm will have negative effects. For instance, you wouldn’t want to give your coworker a goodbye hug when the workday is over. Similar to how you wouldn’t want to pay your mother for a meal she prepared for you, you shouldn’t pay a lady or boy to go on a first date with you. As a result, we must comprehend that different norms are applicable depending on the circumstance.
Market norms, according to Dan, are typically more self-centered. Economic gain may result from making requests that are pertinent to particular norms at the appropriate moment. Dan uses attorneys as an example. The majority of the time, a lawyer will decline your request to provide less expensive legal services to those in need. This proposal presents a problem since it corresponds to market norms, which are rational, chilly, and focused on resource exchange. Asking lawyers to work for free to help those in need is much more likely to be successful. Dan advises that you consider the scenarios in which you ought to bring up money. People’s market norms will almost always be activated when money is mentioned.
Set long-term objectives while battling your immediate urges
Dan likens the way we live to how Dr. Jekyll and Mr. Hyde come together. We are always striving to become better people and set longer-term goals that are more sensible and realistic. Our Dr. Jekyll side is shown here. Yet, we also have a Mr. Hyde side that interferes with these long-term objectives. Impulsive and out-of-control, Mr. Hyde takes over and acts in opposition to what Dr. Jekyll advises.
Children understand this, which is why they intend to engage in safe sex, but amid the intense desire, they may lose control of their reason. We commit the same errors as adults. We set long-term objectives for our lives and jobs. Yet, procrastination frequently triumphs over our reason, keeping us from achieving our objectives.
Dan says we can still lessen the risk of procrastinating in spite of this. He uses a research done with notoriously disorganized university students as an illustration. This study found that when given deadlines, pupils were able to admit their faults. Instead of being given deadlines and putting off work until the last minute, they were able to set short, regularly spaced deadlines throughout the course by admitting their inadequacies. Procrastination might be avoided by pupils who were able to recognise their deficiencies and modify their goals accordingly. They consequently obtained much better grades than those students whose final project had a single large deadline.
Dan offers the following advice for avoiding procrastination:
- Set boundaries and deadlines in advance.
- Give a momentary reward to unpleasant acts, like eating your favourite dish while doing something terribly uninteresting
You’ll suffer long-term consequences if you keep your options open.
Many individuals think that in an unpredictable environment, it’s essential to keep your options open. Even if we won’t ever utilise them, we purchase the newest technology to have access to every high-tech action. Then, just in case you decide to change your mind, we get insurance coverage that cover this technology. We are ultimately left with technology that does more tasks than we require and expensive insurance that we will never use. It costs money to keep your options open, and this is supported by numerous research and historical examples.
Dan gives the Chinese general Xiang Yu as a historical example. In 210 BC, Xiang Yu was in charge and was tasked with transporting his army across the Yangtze River. He then set his ships on fire after doing so. This was an extreme case of a leader limiting alternatives so that his army could concentrate on one thing: battle. As they had no other choice, his army was therefore fully inspired to fight, and they went on to win nine straight engagements.
Studies have shown that this is true. Dan talks about a research where participants were given the option to play video games for real money. By allowing their options to expire, participants were able to earn this cash. They could also lose money to maintain their options. The temptation to unreasonably keep choices open is too great, even in a game environment where money is involved. Most participants made the choice to remain flexible and obtain no actual money.
Dan says that in order to concentrate on the one objective that is most essential to us, we must close possibilities in our lives. We are constantly told that we can live our lives whatever we want and be whoever we want. The issue with this way of life is that it allows us to remain open to changing our ideas, but it also prevents us from achieving any long-term objectives. We are overextending ourselves. Dan advises that we begin intentionally closing some of our doors.
Little doors in our lives will be simple to shut, but larger ones will be far more challenging. Doors that could open up for a better job or a new career, for instance, might be challenging to shut. It can be difficult to shut doors that are connected to our dreams. The same goes for certain relationships, even if they appear to be stagnant.
One of the hardest judgements we may make is deciding between two items that are equally enticing. This is an instance of being so unsure that we end up paying for it.
Dan contends that we neglect to consider the repercussions of not making a decision when concentrating on the similarities and slight variations between two things. More crucially, we neglect to take into account the comparatively small differences that would have resulted from either choice.
The corporate world is significantly impacted by these indecisions. If we provide our client with all the bells and whistles, we give them options to consider. The decision to buy will be affected by these possibilities. As a result, we ought to strive to make decision-making simple.
Predictably Irrational Book Review
Predictably Irrational by Dan Ariely is a fascinating exploration of the ways in which our decisions and behaviors are often influenced by hidden psychological forces. Ariely, a behavioral economist, draws on a range of studies and experiments to demonstrate how our rational minds can be derailed by emotional biases, social norms, and other factors.
One of the key themes of the book is the idea that we are not as rational as we like to think we are. Ariely argues that we are often driven by irrational impulses and that our decisions are frequently influenced by factors that we are not even aware of. For example, he demonstrates how we are often more likely to choose an option that is framed as a “loss” rather than a “gain,” even if the options are objectively the same.
Ariely also explores the ways in which our sense of fairness and justice can be skewed by contextual factors. He uses the example of how people are often willing to pay more for a product if they feel that the seller has been fair and transparent in their pricing, even if the actual price is higher than they would pay elsewhere. This demonstrates how our sense of fairness can sometimes override our rational cost-benefit analysis.
Another important theme of the book is the idea that small changes in the way choices are presented to us can have a big impact on our decisions. Ariely shows how the same option framed in different ways can elicit very different responses. For example, people are often more willing to try a new product if it is presented as a “limited time offer,” even if there is no real scarcity involved.
Overall, Predictably Irrational is a thought-provoking and engaging read that challenges our assumptions about our own rationality. Ariely’s writing style is accessible and entertaining, making the book enjoyable to read despite the complex ideas it presents. Anyone interested in understanding the psychological forces that shape our decision-making processes would benefit from reading this book.
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